Presentation to the Standing Committee on

Public Accounts

19 March 2003

Contents

1. Introduction

2. What has SARS Achievedi. Business Achievementsii. Revenue Achievementsiii. Audit Reports

3. SARS Transformation

4. Risk Management & Internal Controls

5. The Next Steps …

Business Achievements

Achievements - Processing Improved cycle times:

84% of all assessments issued within 21 days Quality Improvement

quality assurance to reduce assessment errors Corrections of accounts

Reduced balance of SMR account (unallocated payments) by 43.8%

Introduced UIF collections process in April 2002 UIF collected till 16 March 2003 – R3.9 billion

Developed a more user friendly tax return

Achievements - Customs Improvement in border post infrastructure Implemented: Transit System; Warehouse

Inventory Management System; Export System; Manifest Acquittal System; CAPE Phase II

Recruitment and training of over 500 staff Established national and local stakeholder

forums Promotion of regional and international

cooperation

Excise Duty at Source

Implementation of Duty at Source Tobacco 1 Oct 2003 Spirits 26 Feb 2003 Beer 26 Feb 2003 Oil 2 April 2003

Service

Launched SARS Service Monitoring Office New dedicated tax exemption unit for public

benefit organisations and other entities Released discussion document on Taxpayer

Service Charter New rules for tax courts and settlement of

disputes Introduce an advance ruling system

Enforcement Actions

Registration Create awareness of obligation to register Penalties and prosecution for failing to register Reduce number of unregistered taxpayers Migrate towards single registration for taxes Initiate specific tax base broadening programs

Using third party information Street visits

Enforcement Actions (cont)

Filing Provide assistance to taxpayers with filing process Revision of extension regime Quicker action against filing defaulters Penalties and prosecution for non – filers

Enforcement Actions (cont) Audit

Risk based approach Introduce segmentation of the taxpayer base Enhanced field audit presence Proper reporting and statistical analysis of audit

results Special audit teams focussing on areas of serious

non-compliance Higher penalties on PAYE defaulters Increase skilled audit capacity

Enforcement Actions (cont) Investigation

Proactively identifying criminal investigation cases through intelligence; industry analysis

Enhanced cooperation with other government agencies

Strengthen investigation and prosecution capacity Special focus on organised crime Targeted campaigns iro high risk areas

Alcohol Ghost exports Counterfeit products

Enforcement Actions (cont) Collections

Automated debt management system Special focus on old debt Proactive management of new debts Enhancing outbound call centre capacity Outsource certain categories of debt collection Extension of appointment of agents for payment of tax to

other taxes Making shareholders of liquidated companies personally

liable for failed companies tax liabilities Making withholding agents directly liable for taxes

Measures to Address Tax Avoidance

Disclosure of tax avoidance structures Limiting losses from secondary trades Extension of general anti-avoidance principles

to other tax acts Transfer duty avoidance utilising nominee

transactions Extension of anti-connected person loss rules 200% penalties for PAYE transgressions Penalties for non-royalty payments

Audit Achievements

Audit Achievements A notable achievement in the audit report for

Administered Revenue was the elimination of the previous report items relative to insufficient risk analysis and audit procedures.

An unqualified audit opinion for SARS Own Accounts

Ongoing strengthening of the relationship between SARS and AG and a shared understanding of the key risks in the Audit engagements, with recognition of the Internal Audit role.

Revenue Achievements

Revenue : 2002/03 Printed Estimate: R268.5 billion Feb 2003 Revenue Estimate: R280.1 billion Revised is R11.6 billion above Printed

Estimate This is attributed to:

real growth in the economy higher than expected inflation greater corporate earnings particularly in the

commodities sector, and improved compliance activities

Achievements for the past six years

* R11.6 billion is projected as the surplus above the original estimate

R 'billion 1997/8 1998/9 1999/0 2000/1 2001/2 2002/3

Target 164.2 179.2 193.9 213.6 236.8 268.5

Collections 165.3 184.6 200.9 220.9 252 280.1

Above target 1.1 5.4 7.0 7.3 15.2 11.6

Total additional collections 47.6

1998/9 1999/2000 2000/01 2001/2 2002/3Lowest personal bracket 31,000 33,000 35,000 38,000 40,000 Lowest marginal rate 19% 19% 18% 18% 18%Highest personal bracket 120,000 120,000 200,000 215,000 240,000 Highest marginal rate 45% 45% 42% 42% 40%Number of brackets 6 6 6 6 6Primary rebate 3,515 3,710 3,800 4,140 4,860 Additional rebate 2,660 2,775 2,900 3,000 3,000 Tax threshold 18,500 19,526 21,111 23,000 27,000

For under 65

Trend - Individual Tax Rates

1995/6 96/7 - 98/9 99/00 - 01/02 2002/3 2003/4

Company rate 35% 35% 30% 30% 30%STC 25.0% 12.5% 12.5% 12.5% 12.5%Combined rate (100% distribution) 48.0% 42.2% 37.8% 37.8% 37.8%Combined rate (33.3% distribution) 39.3% 37.4% 32.6% 32.6% 32.6%

Trend – Corporate Tax Rates

Tax Cuts

PIT relief 1998 – R3.7 billion 1999 – R4.9 billion 2000 – R9.9 billion 2001 – R8.4 billion 2002 – R15.2 billion 2003 – R13.3 billion

Total R55.4 billion

SARS Transformation

SARS Transformation Process

Approach to Transformation at SARS Immediate Changes

Infrastructure; Process Improvements; Teaming; Skills Upgrading

Immediate to Medium Term Changes New Business Architecture; Policy Changes; Organisational

Design

Medium to Long-term Changes New Automation and Technology Platform; Continuous

Policy and Process Improvements

SARS Transformation: Delivered? December 2001:

Implementation of Siyakha in KwaZulu-Natal

October 2001 to September 2002: New Management Team in Customs; New

Business Process; e.g. New Anti-smuggling, PCI, Risk Profiling Teams.

October 2002 - January 2003: Implementation of Siyakha in Western Cape

Siyakha Western Cape Roll Out Bellville Assessment Centre

Establishment of a call centre and two branch offices

Enforcement Centre in central Cape Town

Changes to smaller offices over the next few months

In the medium term

Medium Term Develop an Enterprise Architecture to facilitate the

organisation’s transformation

Review Administrative Policy

Continuous Process Improvement

Risk-Based Business Processes

Performance Metrics and Measurement

Skills Development and Deployment

Technology enhancement

Financial investigationsCriminal investigations

Prosecutions

Internal / External

examinations and inspections

AssessingFiling

Pre

-fil

ing

Pre

-e

ng

ag

em

en

t

Education

Service

Encourage filing

Subscription - registration

Receive & update information

Payments

Calculate and measure liability i.r.o declaration by customer

Examine Inspect Investigate Criminally investigate

CollectProsecute

Educate

Com-municate

Adver-tise

Service

Risk-profiling

Service & Engagement

SARS Business Process

In the medium to long term

Long Term

New Automation Technology Electronic Document Management System Integration of Systems

New Technology Platform Additional FIMS Modules Completion of New Customs Systems

E- SARS

Risk Management &

Internal Controls

Risk Management Governance

Process/Business Risks Tax Gap SARS Compliance Model

Internal Control System

Technology and Systems

Governance Minister

Regular Meetings

PFMA Audit Committee; Internal Audit

SARS Amendment Act HR; IT Committees

Internal Governance EXCO; Sub-Committees; Programme Steering Committees

Parliamentary Committees

Revenue Gap

Revenue Target

Macro economic factors

Tax gap strategies

Assessing efficiencies and quality

Anti avoidance measures

Legislative loopholes

Drivers of Revenue

Tax and Customs Gap

Tax Gap Analysis

Activation Strategies

Long Term

Revenue Trends

Inductive Surveys

Deductive Analyses

Segmentation of Tax Base

Tools for Activation

Key Accounts & their Drivers

Models for Estimation

What is the future Revenue Base?

How to close the Tax Gap?

Rbn

Time

How big is the current Tax Gap?

Tax Gap - Complexities of the PIT Tax Gap

Foreign dividends

Rental

Allowances

Deductions

Understate Taxable Income

Overstate expenses / deductions

Filing

Not filing

Individual Evasion

Travel

Donations

Medical

Pension / RA

Other

Salary

Self-employed profits

Interest

Other allowances

Uniform

Entertainment

SubsistenceFringe Benefits (non-cash income)

Retains partial

Deducts

Not deduct

Registered for PAYE

Not registered for PAYE

PAYE - EmployerEvasion Retains all

Incorrect issuance of IT3’s

Simply not deducting tax

PIT

Ev

as

ion

Retirement Benefits

Under deducts(with knowledge)

This tree defines the exhaustive set of areas that require data to estimate the tax gap based on where the decision rights are held.

Tax Gap - Corporate Income Tax Evasion

Cash

Non cash

Active

Dormant

Filing

Not filing

Corporate Evasion

Depreciation

Allowances

Provisions (14)

Inflation of expenses (7,8,9,10,11,12)

Private expensesOverstate

expenses(1, 12)

Under-declare income(1, 12)

Active

Dormant

Recoupment

Understate income (2)

Declaring income as capital (5,6,7,8)

Other income

Interest received**

Discounts/rebates

Sundry (3,4)

Tax underpaid (13)

Assessed lossschemesTax holidays

* Income earned on ‘grey’ money, which cannot be declared as it was taken out illegally** Interest received and foreign exchange gains on Rand denominated outward bound loans

Evasion Schemes:

1. Offshore structures (includes transfer pricing)

2. Controlled foreign entities

3. Under-declare foreign income

4. Foreign dividends

5. Deferred allotment and share-incentive schemes

6. Incorporation of professional practices

7. Long-term insurance schemes (inflated premiums)

8. Short-term insurance schemes (inflated premiums)

9. Preference share financing schemes

10.Property schemes (could include CGT)

11.Structured finance schemes

12.Transfer pricing

13.STC not paid

14.Under-valuation of trading stock

False deductions

SARS Compliance

Strategy

Key Principles of Compliance Strategy

Balance between Education, Service and Enforcement

Taxpayer Conduct Determines Administration Response

“Cradle-to-Grave” Approach

The Drivers of Revenue

SARS Compliance Model

Education Service

Enforcement

TAXPAYER COMPLIANCE

COMMITTED COMPLIANCE

CAPITULATIVE COMPLIANCE

CREATIVE COMPLIANCE

CREATIVE COMPLIANCE: AVOIDANCE (GAAR)

CREATIVE COMPLIANCE: EVASION

NON-COMPLIANCE:

EVASION

Incentivise; accredited clients

Monitor (lesser degree); examine; incentivise

Monitor: inspect

Monitor; Legal action to challenge; “compliance checks”

Monitor; legal action; investigate

Identify; legal action; prosecute; investigateE

DU

CA

TE / E

NG

AG

E

CO

MP

LIA

NT

TE

CH

NIC

AL

LY

C

OM

PL

IAN

TN

ON

-C

OM

PL

IAN

T

The Compliance Behavioural Model

Risk Management: External Clients

All actions to be intelligence driven Automation of risk profiling systems Regulatory model developed Understanding of the tax gap

Implementing integration of Enforcement, Customs and Revenue Analysis risk units into a centralised risk management unit for SARS

Risk Management: AG Concerns GRAP vs. GAAP

Defining rules relative to Revenue from non-exchange transactions

Year-end Accounts for Own Accounts and Administered Revenue Synergies between AG and Internal Audit to reduce scope of work Planning workshops conducted in order to optimize scope of work

and operational management of the audit Regular audit progress meetings

Siyakha Involvement of AG and Internal Audit

Internal Controls

Internal Control Model

Risks(Inherent Risk assessment)

Internal Controls(Risk mitigation)

Measure & Monitor(Risk management)

COSO

Self-Assessment

AuditManagement Responsibility

Control Objectives

Audit Role

Audit/Business Interface

COSO is the adopted model in SARS

Risk Management Model

Tax

pay

er

dat

a b

ase

Con

ting

ent

taxp

ayer

(T

ax g

ap)

Imp

ort

ers

&

Exp

ort

er

Key Risk (Impact) Core Assets Enablers

Pro

cess

Assessment

Collection

Enforcement

Integrity of assessments (Financial loss; poor taxpayer service)

Non collection (Financial loss; SARS collection target) Non-collection Growth in the tax gap (Financial loss; SARS collection target) Export and import of prohibited goods (Financial loss; SARS collection target)

People Skills & Capacity - Poor assessment, enforcement & TPS - Increased service/production costs

Technology

Integrity, availability, adaptability and confidentiality of the Information Systems - Turnaround times - Service/production cost - Taxpayer service - Financial loss

KEY OUTPUTS - Organisational goals - People outcomes

Loss of funds or assets (Financial loss; SARS collection target)

New business design

Change management

Project management Tra

nsf

orm

atio

n

Inappropriate business architecture/ design - Loss in current revenue streams, increase in the tax gap - Undesirable people outcomes - Compromise to the current business model

Decreased business results during Transition period (Financial + People) - People fatigue - Increase in tax gap - Increased project cost - Risk to the project outcomes (new business)

Failure to manage resources to deliver on Siyakha goals - Delayed and costly Siyakha - Decrease in the current business edge (loss of the sustained growth in collection and TPS. - Undesirable people outcomes

Technology

Information Security

COBIT Process Control Framework

Disaster Recovery Planning

The Next Steps...

The Next Steps:Transformation Siyakha Programme

Gauteng, Eastern Cape, Free State

Large Business Office

Continuous Process Improvement

Registration and Filing

Technology New Customs System; New Integrated Financial System;

EDMS; CRM; Business Intelligence; Risk Profiling

The Next Steps: E-SARS Evolve to an intelligent e-business infrastructure Creation of a single SARS corporate portal for

employees and customers Electronically enable most of our processes and

transactions, improving productivity and maximizing IT investment

Improve information security as a corporate priority Avail appropriate information to government

constituencies through world wide web services

The Next Steps: Processing Revenue Target 2003/04 Improved Quality of Assessment and Cycle

Times Enhancement of Skills Implementation of New Dispute Rules Filing Process E-Filing/E-Payment Single Registration Third Party Verification

The Next Steps: Enforcement Coordinated Campaigns on High Risk Sectors

Industrial Focus Areas Revenue Activation Projects

Tax Gap Risk Profiling System Roll out Debt Management System Outsourcing Part of Debt Prosecution for Non-registration Building Greater Prosecution Capacity with NPA

The Next Steps: Customs SA Cargo Security Project Smuggling of Drugs and Protected Species Export Control Control of Rail Traffic Implementation of Risk Management Suppressing corruption and promoting integrity Improving infrastructure especially for land border

posts Regional co-operation and Nepad

The Next Steps: Service One stop service to the largest companies Additional call centre capacity Simplified tax returns for individuals Provide assistance to taxpayers with filing

process Differentiated Channels Regulation of professionals

Tax practitioners Customs accreditation

Continuous Process Improvements Process Culture – a new way of looking at business at all levels.

Process Management – the concept that processes need to be owned and managed in accordance with customer requirements.

Process Enhancement – supporting the pace of change required to deliver on strategic intent covering improvements, re-engineering and transformation.

Process Technology – the tools that allow the organisation to best fulfill its mandate, including hardware, mapping software, design methodologies and project management disciplines.

Conclusion

The enduring challenge for SARS Sustain performance in revenue collection Consolidate and deepen efficiency gains Improve quality of service and education to

taxpayers Improve levels of compliance and reduce the tax

gap Expand the tax base Enhance risk management and internal controls

THE END….!