SARS Modernization Program:

Improved Organizational Performance and Value Delivery

Randall Carolissen (PhD) Group Executive Revenue Analysis, Planning and Reporting

November 2011

0

The Use of Advanced Analytics in Tax Administrations Dublin, Ireland

CONTENTS

Economic landscape of South Africa SARS Profile South African Taxbase SARS Compliance Model Modernization Program A Differentiated Operating Model Segmentation Risk management Outcomes and Benefits

Societal Gains Summary and Conclusion

1

Main Economic Indicators

2

South Africa key Economic Indicators

Historical high 1994-2011 Historical low 1994-2011 Current

GDP growth rate 7.1% Dec 2006 -2.6% June 2009 3.0%

Unemployment 31.2% March 2003 23% September 2008 25.0%

Debt as a % of GDP 42.3% Dec 2001 26.8% December 2008 35.7%

Budget balance %

of GDP

- 6.8% 2010 0.1% 2008 (Surplus) 5%

Tax revenues declined from R625. 1 billion 2008/2009 to R598.7 billion 2009/2010 (R26.4

billion or 4.2%) before rising to R R672.2 billion 2010/11

3

SA ECONOMIC LANDSCAPE

INDUSTRY CONTRIBUTION TO GDP GROWTH Although Manufacturing and Mining constitutes only 15% and 5% of total economy, both

industries consistently account for the largest shifts in GDP growth. Finance the biggest contributor at 20% to the economy, following the global recession

assumed a lesser contribution to the growth in GDP. Construction has, except for 2009Q1, contributed very little to overall GDP growth.

4 Industry contribution to quarterly GDP, 2008Q1 - 2011Q1

-8

-6

-4

-2

0

2

4

6

2008Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2010Q1 Q2 Q3 Q4 2011Q1

GD

P G

row

th (%

)

Agriculture Mining Manufacturing Construction Trade Transport Finance Government Other

Government, at 14% of economy, contributed to GDP growth during and post financial crisis.

Despite the contribution of agriculture showing a consistent decline from 4.2% in 1993 to 2.5% in 2010, its impact on GDP growth is still significant.

SARS Profile

In terms of the South African Revenue

Service (SARS) Act (no. 34 of 1997),

SARS is mandated to…

Collect all revenues due

Ensure maximum compliance with tax

and customs legislation

Provide a customs service that will

maximize revenue collection, protect our

borders and facilitate trade.

Revenue growth from R114bn to

R674bn over the past 16 years

(CAGR ~ 12%)

5

13.1 million assessments

processed

R13, 4 billion

debt collected

5.9 million calls

received

3.7 million

Taxpayer visits

3.4 m outstanding returns finalised

1,4 million inbound and outbound passengers processed

320,000 imports and exports processed

2,8 million declarations

processed per month

Tax Revenue

collected

R674 billion

8,8 million

Taxpayers on register

4.7 million

eFiling

registrations

15,307

employees

OPERATIONAL PERFORMANCE 2010/11

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

27.0%

28.0%

100

200

300

400

500

600

700

800

Tax:

GD

P r

ati

o (

%)

Tax

reve

nu

e co

llect

ion

s (R

bn

)

Tax revenue collections Tax:GDP ratio

Decline in tax revenue of 4.2%

SARS Profile: COMPOSITION OF REVENUE Growth in tax collections is a result of a combination of inflation, economic growth, high commodity

prices, improvements in tax administration and tax compliance. Due to stronger CIT collections as well as significant tax relief for fiscal drag the relative contribution of

PIT shrank from 40% in 1994/95 to 34% in 2010/11. Despite the fact that CIT tax rate decreased from 30% in 2004/05 to 28% in 2008/09, relative

contribution increased from 12% in 1994/95 to 20% in 2010/11, with some contraction during recession. Contribution of VAT remained steady at an average ratio of 25%; in 2010/11 the year-on-year growth in

domestic VAT collections was muted. Subsequently a strong recovery in import VAT well lower VAT refunds with introduction of risk engine.

6

-

100 000

200 000

300 000

400 000

500 000

600 000

700 000

1994/95 1999/00 2004/05 2009/10 2010/11

R m

illio

ns

PIT CIT VAT Fuel levy, customs & other

CAGR of 11.8%

CAGR = Compound Average Growth Rate

S.A. Taxbase: PIT distribution mimics Gini Coefficient The skewed distribution of personal income in South Africa (Gini co-efficient

in 2009 of 0.679) is reflected in tax statistics of 2010. The distribution is on 4.6million liable taxpayers.

SA has approximately 5m individuals with taxable income below R60k who is not required to submit tax returns. This group is not included below.

55% of assessed PIT is paid by 9% of assessed taxpayers.

7

–

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

–

25 000

50 000

75 000

100 000

125 000

150 000

175 000

200 000

< 0

1 –

20

00

0

30 0

01

–4

0 0

00

50 0

01

–6

0 0

00

70

00

1 –

80

00

0

90

00

0 –

10

0 0

00

11

0 0

01

–1

20

00

0

13

0 0

01

–1

40

00

0

15

0 0

01

–1

60

00

0

17

0 0

01

–1

80

00

0

19

0 0

00

–2

00

00

0

21

0 0

01

–2

20

00

0

23

0 0

01

–2

40

00

0

25

0 0

01

–2

60

00

0

27

0 0

01

–2

80

00

0

29

0 0

00

–3

00

00

0

31

0 0

01

–3

20

00

0

33

0 0

01

–3

40

00

0

35

0 0

01

–3

60

00

0

37

0 0

01

–3

80

00

0

39

0 0

00

–4

00

00

0

41

0 0

01

–4

20

00

0

43

0 0

01

–4

40

00

0

45

0 0

01

–4

60

00

0

47

0 0

01

–4

80

00

0

49

0 0

01

–5

00

00

0

51

0 0

01

–5

20

00

0

53

0 0

01

–5

40

00

0

55

0 0

01

–5

60

00

0

58

0 0

01

–6

00

00

0

62

5 0

01

–6

50

00

0

70

0 0

01

–7

50

00

0

80

0 0

01

–9

00

00

0

1 0

00

00

1 –

1 2

50

00

0

1 5

00

00

1 –

2 0

00

00

0

3 0

00

00

1 –

7 5

00

00

0

10 5

00

001

+

R m

illi

on

Nu

mb

er

of

tax

pa

ye

rs

Taxable income group

Number of taxpayers

Tax assessed (R million)

Taxpayers assessed for 2008 tax year

S.A. Taxbase: CIT reflects concentration of economy

8

Over 50% of the income tax assessed (222 of the 473 034 assessed) is paid by large companies with taxable income exceeding R200 million.

Contributions of CIT revenue in 2008/09 came mainly from the Financial (29%), Manufacturing (27%) and Mining (13%) sectors

–

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

–

2 000

4 000

6 000

8 000

10 000

12 000

14 000

50

0 0

01

to

1 m

illio

n

1 m

illio

n t

o 2

mill

ion

2 m

illio

n t

o 3

mill

ion

3 m

illio

n t

o 4

mill

ion

4 m

illio

n t

o 5

mill

ion

5 m

illio

n t

o 6

mill

ion

6 m

illio

n t

o 7

mill

ion

7 m

illio

n t

o 8

mill

ion

8 m

illio

n t

o 9

mill

ion

9 m

illio

n t

o 1

0 m

illio

n

10

mill

ion

to

20

mill

ion

20 m

illio

n t

o 4

0 m

illio

n

40

mill

ion

to

60

mill

ion

60 m

illio

n t

o 8

0 m

illio

n

80

mill

ion

to

10

0 m

illio

n

100

mill

ion

to

200

mill

ion

20

0 m

illio

n+

R m

illi

on

s

Nu

mb

er

of

tax

pa

yers

Taxable income group

Number of taxpayers

Tax assessed (R million)

Roughly (no. of companies): • ⅓ have taxable income < 0 • ⅓ have taxable income = 0 • ⅓ have taxable income > 0

Taxpayers assessed for 2008 tax year

SARS Compliance Model

Education

Environmental

Knowledge and

Understanding Effective

Segmentation

Risk

Assessment

Customer

Awareness

Focus on making compliance

easier for taxpayers by

improving service and reducing

the administrative burden.

Deter and catch non-compliant

taxpayers. Credible, legitimate

and firm enforcement, with

appropriate sanctions, will

discourage tax evasion.

Broadening tax base by educating

the public about their tax obligations.

It’s recognised that there is a low

awareness of responsibilities of

fiscal citizenship.

..which will be achieved through our compliance philosophy which

links our actions to the degree of taxpayer/trader compliance..…

…and which we will achieve by increasing efficiency

resulting from our Modernisation programme…

Pareto’s analysis of wealth distribution

SARS focused on

processes with the

highest leverage

i.e. PIT, PAYE

An End-End approach

was taken

Phase 1 focussed on

processes in PIT, PAYE

that account for 20% of

the complexity, but 80%

volume

100%

Useful

many

Vital

few

Wealth Population

100%

80%

20%

20%

80%

Juran showed that Pareto‟s Principle applied generally

Source: J. Juran – „Jurans Quality Control Handbook‟ 1974

“The idea of focusing on leverage points surfaces in

two other ways when we seek to improve processes:

critical paths and bottlenecks.” Joiner

12

… whilst Segmenting the tax base to find High Leverage points

Future SARS differentiated approach

• Streamline

middle Optimise

and reduce effort

on processing

medium revenue

generating

taxpayers/ traders

• Increased

specialisation

Improved targeting

of high revenue

generating

taxpayers/ traders

• Increase outreach

Efficiently enlarge

footprint to

increase

awareness and

compliance

amongst SMMEs

and the informal

sector

1

2 2

3 3

1

1

Modernization: Key Principles

13

In pursuit of maximising taxpayer and trader compliance through targeted

Service, Education and Enforcement a Modernisation Programme built on

three strategic pillars was initiated in 2007 to:

Develop a differentiated operating model to free resources to improve

taxpayer and trader service, enhance risk detection and enforcement

while managing increasing volumes more efficiently and effectively;

Deliver on government priorities including the administration of the

proposed social security system and enhancing border protection, whilst

maximising synergies with our core tax and customs systems; and

Strengthen the organisational foundation by leveraging technology to

ensure sustainable delivery.

Modernization: New Paradigms

14

15

SARS universe (CIPRO and SA population)

Special Individuals Businesses and SOEs Intermediaries

Affected employer

segments

SOURCE: Team analysis

Modernization: Segmenting the Tax Base

Traders

(Trade inter-

mediaries)

Tax practitioners

Employer

as agent

1

2

10

Standard

Complex

SITE

and

below

threshold

4

5

3

Formal

business

Large

Informal

business 8

7

6

NGOs,

PBOs,

government

departments

9

Leg

isla

tive

Fra

mew

ork

Modernization: From Gate Keeper to Risk Manager

16

• Application for Legislation provides for a “one

size fits all” approach to compliance management

• Onus for achieving regulatory compliance

placed on Individuals and businesses

• Application of a legislation provides for flexibility

and tailored solutions to enable risk approach

• Responsibilities for both SARS and taxpayer in

achieving regulatory compliance

• “One size fits all” compliance strategy

• Control and Enforcement focus

• Unilateral approach and Inflexible procedures

• Focus on assessing the veracity of transactions

• Focus on real-time intervention and compliance

• Lack of/ineffective appeal mechanisms

• Strategy dependent upon level of risk

• Balance regulatory control and trade facilitation

• Dual enforcement/client service focus

• Consultative, cooperative approach

• integrity of trader systems and procedures

• Focus on post-transaction compliance assessment

• Effective appeal mechanisms

Le

gislative

Fra

me

work

• Indiscriminate intervention or 100% check

• Control driven focus

• Focus on identifying non-compliance

• Focus high-risk areas , minimal intervention low risk

• Information Management and risk analysis focus

• Identifying both compliance and non-compliance

Ad

ministrative

Fra

me

work

Risk

Ma

na

ge

Fra

me

work

• Legislative provisions provide the individuals and businesses with electronic reporting, storage and

authentication options, enables SARS to rely on source generated data

• Appropriate communication and information technology infrastructure to provide for automated processing IT

Fra

mew

ork

Sanctions for non-compliance

TRADITIONAL “GATEKEEPER” STYLE RISK MANAGEMENT STYLE

Source: World Bank

To From To

12 page static

forms

Multi page

static forms

Single page

dynamic

forms

Single page

integrated

dynamic form

Manual data

capture

Modernization: Establish Strong, Sustainable capabilities

From

Paper /

Manual

Digitization Scanning

Risk Engine

Gate

Keeping

Risk

Managed Targeted

volume, high

yield

High volume,

low yield

Manual

paper

channels

Digital/Self

service

channels Paper

processing &

data capture

eFiling / E@syfile

3rd Party Data

Limited

validation

3rd party

validation Pre-population /

Verification

Taxpayer

declaration/

manual capture

Human intensive

manual processes,

non-value adding

activities

Automated

workflow

processes, value

adding only

17

Push Pull

Modernization: Reducing Cost of Revenue Collections

18

Modernization: Increased Efficiency shifting to electronic channels

19

Return Submission

2006/2007 2010/2011 % Growth in

Total Volumes Total Volumes

% Electronic

Submissions Total Volumes

% Electronic

Submissions

PIT 4 299 756 3% 4 955 705 96% 15%

IRP6 3 244 814 12% 2 801 674 88% -14%

CIT 672 384 < 1 % 724 027 83% 8%

PAYE 4 049 061 < 1 % 4 655 321 74% 15%

IRP5 Certificates 10 878 734 < 1% 28 173 649 100% 159%

VAT 3 635 838 19% 3 493 574 62% -4%

CUSTOMS Decl 5 006 725 38% 4 210 793 82% -16%

Total 31 787 312 10% 49 014 743 92% 54%

In 2010 SARS processed 92% of submissions electronically compared to the US Tax Agency’s 59.1%

Electronic Payments 2006/2007 2010/2011 % Growth

PIT R 6,076,671,685 R 18,058,128,723 197%

CIT R 96,923,265,294 R 142,085,661,443 47%

PAYE R 102,591,048,826 R 233,115,685,314 127%

VAT R 94,913,969,602 R 195,869,749,855 106%

SARS participated in an International Tax Benchmarking Study by the HMRC and achieved performance in the top quartile

Contact Centre 2006/2007 2010/2011 % Growth

Calls Answered 3 879 959 5 040 330 30%

Operational Audits 2006/2007 2010/2011 % Growth

Audits Finalised 299,951 502,739 68%

Penalties 2006/2007 2010/2011

Taxpayers affected - 416 794

IT88 Payments - R 244 964 252

Outstanding Returns Received - 202 479

Return Submission

Electronic Payments

Contact Centres

Operational Audits

Penalties

Register 2006/2007 2010/2011 % Growth

PIT Register 5 391 785 10 671 221 98%

PIT Register

Modernisation: improvement in %

Benefit 2006 2009

Income Tax returns received manually

100%

7% (38% reduction in paper from 2008)

Returns processed electronically

<1% 92% (56% increase from 2008)

Returns processed via BFE

0% 36% (33% increase from 2008)

Returns received via Efiling

<1% 57% (65% increase from 2008)

Returns assessed within 24 hours

<1% 95% (56% increase from 2008) P

ers

on

al In

co

me

Ta

x (

PIT

)

e@syFile: Finalist in 2008 in

both North America and

Europe in the Adobe Max

awards for innovative use of

Adobe technology

2008 Tax Season survey

results for e@syFile, eFiling

and Branch Offices

Results

eFiling 75.51%

Service points (Branches) 72.45%

e@syFile 86.00%

eF

ilin

g a

nd

ea

sy

Fil

e S

urv

ey

“I am super impressed with your delivery of the 2009 tax season. My husband submitted his tax return via e-filing and within 6 days he received his assessment and refund. A job WELL DONE to SARS!!!!”

Bridgette Myburgh

I would like to congratulate SARS on an EXCELLENT job done with regards to service. It is never difficult to get through to the call

center. The agents know what they are doing and are friendly. The website is in my opinion of international standard. It is easy and

efficient. Well done. This is exactly what South Africans need. Easy, efficient and help from the government.

Roxanne Khan 20

Modernisation: Exponential Improvements

21

Benefit 2006 2007 2008 2009

CHANNEL

Income Tax returns received earlier in filing season - 2009 700,000 returns after 9 weeks

1,280,000* returns after 9 weeks

Income Tax returns received at the end of filing season - 2009 2,820,000 3,855,000*

Income Tax returns processed via e-filing

35,000 1,000,000 1,314,000 2,170,000*

Income Tax returns processed via data capture

All returns 1,000,000 455,000 27,500*

Income Tax returns processed via BFE

0 500,000 1,052,000 1,403,000*

Scanning of returns 0 1,000,000 250,000 187,900*

PROCESSING

Average assessing turnaround time (working days)

45-55 days 20-30 days 10-20 days 1.9 days*

Benefit 2008 2009

Submission of IRP / EMP 501 reconciliations

206,000 recons 240,000 recons

Submission of IRP5 tax certificates

11,500,000 certificates

15,200,000 certificates

Pe

rso

na

l In

co

me

Ta

x (

PIT

)

PA

YE

* Actual s data for PIT returns at the end of the 2009 filing season – Nov 2009 (Week 23)

“Just a short note to thank SARS for the

absolute professional manner in which

my tax was conducted. Speedy, efficient

and my payment was extremely prompt”

Josephine Pearl Prabinowitz

22

Societal Gains

o Using Technology and Analytics SARS leapfrogged peers and address explosive growth since democracy

o Advantage of building good fiscal citizenship support establishment of good societal norms

o Single view of taxpayer, allow for economic profiling o Integrate 3rd party data sources, improved intelligence o Improvement in employment and furtherance of IT,

despite relative low internet penetration of 14% in 2011 (World 30.2%), cellphone 101%

o Improved Revenue collection providing fiscal space during recession

o Improved policy analysis in Treasury and in other Government departments

23

Summary and Conclusion Modernization built on segmented and risk management

platforms, extensively employing technology to effect a step change in Operational Efficiency. To ensure a successful outcome it required: o Tax Activism moved political hostile taxpayers and low tax

morality to responsible fiscal citizens o Careful change management whilst reinforcing job

security through no retrenchment policy. o Address the resultant human capital gap through massive

investment in upskilling. o Continuous Engagement throughout the project with

stakeholders, intermediaries and taxpayers. o Education and buy-in of taxpayers o Championing and visible commitment from all levels of

management.

THANK YOU!

South African Revenue Service www.sars.gov.za Tax statistics www.sars.gov.za/home.asp?pid=64671 Email taxstatistics@sars.gov.za National Treasury of South Africa www.treasury.gov.za

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