The South African Revenue Service (Sars) was considered by many to be a world class tax collector prior to the era of former commissioner Tom Moyane, but internal cracks were already developing before he was appointed. It is time for Sars to take a long, hard look at its own weaknesses. As for low-hanging fruit, Sars must first to learn how to tell the fruit from the trees.
I asked two tax experts who are at the coalface to give me an idea of current tax issues – PwC SA tax controversy and dispute resolution leader Elle-Sarah Rossato and Bowmans partner Patricia Williams.
Rossato and Williams have both served time at Sars and have an in-depth understanding of the internal Sars environment. Both frequently present at tax conferences and are recognised experts in their field.
PwC will repeat its survey on taxpayer experiences with Sars – first done last year, a month after the Nugent Commission of Inquiry into tax administration and governance at Sars began – in June, and anticipates improved results.
The Sars risk engine
Williams remarked that Sars still issues absurd queries to taxpayers. This is an indication that the risk engine is defective.
The downside for Sars is worse, because if the risk engine detects a ‘risk’, the auditor is compelled to conduct a verification audit and perhaps a full audit. I would expect the executive in charge of audit to be given a quarterly report of ‘hit’ rates – the percentage of risks detected by the risk engine resulting in audits that are expected to result in assessments.
Unfortunately, the downside for the taxpayer is the waste of productive time in having to submit documentation, and worse, having to get an incorrect assessment annulled.
Rossato is of the understanding that Sars recently refined its risk engine to reduce the number of unnecessary audits of refunds.
Sars explained to Moneyweb that the risk engine is one of various risk detection methods. Verification audits focus on one period, whereas investigative audits that “stem from detailed risk profiling processes can cover multiple risks spanning many years and different tax types”. Sars acknowledges that the risk engine continuously needs refining, and is updated when new risks are detected.
Sars further comments: “Risk and service must always be balanced. With a concerted effort to reduce false positives, Sars risk detection in relation to fraudulent and incorrect declaration (through both the risk engine and manual profiling) prevented a loss of R76 billion to the fiscus during the 2018/2019 period.”
Training of Sars staff
Sars informed Moneyweb that training in the following areas is provided to employees in the Large Business Centre:
- Transfer pricing
- Base erosion and profit shifting (BEPS) risks and remedies
- High-net-worth individual lifestyle audits
- Auditing of company income tax
Sars further advised that the Organisation for Economic Training and Development (OECD) delivered two sessions on transfer pricing and BEPS topics during the past financial year. “Legal counsel has access to LexisNexis and Juta, while audit officials, among others, also have access to tax handbooks.”
From this I understand that technical staff (as at the Large Business Centre) and the advance ruling sector no longer have access to the case law? Tax auditors require an in-depth knowledge of the law, and they also require knowledge of the law of evidence. Otherwise what on earth are they doing on audits? Tax audits are not a statutory accounting tick-box exercise.
A lack of legal training
Williams is of the view that Sars staff lack training in legal obligations and constitutional and administrative law.
She notes the high volume of taxpayer complaints and reports from the Tax Ombud regarding systemic issues where Sars is abusing taxpayer’s rights, including delayed refunds, failure to follow due process, non-compliance with dispute timelines and abuse of the tax compliance system.
On a more serious note, she observes that: “Sars unlawfully coerces taxpayers into making payments, even where a suspension application has been submitted, to avoid loss of business as a result of a non-compliant status on the central database.” She sees this on a regular basis.
She further remarks: “While the Nugent commission reported on a complete breakdown of integrity, the problem appears to be larger. The widespread nature of the abuses by Sars suggests that the organisation as a whole has a lack of understanding of Sars’s legal obligations and constitutional and administrative justice context.
“A few current and former Sars officials confirmed to me that they have not been given training in these areas during their time at Sars.
“It is not only a culture of integrity, but also one of commitment to constitutional legal values, that can begin to solve these issues.”
Sars did not provide comment on these observations by Williams.
The proof of the pudding will be in taxpayer experiences, the quality of audits, the quality of assessments, and whether Sars audit staff can move away from ‘time value of money’ assessments (where a tax amount is moved from one tax period to another) to more complex structures that will result in a massive increase to the fiscus, and where value-added tax assessments are raised in complex areas, for example, banking transactions. Another test is where costs are not awarded against Sars in a tax judgment.
Much can be gleaned from the quality of the audit work in a tax judgment, and this will remain the ultimate test of the quality of Sars staff.