Underfunding hinders Sars’ progress in advancing systems

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JIMMY MOYAHA: I’m joined on the line by the commissioner of the South African Revenue Service, Mr Edward Kieswetter. Good evening, Edward. Thank you, as always, for your time. You’ve just wrapped up the [second] Network of Tax Organisations conference, and I believe the conference went well.

EDWARD KIESWETTER: It went exceptionally well. Just for the audience, the Network of Tax Organisations [is a global network of regional and international organisations of revenue administrations] connecting …..180 countries around the world. And so we were privileged as the Africa Tax Administration Forum, which served as vice-chair, to co-host the conference for three days in Cape Town.

JIMMY MOYAHA: What was discussed at the conference? The last time you and I spoke, there was a conversation around improving Sars’ efficiencies, ensuring that digitalisation comes to the fold.. Did that come up and was that a key focal point in the conference?

EDWARD KIESWETTER: The theme of the conference was digitalisation. Increasingly as the world of work changes, as business models are significantly impacted by exponential and disruptive technology, issues such as taxing rights are affected because traditionally taxing rights are determined by physical presence. But today [company] like Amazon or Alibaba may be physically located and headquartered in one jurisdiction, [while its] economic presence is ubiquitous.

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JIMMY MOYAHA: Absolutely.

EDWARD KIESWETTER: So where are those taxing rights really determined? How much of that revenue should a country like South Africa have? That’s a huge issue that is imposed on us by digitalisation and technology. In addition to that, if you think about the fact that an organisation like Sars has to process 27 million returns every year, we cannot do that by capturing that in the old-fashioned way. We cannot process it by assessing it in the attrition way.

So digitalisation and enabling technology, artificial intelligence, is central to the success of our work. There is one last point that I made very clear. Well, I made two points clear at the conference, which are worth repeating.

The first is that we need to work towards a common digital identity for all citizens across the whole of government, and even across the whole of society.

Where countries have regional digital identities, you are not only better able to serve through the provision of public goods and services, but you are better able to track economic activity and detect and respond to the proliferation of economic and tax crime, illicit financial flows, etc. So that was a strong message for this conference. It has worked together towards a common digital identity.

And another strong message is that governments ought to see the revenue authorities as investment centres, not as cost centres.

What that means is in times of austerity, governments tend to cut across the board; and cutting costs from a revenue authority, which may have short-term expediency, just creates long-term implications.

For me the best form of revenue for any government to strengthen its fiscal integrity is still an efficient and well-functioning tax administration. Over the last four years through the turnaround of Sars we’ve seen how that can benefit South Africa.

JIMMY MOYAHA: Let’s look at the requirements for this digitalisation and the significance of making sure that the institution that is Sars remains ahead of these sorts of things. The technological investment that needs to go into updating some of the old processes that you mentioned, ensuring that things aren’t done as manually as they used to be – if we are not able to do that, how significant a bearing will that have on not only the collections that Sars is responsible for, but also on the overall state of our development going forward? It sets us back more than just five or six years if we’re not able to keep pace with the developing world that we now live in.

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EDWARD KIESWETTER: Oh, absolutely. You are spot on. An underinvestment in Sars, such as we’ve experienced since about 2014 at the beginning of state capture, has an incalculably negative impact, firstly on the compliance environment and secondly on the revenue collection.

Many studies, including studies that we have recently undertaken, have shown that we undercollect anywhere between R200 billion and R300 billion of tax revenue. Imagine if we can ensure that we harvest that, that’s another R200 billion to the coffers of state that we don’t have to go and borrow from expensive international borrowers or from the market. That over the long term is the surest way [to the] fiscal sustainability of South Africa.

The point you make is that we have a growing social wage. Understandably, healthcare, social grants are necessary factors of the South African context in addressing the social disadvantages.

In addition to that, though, government has to invest in legacy infrastructure that enables data, economic activity, building economic capacity and creating more jobs. When you do all of that well, you expand your tax base.

But an expanded tax base is only half of the challenge. The second half of the challenge is to ensure that that base remains compliant. That’s why Sars’ impact on the South African democracy is so inordinately significant. And sometimes if we are shortsighted, we can take austerity actions that may balance the books in the short term but will have incalculable damage in the longer term.

JIMMY MOYAHA: Commissioner, before I let you go, can we take a look at the hindrances? The underfunding side of the conversation is a significant contributor. The fact that Sars remains underfunded by National Treasury hinders you as an organisation from being able to deliver on your objectives. I bring this up in the context of conversations around other departments like the Department of Tourism, where we’re looking to approve billion-rand sponsorships of international football clubs and improve tourism into South Africa.

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As you rightly mentioned, it’s very nice as a picture to invite people into South Africa, to increase the spend in South Africa, to promote the economy of South Africa, but if we’re not effectively and efficiently collecting where we need to be, then a lot of the money slips through the cracks. This is why your organisation has to deal with illicit trades and all of those sorts of things. How much is required for Sars from a funding perspective at National Treasury level, and how much of that has been committed?

EDWARD KIESWETTER: To be fair to my colleagues in National Treasury, it’s not just Sars that is subject to austerity measures. All other departments are. The NPA, the Hawks, all of the departments [are], because the reality is that currently expenditure significantly exceeds revenue. The economy has declined and we have seen a point of slowdown in revenue collection. That’s a reality that the minister of finance has to deal with and in his October budget speech address, he will address that.

But in the meantime, there are two things that I am clear about. The one is not only to indiscriminately slow down the expenditure of government, but in fact to improve the efficiency of spending. That’s an important point.

Secondly, not to make across-the-board soft tack……, but in fact in certain areas to spend more money that will create productive capacity, that will improve the efficiency of the enforcement of the state. And so one has to be very prudent in how you over time reconfigure the cross profile of South African government, as opposed to only expending or slowing down expenditure.

How does that affect Sars? Well, let me say, we are on public record in our reports to parliament to say that over the next three years in Sars’ funding we are short of anywhere between R16 billion and R23 billion.

JIMMY MOYAHA: That’s significant. That’s a big number – anywhere between R16 billion and R23 billion required in order to improve the effectiveness and the efficiencies that Sars as an organisation aims to achieve. Hopefully this is something that National Treasury is able to balance.

As you rightly mentioned, there are some difficulties that present themselves for National Treasury, and we will obviously hope that the opportunity, when afforded in the October Mid-Term Budget Policy Statement, provides a bit of clarity around where we could potentially head and what we could potentially see in an effort to optimise our current budget situation. The hope is obviously that we are able to narrow that deficit as quickly and as sustainably as possible.

But thank you so much, commissioner, for your time. Thank you for availing yourself. We know that you were at the conference and you’ve just wrapped up. Thank you so much for that.

That was Sars Commissioner Edward Kieswetter giving us a sense of the Network of Tax Organisations conference that took place in Cape Town today, as well as the objectives discussed there, and what that means for our receiver of revenue services, and what their collections will look like potentially throughout the remainder of the year and hopefully going into next year.