National Treasury & SARS 2019/20 Preliminary Annual Reports; with Deputy Minister

Meeting report

The Chairperson welcomed everyone in attendance and announced the purpose of the meeting. The Committee will be briefed on the preliminary annual performance of National Treasury (NT) and the South African Revenue Services (SARS) as part of the Budgetary Review and Recommendation Report (BRRR).
 
The Committee Secretariat noted apologies from Mr G Hill-Lewis (DA) and Mr W Wessels (FF+).
 
Dr David Masondo, Deputy Minister of Finance, apologised to the Committee, stating that he would have to leave the meeting between 09:30 and 10:00, and return during the SARS briefing. 
 
The Chairperson announced why the preliminary reports are presented instead of final reports. The reports are not complete until the Auditor General’s report is received. The letter from the National Assembly House Chairperson, Mr Cedrick Frolick, states that a notice from the Minister of Finance in the Government’s Gazette requests that Departments annual reports be submitted by the end of November. The annual reports are usually tabled by end of September, however, the timeframe has been extended due to the Covid-19 pandemic lockdown. This will have an impact on the Assembly’s consideration of BRRRs and Medium Term Budget Policy Statement (MTBPS), which normally occurs in October.  It has been requested that Department annual reports be prioritised and submitted before 16 November. Between 06 and 16 October, Committees are to consider Departmental performance for BRRRs. The tabling of the MTBPS by the Minister is scheduled for 21 October 2020.
 
Remarks by Deputy Minister
Deputy Minister Masondo stated that the team would present the draft in-year financial performance report for 2019/20. He pointed out that NT’s 2019/20 Audit is still underway. Treasury achieved 88% of its fourth quarter (Q4) performance indicators, and expenditure amounted to 95% of the budget. 2020 marks the end of the 5-year strategic plan, and over 80% of indicators were achieved over the past 5 years. The 2020-2025 strategic plan had been updated to reposition the department to focus on service delivery.
 
Government’s procurement process has come under public scrutiny and one of NT’s priorities is to modernise and automate the public procurement system. Treasury is currently reviewing public input on the Draft Public Procurement Bill (PPB), and will engage stakeholders once it has been reviewed. NT has released an interactive Covid-19 procurement dashboard on Treasury’s website. It shows the commodities purchased, the quantities and price of items. It also discloses names of directors of companies that have provided covid-19 related services and goods. With the dashboard, data on public spending can be updated monthly. The dashboard went live on Friday and has since been viewed almost 50 000 times.

He announced that the State Bank memorandum is on its way for cabinet to consider.
 
Briefing by National Treasury
Ms Laura Mseme, Chief Director: Strategic Planning, Monitoring and Evaluation, NT, highlighted that
Treasury achieved 83.33% of its annual indicators. 16.67% was not achieved: this is a combination of 12.5% partially achieved and 4.17% not achieved. She elaborated on which indicators were achieved, partially achieved and not achieved for each division, and pointed out that indicators are not rolled over from one year to the next. Treasury focuses on underperformed indicators given its quarterly performance reporting. This is to link performance and budgeting strictly. She highlighted Treasury’s quarter on quarter performance for each programme and elaborated on the reasons for achievement and non-achievement in each programme.
 
In Programme 1: Administration, Treasury achieved 66.67% of its indicators and 33.33% were partially achieved. Partial achievement is owing to the 97% of the internal audit plan being completed.

For Programme 2: Economic Policy, Tax, Financial Regulation and Research, 91.67% of the indicators were achieved and 8.33% not achieved because comprehensive prudential and market conduct framework for new authorities not developed due to substantial revision of the Bill following the invitation of public comments.

Programme 3: Public Finance and Budget Management, achieved 85.19% of indicators and partially achieved 14.81%. She highlighted that 30 capacity building initiatives to facilitate improved planning, budgeting and financial management were conducted. All Budget Facility on Infrastructure (BFI) projects have been evaluated as facilitating infrastructure is a key focus area for NT. The underperformance is attributed to delays by departments in responding to requests.
 
Programme 4: Asset and Liability Management, 71.43 % was achieved, 21.43% was partially achieved and 7.14% was not achieved. Partial achievement and non-achievement is the consequence NT focusing on inter-divisional relations and spending a significant amount of time on inter-departmental stakeholder consultations. Consequently, the timeframe was affected and delayed completing sections of the Public Finance Management Act (PFMA) and reviewing Municipal Finance Management Act (MFMA) submissions.
 
Programme 5: Financial Accounting and Supply Chain Management Systems, achieved 84.38% of indicators, 6.25% were partially achieved and 9.38% were not achieved.

All indicators were achieved in Programme 6: International Financial Relations and Programme 7: Civil Military Pensions, contribution to funds and other benefits.

Lastly, in Programme 8: Technical Support and Development Finance Programme Management, 77.78% of indicators were achieved and 22.22% were partially achieved.
Ms Mseme pointed out that programme 8 has been restructured and realigned into other programmes. In the future it will no longer be reported on as a separate programme.
 
NT achieved a vacancy rate of 11.8% and achieved its staff demographic targets with 88% of its staff members being Black and 59% female. The persons with disabilities staff compliment was lower than the target at 0.76% of the total NT staff compliment being persons with disabilities. 38% employees participated in skills development & leadership programmes, which was less than planned but understandable given the increased work needing to be done at Treasury as a result of the COVID-19 pandemic.
 
Ms Mseme elaborated on the quarterly spending outcomes in comparison to the budget per programme. She highlighted the overall spending for Q4, detailing the under-spending in the compensation of employees, goods and services, transfers and subsidies, and the payment of financial and capital assets.
 
Mr Dondo Mogajane, Director-General (DG), NT, expressed satisfaction with Treasury’s performance given the current economic context, with South Africa’s economic growth stubbornly remaining below the needed target. Also given the external pressures of slowed global trade and sharp rises in developing countries’ debt levels. Additionally, domestic pressures of poor electricity supply and low demand in the manufacturing sector. Government needs to tackle the structural constraints by stimulating growth and increasing public trust and confidence, reducing policy uncertainty and lowering the cost of doing business. He added that building capacity that will enable efficient and effective management practices in all spheres of government is important. Investigation capacity was provided to the state on critical and complex forensic investigations relating to public procurement through conducting 50 forensic investigations, 6 specialised performance audit reports produced and 62 criminal investigation cases supported. He highlighted that the internship programme, which has been slightly cut back due to budget cuts in recent years, should be focused on to ensure skills around finances remain in public sector over time. Lastly, he pointed out that the Neighbourhood Development Programme (NDP) provides support to municipalities in spatially targeted areas, and funds catalytic projects that contribute to socio-economic transformation and inclusive growth by attracting both public and private sector investment into these precincts.
 
(See presentation)
 
Discussion
Dr D George (DA) asked where the pension fund reform issue resides and NT’s progress on that programme. How is NT factoring in the enormous reduction in tax collection as a result of the pandemic? He added that the loan received by the state is not enough to fulfil everything in addition to issues of corruption. 
 
Mr Mogajane replied that NT is factoring in the under-collection of tax as it is expected. There is a revenue analysis committee that is trying to understand the revenue performance as well. The prediction of a double deficit number factors in the under-collection. In response to this, Treasury is considering stopping some programmes, reducing budgets and ensuring efficiency gains are maximised, to ensure functional operations.
 
Ms Mseme replied that Treasury is still engaging with organised labour on the pension fund reform. Having considered the tax collection reductions, Treasury has not made changes to its Strategic Plan, however, it has made changes to 3 of its indicators in its Annual Performance Plan (APP).
 
Mr I Morolong (ANC) asked how NT plans to address the vacancy rate in light of the pandemic. Despite the technical support Treasury gives to municipalities, despite all of NT’s interventions, the audit outcomes of municipalities indicate poor performance. Has Treasury dispatched a team to provide technical support to municipalities? What is Treasury’s position on the extension of the COVID relief grant funding?
 
Mr Mogajane replied that NT continues to lose skilled people to financial services in the private sector. Treasury has become a hunting ground for financial labour for many companies in South Africa. Treasury has advertised job posts; however, it has been challenging to address the vacancy rate. Treasury has dispatched technical advisors to provide support in municipalities; however, municipalities still have negative audit outcomes. The programme bears fruit here and there but how municipalities are supported needs to be relooked at. The extension of the COVID relief grant was not in the current arrangement of NT. The relief package is coming to an end now in October as it was originally announced earlier in the year.
 
Ms Mseme added that NT will be filling its key positions.
 
Mr G Skosana (ANC) asked if NT has seen any positive changes in provinces and municipalities as a result of programme 8: Technical Support & Development Finance, and the dispersal of technical advisors. He stated that the vacancy rate is low and the demographics of NT staff compliment is representative. What are the challenges resulting in the disability quota being lower than it should be? Is it a challenge of requisite skills among people with disabilities?
 
Ms Mseme replied that the support to municipalities is a priority for NT and it is currently undergoing an organisational review, to be able to leverage additional support to municipalities. Treasury is starting a new value-added assessment process. The results of this assessment will indicate if the technical support has added value to municipalities. She explained that Treasury was not able to achieve its target for people with disabilities due to a gap between its recruitment needs and the response. Treasury is looking at how to address this gap.
 
Ms P Abraham (ANC) requested the Chairperson to forward the letter he announced earlier explaining why the Committee is doing things this way, to all Members of the Committee. This is to avoid a situation in which Members blame the Chairperson for the way things are going at the moment. She requested the Deputy Minister to give a timeframe for when Parliament can expect the long-outstanding State Bank Bill. She asked what NT’s long-term plan to address the electricity issue is.
 
Mr Mogajane replied that Treasury is not directly responsible for the electricity issue but of the Department of Energy. The new Independent Power Produce programme and reform programmes in Eskom will lead to a positive change. Treasury will continue to budget the annual R23 billion support package for Eskom.
 
Briefing by the South African Revenue Service (SARS)
Mr Edward Kieswetter, Commissioner, SARS, stated that SARS needs to make a shift in the things it measures. SARS is advocating for a shift from measuring input measures to output and impact measures. For instance, if SARS has to perform 100 audits and a measurement is to check that the 100 have been completed, the measurement has very little value. The measure should be identifying what the impact of those audits has been. Secondly, SARS is advocating for a shift from transactional measures to transformational and strategic measures. It needs to improve its strategic clarity and build employee engagement. The third shift is for SARS to be more agile and responsive, to be able to respond to what happens even outside of what was planned, such as the pandemic and illicit trade. Important measures to SARS are: the buoyancy factor, which is the performance of revenue collection against nominal gross domestic product (GDP); the cost-to-revenue ratio; overall improvement in compliance trend and trade facilitation. He requested the Committee’s support in SARS’ transformation of wanting to shift from measuring what SARS does to measuring the impact of what it does. 
 
Mr Kieswetter elaborated on the revenue performance, SARS’ achievements against strategic outcomes, the state of stakeholder management, people management and governance, legal and risk management. He also highlighted the financial information and gave an in-year update.
 
Mr Kieswetter explained the context for the 2019/20 SARS Annual Report, stating that the economy’s contraction had a direct impact on revenue collection. The nominal GDP growth of 4.6% along with real economic growth of 0.2% and inflation at 4.4% resulted in a net revenue performance of R1,356 billion, which grew by 5.3% compared to the previous year. There was an erosion of the tax base especially for Pay-As-You-Earn (PAYE). The quarter on quarter unemployment rate increase by 1% for the first quarter of 2020, putting primarily employment taxes under pressure. The damage caused by State Capture was also significant and SARS is currently working on rebuilding itself as an institution. In the past year, SARS has worked to address:
-Governance, integrity and reputation
-Building leadership competencies
-Revenue recovery and compliance
-Strengthening organisational capability
 
Some of the performance highlights include the growth of revenue collection outperforming economic growth, the 30% decrease in taxpayer complaints, and the VAT refund turn-around time being reduced to 18.5 days from 27.88. SARS’ overall achievement scorecard is 78.22%. The total debt book for the 2019/20 financial year is R177.0 billion. Attending to this is a priority and so SARS is in the process of migrating its tax and customs systems and processes from a modified cash basis of accounting to an accrual basis of accounting in line with Generally Recognised Accounting Practice (GRAP) standards. This will result in the simultaneous recognition and measurement of revenue, receivables (Debt book) and payables (Credit book), so that a complete financial position is reflected.
 
The strategic outcomes achieved were an increase in customs and tax compliance, an increased ease and fairness of doing business with SARS and an increased cost effectiveness and internal efficiencies. Lastly, there has been increased trust and credibility, with 11.6% of acquisition spending on black women-owned entities.
 
Regarding people management, SARS has 561 less permanent employers compared to last year, mainly due to lack of funding impacting capacity. With governance, legal and risk management, SARS went through enormous changes this year, necessitated by the need for SARS to realign itself with an ever changing environment. The damage to SARS caused by State Capture is also significant and SARS is in the process of restoring public confidence.

Mr Kieswetter presented Members with details on SARS’ expenditure for the 2019/20 period, its strategic intent and vision 2024, which is “to build a smart modern SARS, with unquestionable integrity, trusted and admired”.
 
SARS’ response to the COVID-19 pandemic and lockdown was to ensure that taxpayers were enabled to continue to fulfil taxpayer obligations. SARS reconfigured its way of work to enable staff to work remotely and encouraged online engagement. Branch visits could only occur by appointment and there was an overall upgrade in the use of technology, data and artificial intelligence. The COVID-19 Tax Relief measures, under the Disaster Management Act, were also implemented. During lockdown, there has also been increased communication to taxpayers, traders and tax practitioners.
 
In the 2020 filing season, SARS has committed to the following:
-To invite more than 3 million taxpayers to participate in the expanded use of our auto assessment feature.
-Provide at least 8 out of every 10 taxpayers with an assessment outcome in under 3 seconds.
-Pay at least 7 out of every 10 taxpayers their refund if it’s due, within 72 hours if nothing else is required to be rectified.
- Be specific when requesting any outstanding information that is holding up your assessment.
-Conclude 7 out of every 10 audits, when an audit is required within 30 days.
- Issue letters for late and outstanding returns and impose penalties as prescribed in law.
-Enforce the administrative steps in terms of the Tax Administration Act
-Name and shame those convicted of criminal offences
 
Mr Kieswetter highlighted that SARS paid out R13.4 billion in refunds to 1.24 million tax payers. He concluded by briefing Members on some of the challenges SARS faces, such as the poor global and local economic conditions that make tax collection challenging, and the low compliance levels apparent across the entire tax base.
 
(See presentation)
 
Discussion
Dr George remarked that he was pleased with the progress SARS is making. He asked about the accuracy of the auto-assessments as he received concerns from taxpayers who felt they were being deceived by SARS. Secondly, he asked what SARS intends to do about the difficulty of opening SARS electronic letters for some online users such as himself. 
 
Mr Kieswetter replied that SARS is confident that the algorithm that does the assessment is correct. Two-thirds of people have agreed with the assessment outcomes. Taxpayers who did not agree are able to submit any additional information for verification and reassessment.
 
Mr Mark Kingon, Head: Stakeholder Relations Integrity and Anti-Corruption, SARS, replied that the issue with opening letters is device-related, especially with Apple devices. There is an issue of incompatibility with certain platforms such as Safari on Apple devices. SARS is working on improving its documents to be multi-platform compatible by moving to files to HTML5.
 
Mr Morolong stated that the SARS’ commitment to pay refunds within 72 hours is commendable. He requested the Commissioner to elaborate on the adequate resources from NT, that are required for rebuilding SARS as mentioned in slide 25. He added that the pandemic has exposed the magnitude of illicit tobacco trade. Has SARS had an opportunity to reflect on the need to heighten the fight against illicit tobacco trade?
 
Mr Kieswetter replied that the funding of SARS has seen a steady decline in the past few years. As a short-term measure, SARS has indicated to NT that it requires data-science analysts, specialised investigators and auditors, and IT security to rebuild capacity. He requested to come back to the Committee and give a detailed presentation on the illicit economy, tax evasion and tax gap, which is the difference between the effective tax rate versus the statutory tax rate. A greater gap indicates that something is wrong, such as areas of aggressive avoidance or even tax evasion. He added that SARS has consistently communicated to NT that it is under-funded by R800 million a year.
 
Mr Skosana asked how extensively the tax auto-assessment system was communicated to taxpayers, as introducing something new requires thorough communication. Taxpayers have raised concerns over where SARS gets the information used in the assessment and also the initiative created confusion for some. For instance, a person received an SMS from SARS stating the tax assessment was complete and contained an amount. The person though the amount was a tax refund due to them and accepted, however, later discovered it was tax money owed to SARS. The person then had to start a dispute process.
 
What plans does SARS have to handle its high debt book of R177 billion? 
 
Does SARS think the 11.6% acquisition spend on Black women-owned entities is enough?
 
Mr Kieswetter replied that the auto-assessment outcome uses third-party information from employers, banks, pension fund administrators and medical aid institutions. In the past, SARS has not done well in monitoring Pay-As-You-Earn (PAYE) information. A few large companies recently updated the third-party information resulting in a discrepancy between the information on SARS’ live system and what was communicated by SMS. The live system information contains the most up-to-date information. In hindsight, SARS should not have issued SMSs with a number. Instead it should have just communicated that one has been selected for auto-assessment and can look login to view the outcome. This will be addressed in the future, and SARS is working on giving feedback for any confusion caused. He agreed that communication can be improved.
 
He highlighted that SARS’ debt management is a huge area of concern, particularly how it is accounted for. It is a compliance issue that requires an investment in SARS’ systems towards Generally Acceptable Accounting Principles (GAAP) Accounting from Cash Accounting. Also, SARS has not been efficient in managing its debt and how it is aged.
 
Ms Yolande van der Merwe, Chief Financial Officer, SARS, explained that the reason SARS has not spent as much as it intended to, is because it set high targets for itself in qualifying small, medium and micro enterprises. Given that 90-95% of SARS’ budget is fixed; it leaves very little room to spend in these areas. SARS has exceeded its target of spending in black-women-owned enterprises; however, it did not reach targets in other areas.
 
Mr Johnstone Makhubu, Chief Revenue Officer, SARS, added that SARS aspires to shift its expenditure, however, due to constraints in budget growth, SARS is not able to shift funds to benefit the targeted entities. Additionally, SARS has a stricter definition of exempted micro enterprises (EMEs), with the reported figures reflecting EMEs that are 51% black-owned.
 
Mr F Shivambu (EFF) remarked that the gradual decline in company tax collection is partly due to SARS’ inability to deal with aggressive tax avoidance. What measures are being implemented to deal with the aggressive tax avoidance, especially by multinational companies and large audit firms? He requested that the Committee be given a categorical breakdown specifying how much tax was collected from each sector, such as the mining sector, agriculture sector, retail sector and so forth. How will the digital commerce sector be taxed? He also requested the Commissioner to elaborate on what exactly state capture has done to SARS. He requested specifics on how it has affected its capacity to collect revenue.
 
Mr Kieswetter replied that SARS’ ability to respond to aggressive tax avoidance is heavily impacted by the lack of capacity in areas of transfer pricing, base erosion and profit-shifting. SARS has witnessed a significant increase in moving revenue to offshore accounts. SARS would like to come back and give a more detailed presentation on its response to aggressive tax avoidance. There are two issues with taxing the digital economy. Firstly, changing the basis for determining taxing rights in a country, which is currently physical presence/residency. This is still under discussion as the nexus is no longer relevant. There is a proposal to move the nexus towards economic presence instead of physical presence. Consumption tax/Value Added Tax (VAT), has already been digitised in South Africa.
 
Mr Makhubu replied that Treasury’s detailed Annual Report shows Corporate Income Tax (CIT) performance. This year, CIT has shown an increase of 11% from the mining industry. The financial sector has shown a contraction of 1.6% in annual contribution to CIT. The contraction was mainly caused by the banks fighting off some of the bad debt picked up. The retail sector saw a contraction of 1.8% in annual contribution to CIT, which was driven by multiple things around consumption. For instance, most households focused on servicing debt, reducing consumption thus affecting the retail sector. There have been a few initiatives under the Davis Tax Committee, for instance an initiative has started with international taxes and multinational companies.
 
Mr Kieswetter stated that what is contained in the State Capture report is true. Furthermore, the actual impact of state capture on SARS is even more significant than what is described in the report. Regarding the impact on capacity, inappropriate leadership appointments were made. People who did not have the requisite experience to operate in leadership roles were being appointed, resulting in SARS suffering a negative impact on leadership. SARS saw an exodus of over 2000 people who were specialised auditors, debt collectors and such specialised workers, who left due to losing confidence in the organisation or because the workers were arguably forced to leave. SARS’ procurement and recruitment practices were compromised, which undermined its Integrity, such as the KPMG review. SARS started a listening campaign to hear how people were marginalised and mistreated during the state capture. The campaign provides more evidence of the impact of state capture.
 
Mr Kieswetter requested to return and give a presentation on Members’ areas of concern, such as the illicit economy and areas of aggressive tax planning.
 
Mr Shivambu requested to be given the breakdown of the CIT for each sector and asked for further clarity on what will be done to tax eCommerce.
 
Mr Kieswetter replied that SARS has given a response to the issue of eCommerce tax, and will reissue its response on it to all Members.
 
Mr Mogajane explained that the biggest reduction in funding to SARS was after Fees Must Fall. An amount of R1.5 billion taken at one go, and the reduction was informed by cuts across all departments and other compelling reasons such as SARS running a large cash-balance at the time. SARS’ call that it has been underfunded since that initial reduction are true, however, it is difficult to give back the R1.5 billion immediately without factoring reallocation over a number of years. This is due to several reasons, such as the poor performance of the economy and the revenue shortfall. He emphasised that Treasury makes recommendations on the budget and Cabinet makes the decision on budget cuts, making it a government-wide decision. Treasury expects Departments to make the most efficient use of the resources currently available. If an opportunity arises to increase funding to SARS, then it will be increased.
 
Deputy Minister Masondo stated that economic growth has been low for over 10 years, and has been worsened by the pre-pandemic recession and the pandemic itself. It has significantly impacted tax revenue and unemployment. The number of unemployed people has increased to 14 million. Business spending and investment are low, which are functions of economic growth, partly because of unreliable water and electricity supply. Consequently, NT is prioritising infrastructure to improve business confidence. The quality of government spending has not been producing growth because of spending on ailing state-owned entities (SOEs) and corruption which diverges resources from economic activities that bring growth and servicing the poor. Treasury supports SARS’ efforts to strengthen institutional capacity.
 
Regarding efforts to tax ecommerce activities, the Value Added Tax (VAT) regulations have been revised to include intermediaries like Amazon, to register as VAT vendors. A global and continental approach to tax the digital economy is needed. NT is working with the African Tax Administration Forum (ATAF) to place this issue on the African Union agenda. He requested that Members place the matter of taxing the digital economy on the agenda of the Pan-African Parliament. He expressed his appreciation to compliant tax payers, the Committee and its Members.
 
Closing remarks
The Chairperson thanked SARS and National Treasury for briefing the Committee. The Committee believes that what has been mentioned will be implemented. He remarked on the growing unemployment, inequality, poverty and moving further away from the National Development Plan (NDP) targets. He did not think that the NDP goals will be reached in time. He pointed out that there comes a time where government needs to move beyond focusing on the problem statement.
 
The meeting was adjourned.