Opening remarks by Commissioner of the South African Revenue Service Mr Oupa Magashula to the Parliamentary Standing Committee on Finance on the Presentation of the South African Revenue Service (SARS) Annual Report 2010/11

19 Oct 2011

Opening remarks by Commissioner of the South African Revenue Service Mr Oupa Magashula to the Parliamentary Standing Committee on Finance on the Presentation of the South African Revenue Service (SARS) Annual Report 2010/11

Introduction
Deputy Minister Nene,
Chairperson of the Standing Committee on Finance Mr Mufamadi
Honourable members of the Committee
Members of the media and the public
Ladies and gentlemen

Thank you for this opportunity to present a brief overview of the South African Revenue Service‟s Annual Report for the 2010/11 financial year.

My presentation today will be an executive summary of the following key aspects of the SARS Annual Report for 2010/11:

• the economic context for the year under review and its impact on revenue collection
• an overview of debt and credit management
• Tax and Customs compliance enhancements which we have managed to continue despite the difficult economic circumstances
• on-going improvements in both the tax and customs areas as part of our Modernisation Programme
• human Capital trends in SARS
• and finally some other key highlights of the report.

First, however, allow me to introduce the SARS leadership team who are here today to provide you with additional information for their areas of responsibility should you require it:

• Ivan Pillay is our Deputy Commissioner who oversees our governance, strategy, enforcement, risk, and business enablement divisions
• Kosie Louw is our Chief Legal and Policy Officer
• Barry Hore is our Chief Operations Officer
• Elsie Pule is our Chief Human Resources Officer
• Gene Ravele is our Chief Officer of Customs and Border Management
• Trix Coetzer is our Chief Financial Officer and
• Sunita Manik is the head of our Large Business Centre.

I would also like to offer a special word of welcome and to introduce the chairperson of the SARS Audit Committee, Mr Bongani Nqwababa who has joined us here today.

Economic Context during 2010/11 and its impact on revenue (Annual Report pages 11 -17) 

Honourable members, in the fiscal year ended March 31 2011 the global financial and economic environments showed significant improvement from the prior year. However, recovery remained uneven, with growth in developed markets mixed and slow, while in emerging economies strong growth levels persisted.

At the same time, towards the fourth quarter of the fiscal year 2010/11, geopolitical instabilities in the Middle East and North Africa, the earthquake/tsunami/nuclear disaster in Japan, huge fiscal imbalances in Europe and United States, as well rising global inflation caused by rising food and energy prices, began to gather momentum and increased uncertainty for economic growth and investment.

Honourable members, the year in review once again tested our resilience in the face of the lingering economic pressure and continuing organisational change. I think you all appreciate that it is significantly more demanding to meet revenue targets in an economic downturn or a moderately recovering economy than it is to exceed revenue targets during a high growth phase.

This is why I believe that in the context of the environment, SARS once again performed strongly collecting a total of R674.2 billion - R2 billion above target.

More importantly this reflected a growth of R76 billion or 13% against revenue collections in 2009/10. There are many countries in the world -developed and developing - which would be shouting from the rooftops with double digit revenue growth last year!

All in all, six of the seven categorised tax types showed an increase year-on-year, with only Corporate Income Tax (CIT) showing a marginal decrease. The main contributors to the overall increase were Personal Income Tax (R21.6 billion) and VAT (R35.6 billion) which collectively added to R57.2 billion.

This is a performance that not only we at the South African Revenue Service, but we as South African citizens, can be extremely proud of!

Cost of Collections (Annual Report pages18 -19) 

Honourable members, it is all good and well that we have achieved this significant increase in revenue collection. However, it is also important to ensure that we do so in the most cost-effective manner possible.

In this I am pleased to report that the cost of collection has remained steadily in the 1.0% to 1.2% range over the past 6 years, with the 2010/11 figure at 1.1% or 0.1% lower than the previous year.

This cost of around 1c for each R1 we collect is in line with international practice and places SARS among the more cost-efficient revenue administrations globally.

Debt and credit books (Annual report pages 24-25)

Honourable members, last year we reported a 30% increase in the debt due to SARS to R79 billion - which we attributed to a combination of the economic difficulties of 2009/10 and our own challenges and those of taxpayers in managing accounts.

I noted last year that a key aspect of our on-going modernisation would focus on the issue of debt and account management which is critical to ensure that each and every taxpayer pays what they owe, on time and in full and that payments are accurately reflected against the tax type and period for which they are due.

In a voluntary compliance tax system such as ours, taxpayers complete their own declarations which translate into liabilities or refunds. Where an error is made - even though these are identified by our risk engine and other assessment tools - this error remains as an unpaid debt or a credit liability on our core system until the taxpayer or SARS has rectified this error. In addition, any payment received without a return is listed on the credit book until we are able to allocate this payment against a specific tax period for that taxpayer. 

The vast majority of assessments subject to audit, objections and appeal also remain listed as a debt or credit until finalisation.

For this reason there is constant movement on the debt and credit books and some of the debts and credits cancel each other out once the accounts are rectified and assessments finalised.

Our legacy systems and debt management tools are inadequate to efficiently manage this incredibly complex and constantly changing area of account management and we need to resolve this issue before the switch to accrual accounting.

For this reason we are making a significant investment through the modernisation programme in account maintenance and debt management, providing further checks and balances and providing taxpayers the ability to view and manage their own accounts.

This is already having a significant impact on both our debt and credit books and I am pleased to report that during the 2010/11 financial year we were able to make significant in-roads into curtailing the growth in the debt due to just R6.6 billion - or just 8.3% which given the economic conditions is a considerable improvement.

On the credit side, we ended the financial year with a total of R49.8 billion in payment liabilities, compared to R42.2 billion in 2010.

It is worth noting that the credit book saw an overall decline in credits for all tax types except VAT and is further evidence of the improvements which our modernisation programme is delivering on for both taxpayers and SARS. In particular, Pay As You Earn (PAYE) credits dropped from over R8 billion at the end of the 2009/10 financial year to R5.9 billion last year - following enhancements of the PAYE process.

The modernisation of VAT - which began in earnest at the start of this financial year - is already beginning to show a similar impact on the speed and accuracy with which SARS is able to process VAT declarations and pay refunds. Currently over 88% of VAT declarations are processed within 24 hours and, where due, refunds are paid within 48 hours. This has seen the VAT credits reduce from R27.8 billion at the start of the financial year to R22 billion currently - a decline of almost 21%. Further improvements are anticipated as the VAT modernisation continues.

The account maintenance challenges are most pronounced in respect of VAT where we process over 3 million returns annually and in terms of tax revenue collected and refunded, VAT is by far the largest tax administered by SARS. Due to the large portion of refunds, it also has the greatest scope for abuse. In 2010/11 SARS collected R287.2 billion in VAT, of which a total of R103.6 billion was paid out as VAT refunds. SARS currently pays out an average of almost R10 billion in VAT refunds each month.

Once paid, illegitimate refunds are very difficult - if not impossible - to recover as the criminals quickly move the money and then disappear. To prevent this, SARS has introduced a number of measures over the past few years specifically aimed at reducing the risk of VAT fraud. This included an additional verification process introduced at the beginning of this year in response to an increase in VAT refunds which were not supported by a similar increase in corporate income tax. While not directly linked, one expects a correlation between VAT activity and corporate profitability and the additional review mechanism was aimed at checking the efficacy of the VAT process.

The committee may be interested to hear that as part of the new VAT risk process, VAT vendors selected for further verification of their refund claims are given the option to either submit documents in support of their declaration or to revise their declaration where an error is suspected.

To date, almost a quarter of all vendors given this option have opted to revise their refund claims downwards in the total amount of over R4 billion rather than to submit supporting documents. This is a direct saving to the fiscus.

Honourable members, the modernisation of our systems and payment processes is a critical part of our journey to address the account maintenance challenges which lie at the heart of the debt and credit books. Already this year we have recently introduced self-management functionality for VAT vendors in which they are able to see and more importantly manage their own VAT accounts.

These enhancements will continue to be an important focus of our work in modernising VAT, Customs and Corporate Income Tax areas over the next three years.

Tax and Customs compliance (Annual report pages 20-23)

Honourable members, it is almost axiomatic that a tough economic environment results in a decline in compliance. However, SARS‟s effective approach of educating taxpayers of their tax obligations, providing efficient service to the compliant while taking the appropriate enforcement actions to detect and deter non-compliant taxpayers and traders, has helped to mitigate this trend.

Some key highlights in compliance gains during the year include: A significant improvement in PIT on-time filing to 81% compared to the 58% in 2008/09. This is due, in part, to the introduction of the new administrative penalty regime and the on-going improvements in service An 11% reduction in the outstanding returns book Recovery of R17.7 billion rand in cash from the debt book The decline in the overall debt - excluding interest - is also evidence of greater compliance in on-time payment by taxpayers and traders a dramatic growth of 48% in the overall tax and trader register - largely due to an 80% increase in the number of individuals registered as part of a drive to get employers to register all those in formal employment. This initiative led to more than 4 million additional taxpayers being added to the register last year.

This growth will not necessarily translate into direct revenue gains - as these individuals were and are already being taxed by their employer under the SITE system while others are below the tax threshold.

The significance of having all those in formal employment on the tax register is two-fold: firstly that it recognises the contributions of all taxpayers rather than just those who are required to submit a return each year and allows for a direct engagement between SARS and these taxpayers; and secondly it provides for a more comprehensive compliance approach by providing insight into all taxpayers.

Honourable members, at your request we have addressed the issue of the tax register in more detail in the comprehensive report on our Modernisation Programme which we have provided to the committee today.

Enforcement achievements (Annual report pages 21, 22 & 27)

Honourable members, visible and effective enforcement is an important motivator for compliance. In this regard, I am pleased to report a range of successes on both the tax and customs front during the year in review including: An 83% success rate in investigative audits resulting in an audit yield of R3.9 billion More than 125 000 taxpayers with outstanding returns submitted these after being issued with administrative penalties. 

This process also resulted in a boost to the fiscus of R191 million in fines R765 million collected through post-clearance audits A total of 23 580 seizures with a street value of R994 million, including seizures in counterfeit cigarettes, counterfeit CDs and DVDs, clothing and drugs And a 65% success rate in litigation cases.

Customs Modernisation (Annual report pages 28-30)

Honourable members, in addition to ensuring maximum compliance with tax and customs legislation, SARS has a second and equally important mandate - to facilitate trade and to protect our countrys' borders.

At no time has this mandate been more crucial to support of our government's priorities of job creation through economic growth.

Facilitating trade is about speeding up the movement of goods in and out of South Africa with the ultimate goal being the seamless, uninterrupted access to global markets by local manufacturers. Protecting our borders from unwanted and illicit goods, on the other hand, is about control and enforcement. It requires checking and verification - often physically.

The way SARS and other customs authorities around the world are attempting to balance service and enforcement is through a risk-based approach in which low risk goods are allowed to move relatively unimpeded while high risk goods are subjected to more stringent verification processes.

This is at the heart of our Customs modernisation programme which we embarked on in 2009 and which seeks to provide an automated, electronic risk-based process of goods clearance.

The new Customs Risk Engine has given SARS the ability to move from being a gate keeper to a risk manager - targeting specific consignments with a higher hit rate. The Customs Risk Engine has been redesigned to such extent that it enables more precise risk targeting and selection, thus driving better operational efficiency and output.

This precision has enabled declarations to be controlled by the risk engine, thereby ensuring that cargo that are stopped for inspection have a more likely chance of being non-compliant. This reduces time and resource inefficiencies being employed on legitimate traders and enforcing compliance on illegitimate traders.

Another further aspect of the Customs modernisation programme is a re-engineered and more robust inspection process. Importantly, this contributes significantly in the fight against corruption in that inspectors are no longer allowed to select the cases they work on. Instead, in line with our tax reforms, Customs now uses the "get next item" concept in which cases identified by the risk engine are randomly assigned to inspectors.

Thirdly, we are increasingly focused on textile and other imported products to target undervalued imports by working with industry through NEDLAC along with historical data gathered over a number of years to improve and update our list of prices in a valuation database.

Fourthly, a cornerstone of the modernisation programme is the replacement of the Customs legacy system. Our investment in the subsidiary company Clidet 967 (Pty) Ltd provides the basis for the development of a world-class customs software platform not only for South Africa but also for those of other administrations in the region and in Africa.

Finally, the „Preferred Traders‟ initiative continues to grow. These are traders that have demonstrated a greater assurance of their compliance and will therefore be rewarded with greater service benefits and more rapid movement of goods. At the end of the financial year, a total of 125 client engagements were conducted, 49 audits were finalised and 39 clients were recommended. It pleases me to say that the majority of clients that were engaged with, have welcomed the initiative and are showing high level of commitment to the process.

Service Enhancements (Annual report pages 30 - 32) 

As with others in the public sector, SARS is ultimately judged by the service we provide to the citizens of our country.

Significant progress has been achieved over the past 3 years and this has realised dramatic improvements in return processing turnaround times, increases in service levels and efficiency improvements to the extent of releasing resources to focus on higher value-adding activities.

Further improvements to the income tax process for individuals together with enhancements to the PAYE process have been realised in 2010. Simultaneously the modernisation programme has commenced with the modernisation of the Corporate Income Tax (CIT) and Value-Added Tax (VAT). Some of the key highlights during this year were: 

• Achieving all our service-related targets against the measures in the strategic plan - this included an 85% first contact resolution in contact centres, a 15 days average turnaround time for escalations and a 79% uptake in electronic declarations from entities operating from SACU countries
• The development and promotion of e-Filing as an online electronic channel was an integral component of the modernisation strategy. Over the past five years, we have been able to increase the number of registered e-Filing users from about half a million at the end of 2006 to just over 6 million at the end of March 2011- a twelvefold increase.
• This growth in electronic submission has helped SARS to continue to improve our service to taxpayers as reflected in the results of assessments issued within 24 hours of submission. During Tax Season 2009, 2.3 million returns were assessed within 24 hours. This volume increased by 18% in Tax Season 2010 to 2.7 million returns.
• This rapid turnaround allowed SARS to refund eligible taxpayers in record time. During Tax Season this year, SARS paid R 11.9 billion in refunds to individual taxpayers compared to R10.5 billion last year - a 13% increase. Of these refunds, 79% were paid within 48 hours of assessment. This means that the vast majority of taxpayers who were due a refund received it in their bank accounts in less than three days after submitting their returns.
• The SARS Call Centre handled a total of over 5 million calls last year including a record number of over 3 million calls during the 2010 Tax Season - with more than 49 000 calls answered on the final day alone! The year saw a decline in the abandonment rate from 14% in 2009/10 to 9% in 2010/11
• SARS has also enabled taxpayers and employers to complete and submit returns, together with SARS assistance, at a SARS branch through the Branch Front End (BFE). Eliminating the need for back-office processing and capture of paper-based returns, this channel has proven popular from a taxpayer service perspective: during the most recent tax season, some 38% (1.7 million) individual tax returns were submitted using this method. And also,
• The popularity of electronic channels has resulted in a significant drop in the number of paper returns submitted to SARS for processing. By March 2010 the number of paper returns had already reduced to 8% (345 000) of individual income tax return submissions for that year. By March 2011 the number has almost halved to 4.2% or 186 000 returns with taxpayers preferring to complete their submissions electronically.

During the past three years, SARS has also invested significantly in a Customer Service Programme. To date, considerable progress has been made in the programme. 

We have continually moved towards improved customer service resulting from integrated and virtual Contact Centres, improved transactional workflow, optimised infrastructure and facilities, enhanced staff learning and delivery of self-help service offerings. Some key achievements have been: 

• the enhanced quality of responses from agents to taxpayers
• the optimised self-help channels for taxpayers
• the seamlessly transferring of calls and agents between contact centres in the event of a failure and 
• the optimisation of productivity of all agents by prioritising taxpayers and traders calls when volumes are high, and using spare capacity to conduct outbound campaigns.

Further detail on these and other achievements is provided in the document on the Modernisation Programme.|

Human Capital (Annual report pages 33-35)

Ladies and gentlemen, the automation associated with the modernisation programme has allowed these gains to be made without any significant increase in the number of employees at SARS.

In fact, while the SARS headcount increased very marginally during 2010/11 compared to the previous financial year with a total of 15 296 employees - or 33 more than the previous year - this included the recruitment and training of an additional 625 Customs and Border Control agents.

Importantly, our commitment toward employment equity continues to grow with the number of black employees, women and women-in-management on the upward trend.

The year under review saw the total percentage of black employees rise to 69% from 67% a year earlier comprising 52.32% Africans, 10.64% Coloureds and 6.2% Indians.
At the management level, more than 60% of management staff is African, Coloured or Indian and 45% are women.

Governance

Honourable members we are pleased to report that the Auditor-General has given SARS an unqualified audit report for 2010/11 - the seventh in a row which reflects our on-going commitment to good governance.

In aligning with our „full disclosure‟ policy, we have incorporated the Financial Statements of our wholly owned subsidiary, Clidet (Pty) Ltd into the SARS Financial Statements, which were audited.

SARS strives to manage its funds in the most prudent manner possible, while taking into account the specific needs of our business. Two areas that we know the committee may be interested in are leases and travel/S&T expenses.

SARS‟s physical offices are established to provide ready access to taxpayers that are unable to utilise our electronic channels. SARS leases property for its physical footprint to ensure that it remains agile and responsive to the shifting patterns of commercial centres and transport routes. For the year ended March 2011, the total lease cost was R462 million relative to R412 million in the previous financial year.

This variance is attributable to the contracted escalation rates applicable to lease agreements, expansion of the branch office footprint, increase in charges by DPW for government buildings in terms of the devolution of budget as well as the commissioning of River walk in Pretoria from the PIC. This rental amount - comprising approximately 7% of the total operating costs of SARS - was in respect of 144 separate properties around the country.

A breakdown of leases between state-owned facilities provided by the Department of Public Works and those entered into with the private sector is provided on the slide and shows that the bulk of our accommodation is provided by the private sector. This is primarily due to our focus on accessibility to clients with branch locations chosen to suit taxpayers - including in shopping malls and other locations with easy access to parking and public transport.

We also place extremely strict controls on Travel and S&T expenses including booking flights in advance to achieve savings and arranging discounted rates with preferred hotel suppliers. We also deduct travel expenses directly from employee salaries if the expenses are not acquitted within 30 days. For the year ended March 2011, the total travel expenses were R96 million compared to R79 million in the previous financial year. This comprises less than 1.5% of our operating costs.

Areas where we did not meet our goals for 2010/11 (Annual report pages 55, 56 & 57)

Honourable members, as an organisation we set ourselves targets that are aspirational and ambitious, and sometimes we fall short of these. During the year under review the following targets were not fully met: 

• We have filled 92% of our leadership positions (against a target of 95%). The skills shortage which faces us all in South Africa was a significant factor in this regard.
• We have 99.3% of our employees placed on career model (against a target of 100%). In hindsight, a target of 100% is unrealistic due to staff turnover as newly appointed employees cannot be placed on a career path until they have engaged in a career model process - so there will always be a slight shortfall. 
• We achieved 49.5% employee engagement for 2010/11, compared to 47% in the previous financial year. Although this was an improvement, it fell short of our target of 55%
• One of the segments that we initially prioritised for implementation was the Medium business segment (along with the Large Business segment and the Standard Individuals segment). However, due to the need to increase compliance and modernise the Customs environment, the Preferred Trader segment was selected for implementation instead as part of the Customs Modernisation programme.

Other key achievements

Finally, let me highlight some other areas of work during the year in review:

• Internationally, SARS continued its leadership of the African Tax Administration Forum (ATAF) through the role of chairperson of the ATAF Council and by hosting the interim ATAF Secretariat. ATAF has to date already attracted over 30 African countries as members.
• SARS continued to play a key leading role in a number of international multilateral tax and customs forums including the Organisation for Economic Co-operation and Development (OECD) Forum for Tax Administration and the World Customs Organisation (WCO) where SARS‟s former head of International Relations, has been seconded for five years following his election as the WCO head of capacity building in December 2010. 
• We also continue to work closely with other government departments in collaboration around a number of common areas - including border management. During the year in review SARS was instrumental in developing and implementing a world-class movement control system along with the Department of Home Affairs ahead of the 2010 FIFA World Cup.

I am very pleased to report that the relationships forged at that time with Home Affairs, the SA Police Service, the State Security Agency, the SA National Defence Force and other departments have continued to go from strength to strength and we are in the process of formalising the Inter Agency Clearing Forum which was founded ahead of the world cup to enhance coordination and cooperation among the various agencies working at our borders.

Conclusion,

In conclusion, Honourable Members, in what was yet another challenging year for revenue administrators globally; SARS continued to exceed the high expectations of its stakeholders by delivering on its revenue mandate and continuing to grow its reputation as a highly respected, trusted and stable institution.

These achievements are only made possible by the 15 000 women and men who tirelessly serve with dedication, passion and integrity and an unwavering commitment to meeting the needs of the South African people.

I thank you.

Issued by the South African Revenue Service, October 19 2011

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