New strategies at Sars set to pay off

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JEREMY MAGGS: Now, you might remember in last week’s budget, the Minister of Finance, Enoch Godongwana, outlining South Africa’s long-term tax policy and strategy, emphasising the objectives of broadening the tax base, enhancing tax compliance and improving administrative efficiency. So I guess the question is, is this being achieved and if it is optimally, what impact is this going to have on the fiscus?

Louis Botha is with us now from the tax exchange and control practice at the corporate and commercial law firm, Cliffe Dekker Hofmeyr. Louis, a very warm welcome to you. Very quickly, what are those measures that the minister was referring to, and more specifically, are they impacting positively on the overall efficiency of tax collection?

LOUIS BOTHA: Hi, Jeremy, thank you very much. Yes, so the measures the minister was referring to, there are a number of them, and maybe I can just refer briefly to two of them. One being the modernisation and rebuilding of Sars (South African Revenue Service) of course, you and your listeners would know that pursuant to the Nugent Commission, a number of recommendations were made, which the commission indicated, things that needed to be done to address certain issues within Sars that had arisen in prior years.

One of the major things that was a good example of the rebuilding process is what was the reestablishment of the Sars Large Business Centre to what it was, which is essentially a one-stop shop for companies with a certain level of income so that they can more easily resolve their tax issues. The rationale behind that being that they generate high profits and, therefore, a large amount of revenue and therefore one would want to enhance and improve efficiency for the revenue that is collected from them.

Read: A look at how Sars is rebuilding itself 

The second one that has been done, which is more novel, is the so-called High Wealth Individuals (HWI) Unit, which was set up two or three years ago, in terms of which essentially Sars is focusing on wealthy individuals who have particularly local, but especially also offshore wealth structures and where they believe that there might be risks of avoidance or very aggressive tax planning, for example, or evasion in the worst instances and trying to address and curb that.

So there are a number of measures, a lot of funding has also been provided to Sars in the previous budget, and I think the fruits of that showed in the last year.

JEREMY MAGGS: Louis, what is utterly fascinating here is the commissioner was saying earlier that they’re now starting to use artificial intelligence in debt propensity modelling. Again, that is something which will also be of benefit to the fiscus and, I guess, also to Sars in the long term.

LOUIS BOTHA: Indeed, Jeremy, it most definitely will be. If one looks at, just to maybe compare the debt aspect is newer and just by way of analogy look at the audit measure, audits are done typically on a risk and randomised basis. So Sars would have algorithms which they use in order to detect certain risk areas or where they perceive a person might have been underdeclaring certain income. From the debt side, we don’t have exact details of course, of what this debt modelling exactly looks like. But obviously, what it most likely would do is it would assist the Sars debt management department, which is responsible for debt collection, to assist them in targeting and identifying where there are large outstanding debts for a longer period of time, collecting it more efficiently. What we have also seen on the debt side is Sars making use of some of the broader expansive powers that they have under legislation to collect tax, and which is encouraging.

Read: Sars set to squeeze taxpayers for more

JEREMY MAGGS: That’s all well and good, so we might have the tools, but in the South African dynamic, it’s always going to be a challenge to broaden that tax base in spite of the fact that the tax register has been expanded.

LOUIS BOTHA: I agree completely, Jeremy, and it’s precisely because of the fact that, and I think your question is hinting towards that, is that in a limited economic growth environment, there is only so much that Sars can do. So Sars can look for instances and sectors and individuals where there is large-scale non-compliance.

But at the end of the day, if there isn’t an increase in growth, there won’t be an increase in profit, there won’t be an increase in tax collections.

So Sars has done a lot in the last year to improve efficiency, also including through the use of third-party data to try and collect wherever they can. But yes, as you correctly say, there are limits as to what they can do.

JEREMY MAGGS: So notwithstanding all of that then, what do you think the strategic focus for Sars needs to be in the coming year to meet the objectives that it’s set out?

LOUIS BOTHA: I think there’s a lot of good groundwork that has been laid, and I think the focus areas that have been identified should be built upon. One thing that they’ve done, for example, and which was announced in previous budgets, was the focus on so-called transfer pricing, for example. Transfer pricing referring to transactions that typically, in the multinational context, where goods and services are sold and exchanged across border, and where there tends to be some scope for base erosion or for profit shifting. What we have seen is that Sars has focused on these kinds of orders more. Of course, one wants Sars to deal with the tax base fairly and within the framework of the legislation, but focusing on that is one area.

Read: Making a dent in tax non-compliance

I think another good area, there are many we can mention, but this just being two of them, aside from the transfer pricing, the focus on the illicit economy, which is also where we’ve seen the expansion of the tax register, Sars essentially finding individuals and companies who should be paying tax, who should be registered for tax, which hadn’t been, and then taking the appropriate steps to bring them within the tax net.

JEREMY MAGGS: I’m going to leave it there. Louis Botha, thank you very much indeed, from the law firm Cliffe Dekker Hofmeyr.