DUDU RAMELA: Let’s take a look now at tax takeaways from the mid-term budget. My colleague Ryk van Niekerk is in conversation with Edward Kieswetter, the commissioner at Sars.
RYK VAN NIEKERK: Edward Kieswetter joins me now, the commissioner of the South African Revenue Service. Edward, thank you so much for joining me. Tito Mboweni said today (October 28, 2020) that tax revenue will be R313 billion below the February forecast. That’s R9 billion less than the projection in June. That is a lot of money. Where are you seeing the lower than expected revenues?
EDWARD KIESWETTER: What’s important to realise first, Ryk, is that the swing in the actual GDP forecast is the main reason why there is the downward projection against the earlier estimates. But, in addition to that, I think we also see a decline in compliance levels, as well as areas of concern in the criminal and illicit economy.
To answer your question specifically, we have seen 11.6% in the first half from employment taxes. And that is a concern because we have also seen an increase in directives for retrenchments going up almost double for the same period last year. We’ve had 248 000 applications versus 144 000 last year.
And then also, as you have heard, the second-quarter job losses figure announced is 2.2 [million]. And what that means is that’s not just a decline in revenue performance for this year, It is a permanent impairment, or at least a short-term impairment of the tax base, mainly in the financial services, manufacturing, construction and the wholesale sector.
The second big area is business income. We [are seeing] a 22.5% decline. And then we’ll also have the concern that it’s not just a short-term loss of profit, but it is also an increase in business-rescue applications, and liquidation applications have gone up significantly compared to the same period last year.
And then the third big area is domestic Vat. That has gone down 6.5%. Obviously there’s the impact of the alcohol and tobacco industry.
And then we have seen a 22.5% decline in imports. And that basically is explained by a 21% decline year on year in the level of imports into the country, which also explains why we’re currently sitting on a trade surplus.
RYK VAN NIEKERK: Yes, I can appreciate that the tax revenue is very correlated to the economic performance of the economy, but our tax base is so small. How much tax money is available outside the existing tax base? Or, put differently, are there people and institutions and companies and businesses you can target to supplement the current tax revenue?
EDWARD KIESWETTER: In terms of what we call the “white collar” area of aggressive tax planning, we have seen concerning levels of offshore transfer of South African funds in the form of interest payments and other services that are charged between international parent companies from South African subsidiaries, and that clearly is a risk of not only offshore short-term tax revenue, but also an erosion of the tax base. That’s a concern we’ve raised before.
We have a concern that all of the individuals in South Africa who have financial assets offshore might not have disclosed that properly. We are aware that there are more than three million South Africans who have bank accounts offshore.
And then, thirdly, we have expressed concerns in the area of imports, customs under-declaration trade, mispricing, and then also on exports, the manipulation of Vat fraud by irregular what we call round-tripping – people actually posing that things are exported but they are just round trips – and also overstating the value of exports to gain from the Vat-refund system.
So they are significant numbers. The numbers are large. We have previously reported that we have at least R100 billion outside of the tax net at the moment, which will require hard work, continued efforts to improve compliance, and to bring those who are guilty to book.
RYK VAN NIEKERK: But do you have the capacity to do that?
EDWARD KIESWETTER: Capacity isn’t zero or 100%. Of course, Sars has 12 000 staff in the areas that we need. But, as we indicated to parliament earlier this year, we are significantly under-resourced, and would need between R400 and R800 million more just to respond to some of the areas we believe we are not currently touching. And we have over 1 000 vacancies, 650 of which we consider critical at this stage.
RYK VAN NIEKERK: And then another way to increase tax revenue is to increase taxes, but there is a thing called the Laffer Curve, which suggests that you reach a point where, if you increase taxes it doesn’t lead to an increase in revenue. How far do you think we are from that inflection point of the Laffer Curve?
EDWARD KIESWETTER: I think many of the industry commentators have indicated that that inflection point – the minister himself has, as in the February announcement, you will recall, indicated that in fact he wants to trend towards … norms as far as tax-to-GDP ratio and corporate tax rates are concerned. But he has also indicated in today’s announcement that we will need to find an additional R40 billion of tax revenue.
But the Medium-Term Budget Policy Statement is not really a time for looking at tax rates. And so the minister will indicate in his February speech how he thinks about that. But I think he has been very clear in terms of his intent.
RYK VAN NIEKERK: Just lastly, the minister also announced a possible freeze in salaries of public employees, as well as potential pay cuts for senior employees. Has the revenue service been consulted, or have you been consulted regarding this proposal? And what do you think the reaction would be if it is implemented?
EDWARD KIESWETTER: It’s really the domain of the minister of public services, not really the domain of the minister of finance, and certainly not the domain of Sars. So we can only wish the minister responsible for that area well, because negotiations, as you all know, are tough. But we remain positive that the best possible outcome will be achieved.
I think what’s important to note, the minister has issued almost a warning to South Africa, but also to the rest of government, to say we are heading for darker times and, while we are walking in the light, now’s the time to act. And a big thing obviously is government expenditure, and a big component of government expenditure is salaries.
So one would hope that all of the parties, the stakeholders, understand that we will all have to make sacrifices.
RYK VAN NIEKERK: Edward, thank you so much for your time today. That was Edward Kieswetter. He’s the Commissioner of the South African Revenue Service.