If there were any doubts about the dire situation faced by the SA Revenue Service (Sars) in raising tax revenue, finance minister Malusi Gigaba laid them to rest in his budget speech.

In a move potentially fraught with political risk for the ruling ANC, Gigaba announced an increase in the Vat rate from 14% to 15%, effective on April 1.

This will bring in an estimated extra R22.9bn in the 2018/2019 fiscal year, helping to close an annual tax receipt deficit approaching R50bn.

"We always knew that when government increased the Vat rate we would be at the bottom of the revenue barrel," says Ernie Lai King, MD of tax consultancy One Road Consulting.

The past fiscal year was always going to be a tough year for Sars on the tax revenue collection front. And it was — in no uncertain terms.

Last February, then finance minister Pravin Gordhan set Sars a goal of collecting tax revenue of R1.265trillion, a 7% increase compared with the previous fiscal year. It was a daunting task in an economy in which growth had ground to a halt and annual inflation was to fall to just above 5%.

Ernie Lai King
Ernie Lai King

Sars pulled out the stops, but it was not enough. Preliminary estimates show that tax revenue collected in the past fiscal year fell R48.2bn (3.8%) short of the budgeted total.

That’s at least a marginal improvement from the expectation in the October medium-term budget policy statement, in which Gigaba warned of a projected tax collection shortfall of R50.8bn.

In his latest budget speech, an undaunted Gigaba set Sars the task of raising tax revenue of R1.345trillion in the 2018/2019 fiscal year. It represents a 10.5% (R128bn) rise on the estimated tax revenue collected in the past year.

As always, personal income taxpayers will bear the brunt of Gigaba’s tax-raising goals. In addition to the increase in Vat, he is aiming to extract another R44.8bn (9.7%) from taxpayers through means including lower-than-inflation increases to personal income tax rebates and brackets. In all, individual taxpayers are projected to contribute revenue of R505.8bn, or 37.6% of total tax revenue.

With Vat added, individuals are projected to contribute tax revenue of R853.9bn, or 63.5% of total tax revenue.

Also as usual, corporates got off lightly, with their tax contribution to state coffers projected to rise by R13.1bn (6%) to R231.2bn, or 17.1% of total tax revenue.

But in government’s defence, it finds itself between a rock and a hard place on corporate tax. The current corporate tax rate is 28%.

In its revenue trends and tax policy review, national treasury notes that the global trend is to reduce corporate income tax rates. The US, for example, has lowered its corporate tax rate from 35% to 21%, and the UK has lowered its rate from 30% to 19%.

"At 28%, SA is becoming an outlier," warns national treasury.

Can Sars pull off the revenue collection objective it has been set by Gigaba? It remains to be seen. But recent history suggests it will be touch and go.

Tax collection shortfalls have, unfortunately, become the norm over the past four fiscal years. And the shortfalls have been rising.

In the 2016/2017 fiscal year tax revenue fell 7% (R30bn) short of the R1.174trillion targeted. That was a sharp rise from the 1.1% (R11.6bn) shortfall in the 2015/2016 fiscal year and the 1.5% (R14.65bn) shortfall in the 2014/2015 fiscal year.

With the growing shortfalls has come an increasingly aggressive approach by Sars to extract every last cent it can from taxpayers.

Sars has also been clinging on to refunds due to taxpayers, says Andrew Wellsted, head of tax at Norton Rose Fulbright.

This is so much so that the tax authority was censured in a recent report on the refund issue by the tax ombud. The report noted that between November 2016 and March 2017 the office of the ombud received 500 complaints about Sars’s refusal to pay refunds. Half of the complaints were found to be valid.

"The average time it takes us to sort out a refund problem is three months," says Mike Teuchert, national head of taxation services at Mazars. "It is time-consuming for tax advisers, and, for clients, [it] adds more fees. Most individuals do not have the knowledge needed to approach Sars themselves."

And for refunds or other issues a taxpayer may have with Sars, the office of the tax ombud is not a quick solution.

"All avenues with Sars must first be followed before a taxpayer can approach the ombud’s office," says Teuchert.

Sars has devised another means of making life difficult for taxpayers through deductions claimed in a tax return.

Teuchert explains that if Sars requests verification of a claimed deduction, it sends it to the taxpayer’s online eFiling profile, with no back-up through e-mail or conventional mail. Miss a Sars request, and it will disallow the deduction.

This can easily happen. "No one looks at their eFiling profile on a regular basis," says Teuchert.

Sars is also after much bigger fish, among them high-net-worth (HNW) individuals with undisclosed assets offshore. Sars is now armed with the automatic exchange of information treaty, an initiative of the Organisation for Economic Co-operation & Development (OECD) that came into force in June.

Mike Teuchert
Mike Teuchert

The treaty brought with it the common reporting standard under which tax authorities in more than 60 countries share information on assets and bank accounts held by HNW individuals.

Underpinning this, financial institutions are now required to keep records of their HNW clients, comply with due diligence requirements and report pertinent information on a regular basis to tax authorities.

The no-place-to-hide nature of the new common reporting standard was hoped to already have shown results, albeit indirectly. Delinquent taxpayers with undisclosed foreign assets had been provided with an amnesty to come clean. It expired at the end of August.

Disappointingly, Gigaba made no mention of the outcome of the amnesty in his budget speech.

"I suspect the amount of assets revealed proved to be embarrassingly low," says Lai King.

Whether Sars will use the OECD’s common reporting standard to crack down on errant taxpayers remains to be seen.

"We have not seen anything yet," says Teuchert. "But it is still early days. A lot of revenue authorities are still trying to work out how they will be able to analyse the information."

The common reporting standard has another key role to play: cracking down on multinationals indulging in profit shifting to the most beneficial tax jurisdictions. The result is a loss of tax income (base erosion) in countries where they earn their profits.

SA’s comparatively high corporate tax rate puts it at risk of base erosion and profit shifting, warns treasury. The most significant factor in this is transfer pricing between units of a multinational company. While it should be done at arm’s length pricing, it is a practice open to much abuse.

With the introduction of the common reporting standard, Sars now has access to country-by-country information on all large multinationals operating in SA.

Sars will soon find itself under scrutiny following President Cyril Ramaphosa’s announcement in his state of the nation address that a commission of inquiry is to be set up to probe "tax administration and governance" at the revenue authority.

Gigaba in November called for such a commission to be set up.

"We know very little about what the commission’s remit is, but I suspect it will in part deal with the substantial loss of senior staff in the past 18 months and all the negative public attention Sars has been getting," says Wellsted.

Says Teuchert: "There is no accurate information on Sars staff turnover and in its media releases it has played down the losses of highly experienced people. But anecdotally we see it all over the place."

It is worrisome at a time when Sars needs all the skills it can muster.

"A strong Sars is critical to restoring SA to health," says Teuchert.