CURRENT CONTEXT

1. JOINT ATAF-KOREA CONFERENCE ON DOMESTIC RESOURCE MOBILISATION: CHALLENGES TO AFRICAN TAX POLICY AND ADMINISTRATION SARS DEPUTY COMMISSIONER:IVAN PILLAYSESSION 14:“MITIGATING THE IMPACT OF ECONOMIC LEAKAGES: DEVELOPING HOME-GROWN STRATEGIES TO COUNTER TAX AVOIDANCE AND EVASION”

3. CURRENT CONTEXT • Significant social and economic challenges - poverty, unemployment, infrastructure underdevelopment, crime • Government has to fulfil two important requirements: • Infrastructure development, • Provide a broad social welfare net for the indigent. • Substantial and sustainable revenue flows are a necessity.

5. HISTORICAL CHALLENGES • Pre -1994: • The Government was viewed as being illegitimate • The non-payment of taxes was viewed as acceptable behaviour • Government agents committed criminal actions including evasion and smuggling • Post 1994 social, cultural, economic and political interests will continue to shape compliance behaviour. • The State has to be legitimised. • We are a nation in the making.

7. SARS APPROACH • The most basic transaction between Government and society is at the level of paying tax. • SARS role is not only about revenue collection, it’s about shaping the interactions between society and the State. • Tax compliance is a part of general compliance to the norms, standards and laws. • SARS subscribes to a higher purpose : Meet our historical challenges. Demonstrate political will.

9. SHAPING TAX PERCEPTION • Fairness of tax system • Every earner irrespective of status has to contribute to the tax system • Horizontal equality and vertical equity • Fair and credible enforcement • Use of tax revenue • Effective and efficient • Horizontal equality and vertical equity • Minimal corruption • Pacesetting • Role of political and economic leaders • Role of elites

11. STRATEGIC APPROACH • Taking into account: • Our legacy and insufficient resources • What shapes tax culture • Therefore the strategy focuses on: • Establishing SARS’ credibility – Values and behaviour based • - Vision led • - Robust governance system • From purely administrative to focus on outputs and outcomes • Regain tax authority’s space • Apply the compliance model • Managing the whole value chain

13. OPERATIONAL STRATEGY • We are able to touch everyone • We have the capability to resolve the most complex cases • Width – High likelihood of non-complaint citizens being identified • Horizontal equality • Usually less complex - automation and scripted processes • Depth – Capability to take on highly complex schemes • Resilience to follow through to successful conclusion • Requires higher skills - longer to complete • Chutzpah • Leverage – Multiply our strength • Media • Stakeholder management

15. ADDRESSING AVOIDANCE AND EVASION • Encouraging the reporting of suspicious activities • Use of third party information in order to verify declarations • Leverage tax practitioners • Strengthening case generation, audit and investigation capability – licit and illicit • High penalties, interest, criminal prosecution of serial offenders • Management of significant cases • Use of amnesties

17. ADDRESSING AVOIDANCE AND EVASION • Created LBC – transfer pricing • Sharing of information with other international bodies, like the OECD, in an effort to curb tax avoidance. e.g. fictitious relocation where multinationals relocate in name, but continue operating from their home countries • Implementation of the General Anti Avoidance Rule (GAAR) in 2006

19. ANECDOTES Tax Payer Examples Prominent sports administrator Electronics campaign HNI Case Krion Pyramid Scheme Sales Suppression Software

21. ANECDOTES CONTINUED Internal to SARS Employees 1) No gift policy Code of conduct. Formation of anti-corruption unit 4) Three high ranking managers charged – resigned. Pursued in the CJS. 5) About forty persons per year are fired for theft, fraud and corruption. Also pursued through the criminal justice system.

23. CASE STUDY 1 -2002 • A high net worth individual resident in RSA declaring very little income had: • Offshore Trusts and Companies to export monies from S.A. • A criminal case was investigated and handed over to the NPA for prosecution. However the case has been effectively stalled through: • Numerous legal challenges brought by the defendant (e.g. one challenge concerned who should pay for the photocopying of the docket) • An overloaded charge sheet with multiple counts which created unnecessary complexity in the case.

25. CASE STUDY 1 - 2002 • Faced with these problems SARS adopted the following strategy: • Re-focusing of the investigation towards civil and administrative remedies; • Tax liability now confirmed; • Civil litigation launched to recover assets hidden in offshore tax havens; • Whilst the criminal investigation remains stalled SARS has thus far been able to seize considerable assets .These actions are ongoing.

27. SALES SUPPRESSION SOFTWARE • Sales Suppression Software – Phantomware and the ‘Zapper’ • SARS only recently aware of the tool • Significant estimated impact on the fiscus • Adaptation of software upon discovery • Leveraging OECD technical platform • Currently a completed case before the tax courts. While awaiting outcome we are fine tuning our approach and toolbox to other identified users of the SSS • Proactive approach – Identification and then auditing of retailers

29. ELECTRONICS CASE • Equality of playing field is important prescript of tax • During 2000 SARS was approached by local suppliers of international brands. • Indicated that they were considering withdrawing from SA due to unfair competition; • High prevalence of non-compliance within this sector. • SARS called in retailers and importers – applied pressure and leveraged cracks

31. ELECTRONICS CASE • Approach: • Introduction to practices - Money laundering, tax evasion, customs fraud • SARS allowed audit by reputable approved firms - Lessen the burden on SARS capabilities • Agreement that retailers would vet suppliers • Leveraging media • Results: • Tax settlements • Criminal actions and convictions • Retailers saw a 10% increase in profit in year of project

33. KRION PYRAMID SCHEME • Taking investments & paying of interest to investors – labelled as “pyramid scheme” • SARS worked with the SAPS and the NPA • Number of investors involved: 12,000 • All transactions were done in cash – record keeping at a minimum • Gross income amounted to R1,5 billion • Significant departure in court process: due to enormous volume of evidence it was agreed that evidence will be presented in an electronic format in court – significant impact on court time, presenting evidence, reference to documents, saving on expenses such as filing, copying etc (1st court case in which evidence was presented in this manner)

35. KRION PYRAMID SCHEME • Charges and Court Proceedings: • Fraud, tax evasion, under-declaration, non-submission of tax returns • Trial was set down for 26 October 2009 to 11 November 2009. Judgment was given on 9-10 June 2010. • Accused were found guilty as follows: • M Prinsloo guilty on 125,492 charges – 25 years direct imprisonment • B Prinsloo guilty on 29,908 charges – 12 years direct imprisonment • Y Lemstra guilty on 83,074 charges – 12 years direct imprisonment • 1 year direct imprisonment for non-submission of return without the option of a fine • G Lemstra guilty on 44,237 charges – 15 years direct imprisonment • W Pelser guilty on 62,556 charges – 5 years direct imprisonment • I Engelbrecht guilty on 68,627 charges – 12 years direct imprisonment • H Engelbrecth guilty on 2 charges – 5 years imprisonment suspended for 5 years