Presentation to the Standing Committee on Public Accounts

1. Presentation to the Standing Committee on Public Accounts 19 March 2003

2. Contents • Introduction • What has SARS Achieved • Business Achievements • Revenue Achievements • Audit Reports • SARS Transformation • Risk Management & Internal Controls • The Next Steps …

3. Business Achievements

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Audit Achievements

15. 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.

16. Revenue Achievements

17. 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

18. Achievements for the past six years * R11.6 billion is projected as the surplus above the original estimate

19. Trend - Individual Tax Rates For under 65

20. Trend – Corporate Tax Rates

21. 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

22. SARS Transformation

23. 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

24. 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

25. 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

26. In the medium term

27. 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

28. SARS Business Process Pre-engagement Pre-filing Filing Assessing Internal / External examinations and inspections Financial investigations Criminal investigations Prosecutions Risk-profiling Calculate and measure liability i.r.o declaration by customer Educate Com-municate Adver-tise Service Education Service Encourage filing Subscription - registration Examine Inspect Investigate Criminally investigate Prosecute Collect Payments Receive & update information Service & Engagement

29. In the medium to long term

30. 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

31. Risk Management & Internal Controls

32. Risk Management • Governance • Process/Business Risks • Tax Gap • SARS Compliance Model • Internal Control System • Technology and Systems

33. 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

34. Revenue Gap

35. Drivers of Revenue Macro economic factors Tax gap strategies Revenue Target Anti avoidance measures Legislative loopholes Assessing efficiencies and quality

36. Tax and Customs Gap Tax Gap Analysis Inductive Surveys Deductive Analyses Rbn How to close Activation Strategies Segmentation of Tax Base Tools for Activation the Tax Gap? How big is the What is the future current Tax Gap? Revenue Base? Long Term Revenue Trends Key Accounts & their Drivers Models for Estimation Time

37. Tax Gap - Complexities of the PIT Tax Gap Foreign dividends Salary Understate Taxable Income Retirement Benefits Interest Rental Filing Self-employed profits Fringe Benefits (non-cash income) Subsistence Uniform Individual Evasion Travel Overstate expenses / deductions Allowances Entertainment Other allowances Donations Deductions PIT Evasion Not filing Medical Pension / RA Not registered for PAYE Other Under deducts(with knowledge) PAYE - Employer Evasion This tree defines the exhaustive set of areas that require data to estimate the tax gap based on where the decision rights are held. Deducts Retains all Retains partial Registered for PAYE Simply not deducting tax Not deduct Incorrect issuance of IT3’s

38. Tax Gap - Corporate Income Tax Evasion Understate income (2) Interest received** Other income Discounts/rebates Declaring income as capital (5,6,7,8) Sundry (3,4) Recoupment • Evasion Schemes: • Offshore structures (includes transfer pricing) • Controlled foreign entities • Under-declare foreign income • Foreign dividends • Deferred allotment and share-incentive schemes • Incorporation of professional practices • Long-term insurance schemes (inflated premiums) • Short-term insurance schemes (inflated premiums) • Preference share financing schemes • Property schemes (could include CGT) • Structured finance schemes • Transfer pricing • STC not paid • Under-valuation of trading stock Under-declare income(1, 12) Active Inflation of expenses (7,8,9,10,11,12) Filing False deductions Cash Private expenses Dormant Overstate expenses(1, 12) Corporate Evasion Depreciation Allowances Non cash Provisions (14) Assessed loss schemes Tax underpaid (13) Active Tax holidays Not filing Dormant * 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

39. SARS Compliance Strategy

40. Key Principles of Compliance Strategy • Balance between Education, Service and Enforcement • Taxpayer Conduct Determines Administration Response • “Cradle-to-Grave” Approach • The Drivers of Revenue

41. SARS Compliance Model Enforcement TAXPAYER COMPLIANCE Education Service

42. The Compliance Behavioural Model Identify; legal action; prosecute; investigate NON-COMPLIANCE: EVASION NON-COMPLIANT CREATIVE COMPLIANCE: EVASION Monitor; legal action; investigate CREATIVE COMPLIANCE: AVOIDANCE (GAAR) Monitor; Legal action to challenge; “compliance checks” EDUCATE / ENGAGE TECHNICALLY COMPLIANT Monitor: inspect CREATIVE COMPLIANCE CAPITULATIVE COMPLIANCE Monitor (lesser degree); examine; incentivise COMMITTED COMPLIANCE Incentivise; accredited clients COMPLIANT

43. 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

44. 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

45. Internal Controls

46. Internal Control Model Risks (Inherent Risk assessment) Measure & Monitor (Risk management) Internal Controls (Risk mitigation) COSO Self- Assessment Audit Management Responsibility Control Objectives Audit Role Audit/Business Interface COSO is the adopted model in SARS

47. Risk Management Model

48. Technology • Information Security • COBIT Process Control Framework • Disaster Recovery Planning

49. The Next Steps...

50. 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