It seems there isn’t just one elephant in the value-added tax (Vat) room, but a whole herd. One of the bigger elephants is the lack of specific timelines in which the South African Revenue Service (Sars) must conclude an audit or a verification process.
Delays related to audits and verifications result in the withholding of (in many instances legitimate) Vat refunds, which in turn can result in insolvencies.
According to Annelie Giles, tax manager at ENSafrica, although Sars cannot be overly restricted in administering tax laws and enforcing compliance, it cannot continue with an audit for years on end, and withhold refunds while doing so, especially if there is no indication of wrongdoing.
“We need a set of timeframes in the legislation where extensions are the exception rather the norm,” she said at the annual Tax Indaba hosted by the South African Institute of Taxation (Sait).
Giles added that the current lack of timeframes creates the perception that there is no commitment to finalising an audit.
Frikkie de Jager, director of indirect taxes at SecuriTax, said it also appears as if some industries are audited more often than others. He referred to a client who has been audited 10 out of 12 times after submitting Vat returns.
De Jager noted that there are “serial refunders” such as mining companies and exporters where the Vat Act specifically allows them to claim refunds. It is in the “DNA of the Vat Act” to allow them to claim the input Vat as a deduction.
Then there are “non-regular refunders”. He said he would like to assume that at this stage Sars will be able to distinguish between the regulars and the non-regulars.
Burden of proof
Another elephant in the room is the perceived shift in the burden of proof. Giles said in most cases the Vat Act requires a valid Vat invoice and, in the case of an exporter, that the goods have left the country. However, because of the prevalence of fraud and corruption Vat refunds have become a focus area.
Even though the act does not require the taxpayer to prove that the supplier paid the Vat to Sars, or to prove the origin of the goods and whether they are from a legitimate source, it seems that is now required in practice.
“A Vat invoice is no longer good enough,” said Giles.
“We increasingly find the situation where Sars is asking for evidence or proof that is not prescribed by the legislation. As a creature of statute that can be perceived as an overreach of power.”
Ernie Lai King, director at 1 Road Consulting, says everyone realises that crime and corruption is a scourge. “We cannot deny that. But as we talk institutions that are supposed to be doing the work of finding, prosecuting and putting criminals in jail are failing us.”
He respectfully added that it seems as though Sars is not able to identify exactly where the problem arises and as a result it just withholds refunds.
Broad approach to enforcement
Giles agreed and said another elephant in the Vat room is the struggle to distinguish between “errant compliant taxpayers” and “errant criminal taxpayers”. The result of this is the emergence of a broad-brush approach to enforcement.
“We need sound methodology to quickly and efficiently separate the good apples from the bad apples. We cannot call it a victory when compliant businesses are literally audited to death simply because they operate in a specific industry.”
Mark Kingon, head of stakeholder relations, integrity and anti-corruption at Sars, acknowledged the impact the withholding of valid refunds has and said the revenue service is fully aware of the catastrophic impact on a business.
“We really have to balance the seamless element by making it easy for people [to comply], but the risks are significant at the moment.” This includes the risk of illicit trade in goods and the fabrication of invoices.
Kingon says the registration of shell companies for Vat purposes, when there is no enterprise that gives rise to the registration, is a “daily occurrence”. Sars is committed to conducting audits in a reasonable time, and while it does fail, there are also successes.
Johnstone Makhubu, chief revenue officer at Sars, said due to its audit processes last year it was able to prevent the payment of R57 billion in refunds that were not legitimate.
“But there needs to be a differentiation of taxpayers and how we profile them. We are looking at our case selection methodology to make sure that it is better.”
He said it is not in Sars’s interest to withhold legitimate refunds because as the revenue officer he has to account for these funds as a contingent liability in the financial statements.
De Jager also raised the issues of interest payments to taxpayers where an audit or verification drags on forever and the generic letter issued to taxpayers to alert them to a verification or an audit – where there is no differentiation between a mine with millions in invoices and a vendor with far less.
Makhubu said the issues raised were on the radar of Sars leadership. “They are worrying us, and we are infusing some solutions into our value chain to ensure that we attend to them.”