South African Revenue Service (Sars) Commissioner Edward Kieswetter is looking to collect “tens of billions” in taxes from people and institutions who are deliberately hiding it from the collection agency.
Kieswetter, speaking on a Ninety One webinar on Tuesday, says Sars has come across numerous schemes to avoid paying tax and is now diligently working to not only unwind them but also to collect what’s due.
Finding more tax revenue has become a matter of urgency for South Africa. The country was in a difficult economic position prior to the start of the Covid-19 lockdown in March, but the situation has become even worse – the economic decline has led to projected tax revenues falling R300 billion.
Successes to date
The tax authority’s work to close this gap can already be seen in it collecting about R500 million in tax from people who were not paying the tax due on the renting of second or third properties.
It was able to do so using artificial intelligence; this is where it uses sophisticated software to find patterns across different databases.
Aside from rental revenues, it has also prevented R500 million from being paid out by clamping down on export schemes where shell companies claim value-added tax (Vat) rebates, but don’t trade as businesses and just shut down after a few months.
End of the schemes
Kieswetter also notes that there has also been unusual activity in what he calls “white collar” schemes. Sars has, for example, seen instances where there were suspiciously high interest charges on the loans parent companies grant their subsidiaries.
There has also been a noticeable increase in the prices that a particular unit of a company charges another unit, which “leaves some more questions than answers”.
Kieswetter also highlights concerns of companies buying businesses that have incurred losses, which then sees the acquiring companies uses these losses not to pay taxes.
“Assessments were never created to become a tradeable asset and we see a lot of activity around the buying and selling of entities for no other purpose but require a tax loss.”
By clamping down on these types of schemes, “there are comfortably tens of billions that can be collected”.
Kieswetter says the government is not blind to the burden taxpayers are under. This is why it is looking at “broadening the base and improving compliance”.
Kieswetter has to perform quite the balancing act in collecting taxes in a shrinking economy. From what he’s seen, the Covid crisis has put it on life support.
“When measured year-to-year, we see a contraction of almost 12% in employment taxes.”
Deferred taxes have played a part, but applications for retrenchments increased from 144 000 to 248 000 in the first six months and the number of unemployed has increased by over 2.2 million over the same period.
There is a similar story with local companies.
There was a contraction in company taxes of 23% over the first six months.
The difficulty can also be seen in the number of businesses applying for business rescue rising from 104 to 182, and liquidation applications jumping from 1 295 to 1 435 for the first half of the year.
Kieswetter points out that even the improvement in the trade surplus is not as good a sign as it seems because the only reason this happened is that imports fell 21%, which in turn knocked import duties about 23%.
All of this means that it will be a long time before the country’s tax base returns to pre-Covid levels.
“We are seeing an impairment of the tax base which will take a few years to recover.”
Aside from taxes and the economy, Kieswetter hasn’t forgotten about the people who were in charge when the revenue service “became a victim of state capture”.
“The hollowing out of Sars was no accident. It was a deliberate attempt under a leadership who had a corrupt agenda, to do so specifically to serve their narrow interests.
“There was significantly reduced governance structure and institutional integrity.”
Kieswetter says he is watching the Zondo Commission of Inquiry into allegations of state capture very closely and is working with the various investigative and prosecuting authorities.
Kieswetter, who has been in charge of Sars for 18 months, says the tax authority is well on its way in turning itself around. It has embarked on a three-stage turnaround that saw it “exiting out” people who were believed to compromise the organisation.
Then there was a review of every single leader “to ensure that people were placed into roles that [are] more suited to their actual competence and skill set”.
It then began rebuilding and overhauling its leadership. Kieswetter says the broad leadership team went about putting together its strategic vision between July and September.
“We didn’t involve any consultants.”