ROADMAP ROADMAP. Using Tax Gap Measurement Results to Structure the Risk Map and Design Control Plans that Augment SARS Efficiency and Effectiveness

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1 1 Using Tax Gap Measurement Results to Structure the Risk Map and Design Control Plans that Augment SARS Efficiency and Effectiveness Dr. Randall Carolissen South African Revenue Services Inter-American Centre of Tax Administration (CIAT) 44 th General Assembly, April 12 to SARS at a glance 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. 15,307 Employees Revenue growth from R184bn to R625bn over the past 10 years (CAGR ~ 13%) 3 As at March

2 5 SARS ADOPTED A LEADERSHIP MODEL BASED ON KEY BEHAVIOURAL COMPETENCIES Higher Purpose & Integrity Higher Purpose & Integrity Championing the Mandate Responsibility Social Impact Empowering Delivery Driving Excellence Mobilising Teams Transformation Developing others Building Sustainability Leveraging Diversity Influencing Others Insight Conceptual Thinking Accurate Understanding Humility Source Hay Group 5 6 South Africa s Main Fiscal Indicators South Africa Fiscal data in Rmillion Budget Budget Y/y Tax revenue Expenditure (deficit)/surplus to GDP (deficit)/surplus growth GDP 1999/00 201, ,750 16, % 837, % 2000/01 220, ,934 18, % 951, % 2001/02 252, ,905 14, % 1,048, % 2002/03 282, ,524 13, % 1,203, % 2003/04 302, ,709 29, % 1,303, % 2004/05 354, ,541 20, % 1,449, % 2005/06 417, ,760 5, % 1,613, % 2006/07 495, ,193 10, % 1,833, % 2007/08 572, ,499 18, % 2,081, % 2008/09 625, ,064 27, % 2,320, % 2009/10 (estimates) 598, , , % 2,449, % Source: South African Reserve Bank March

3 9 TAX GAP IN SOUTH AFRICA Tax Gap in developing countries estimated to be anything between 15% and 30% of tax collected No formal figure is available for South Africa although several studies underway, both deductive and imputed, and findings suggest that South Africa probably around the middle of range Capital flight the unrecorded and (mostly) untaxed illicit leakage of capital and resources out of a country, albeit lower than other African countries estimated at 6.6% of GDP without doubt largest problem Approach in SARS is to address major leakages by; Policy reform International collaboration Enhancement of administrative efficiencies to ensure optimization of compliance of taxpayers in the formal economy. Education and outreach to informal economy ILLICIT CAPITAL FLIGHT Estimates of the source of illicit financial flows: Bribery and theft by government officials 3% of the global total Criminal activity such as drug trading and racketeering 30 35% of the global total Commercial tax evasion through the mispricing of exports and imports by far the largest component at about 60 65% of the global total. Almost all of the above constitute permanent outward transfers with only a fraction returning as FDI. Capital flight from 40 sub-saharan African countries from stood at $607bn in Total $227 billion external debt owed by those countries. South Africa s s average capital flight from has been estimated at 6.6% of GDP per year VOLUNTARY COMPLIANCE BASED ON Key to this approach ensuring that taxpayers/traders understand obligations make it as easy as possible for those trying to comply improve service Some taxpayers/traders will always try to comply whether effective enforcement exists or not - people who believe in doing the right thing The goal of voluntary compliance is to influence the undecided majority who will choose one way or the other based upon how well we implement this strategy make it very hard for those trying to avoid paying their fair share improve enforcement some taxpayers/traders will not comply whether effective enforcement exists or not the criminals

4 SARS Compliance Model Deter and catch non-compliant taxpayers. Credible, legitimate and firm enforcement, with appropriate sanctions, will discourage tax evasion. Effective Segmentation Enforcement Enforcement Risk Assessment Environmental Knowledge and Understanding Customer Awareness Education Focus on making compliance easier for taxpayers by improving service and reducing the administrative burden. Service Service Broadening tax base by educating the public about their tax obligations. It s s recognised that there is a low awareness of responsibilities of fiscal citizenship. 14 Policy Interventions to address Tax Gap International Tax Amnesty resulted in applicants disclosing R68bn (top 50 accounted for R65bn) with R3bn tax recovered Small Business Amnesty resulted in more than 300k applications Legislative amendments Residents worldwide income 3 rd Party data requirements Scheduling of provisional payments Increased obligations on employers Penalty regime, initially focus on multiple offenders Voluntary Disclosure Formation of African Tax Administrators Forum ITO of African cooperation 15 Exchange of info protocol emphasising transfer pricing Comprehensive DTA s Enhancement of Capacity 16

5 It is necessary to find the high leverage points Pareto Pareto s analysis of wealth distribution 100% 100% 20% 80% 1 11 Phase 1 focussed on processes in PIT, PAYE that account for 20% of the complexity, but 80% volume 3 3 Wealth The idea of focusing on leverage points surfaces in two other ways when we seek to improve processes: critical paths and bottlenecks. bottlenecks. Joiner Juran Pareto s Principle applied generally 17showed that Pareto Source: J. Juran Jurans Quality Control Handbook Handbook Increase outreach Efficiently enlarge footprint to increase awareness and compliance amongst SMMEs and the informal sector Individuals Businesses and SOEs 1 Tax practitioners 3 Complex 6 Large Traders 2 (Trade interintermediaries) 4 Standard 7 Formal business SITE and below threshold 8 Informal business 10 Employer as agent 5 Special 9 NGOs, PBOs, government departments 18 SOURCE: Team analysis 1 17 SARS HAS BEEN ABLE TO ESTABLISH SOME STRONG, SUSTAINABLE CAPABILITIES THROUGH ITS MODERNISATION From SARS Profile South Africa Fiscal Indicators South Africa Africa s Tax Gap SARS SARS approach to Tax Gap Intermediaries Streamline middle Optimise and reduce effort on processing medium revenue generating taxpayers/ traders 2 Later phases focus on next 80/20...continuously 80/20...continuously 20% Population Increased specialisation Improved targeting of high revenue generating taxpayers/ traders 2 80% SARS universe (CIPRO and SA population) Future SARS differentiated approach An End-End approach End End-End was taken Useful many Vital few SARS focused on processes with the highest leverage i.e. PIT, PAYE Given large economic disparity in South Africa even Affected employer more important to segment taxbase segments To From To Push Pull Manual processes Multi page static forms 12 page static forms Policy Interventions Segmentation Modernization Program Risk Management Education and Outreach Single page dynamic forms Single page integrated dynamic form Automated processes Human intensive manual processes, nonnon-value adding activities Gate Keeping Paper / Manual Manual data capture Digitization Scanning High volume, low yield Manual paper channels Conclusion 20 Paper processing & data capture Digital/Self service channels Risk Managed Limited validation efiling / E@syfile Taxpayer declaration/ manual capture 3rd party validation Automated workflow processes, value adding only Risk Engine Targeted volume, high yield 3rd Party Data PrePre-population / Verification 20

6 21 Personal Income Tax (PIT) PAYE The modernisation of SARS has yielded amazing results Benefit CHANNEL Income Tax returns received earlier in filing season ,000 returns 1,280,000* after 9 weeks returns after 9 weeks Income Tax returns received at the end of filing season ,820,000 3,855,000* Income Tax returns 35,000 1,000,000 1,314,000 2,170,000* processed via e-filing Income Tax returns All returns 1,000, ,000 27,500* processed via data capture Income Tax returns 0 500,000 1,052,000 1,403,000* processed via BFE Scanning of returns 0 1,000, , ,900* PROCESSING Average assessing days days days 1.9 days* turnaround time (working days) Benefit Just a short note to thank SARS for the absolute professional manner in which Submission of IRP 206,000 recons 240,000 recons my tax was conducted. Speedy, efficient / EMP 501 and my payment was extremely prompt reconciliations Submission of IRP5 11,500,000 15,200,000 Josephine Pearl Prabinowitz tax certificates certificates certificates Personal Income Tax Closing Tax Gap More than 12m individuals income tracked through information received from 3 rd party data sources 5.3m already Registered Taxpayers About 5.9 million below registration threshold 1.1m Individuals required to register Of Individuals not registered 750K required to register and 350k to additionally file returns * Actual s data for PIT returns at the end of the 2009 filing season Nov 2009 (Week 23) PAYE Closing the Tax Gap Active Employers Recon filed * Recon Balanced Number of employers who issued TC Number of TC issued 11.9 m 15.4 m 15.6 m *SARS modernised the PAYE process in 2008 resulting in increased compliance levels

7 25 IT HAS HUGE POTENTIAL TO REVOLUTIONISE RISK MANAGEMENT... GATE KEEPER TO RISK MANAGER Able to deal with large volumes of data TRADITIONAL GATEKEEPER STYLE RISK MANAGEMENT STYLE New techniques for finding outliers not possible with manual methods Application of legislation provides for a one size fits all approach to compliance management Onus for achieving regulatory compliance is placed solely on the Individuals and businesses Application of a legislation provides for flexibility and tailored solutions to enable relevant risk management & administrative strategies to be b implemented Application of a legislation provides for responsibilities for both b SARS & The individuals and businesses in achieving regulatory compliance Sanctions for non-compliance Enables development of sophisticated risk engines that continuously learn/improve Use of third party data to provide corroborating evidence reduces s need for manual effort One size fits all compliance strategy Control focus Enforcement focus Unilateral approach Focus on assessing the veracity of transactions Inflexible procedures Focus on real-time intervention and compliance assessment Lack of/ineffective appeal mechanisms Strategy dependent upon level of risk Balance between regulatory control and trade facilitation Dual enforcement/client service focus Consultative, cooperative approach Focus on assessing the integrity of trader systems and procedures Risk directed procedures Increased focus on post-transaction transaction compliance assessment Effective appeal mechanisms Get next ensures priority for highest probability and highest yield cases Indiscriminate intervention or 100% check Control driven focus Focus on identifying non-compliance Focus on high-risk areas, with minimal intervention in low risk areas Information Management and risk analysis focus Focus on identifying both compliance and non-compliance Legislative provisions provide the individuals and businesses with electronic reporting, storage and authentication options, and enables SARS to rely on source generated data to the greatest extent possible Appropriate communication and information technology infrastructure ure to provide for automated processing 25 Source: 26 World Bank 26 Risk Management Approach Introduce 3 rd Party Data to validate Taxpayer information Declaration Variance cases created Introduce new Risk Engine Yield R1.4bn Refine the use of 3 rd Party data resulting in the prepopulation of PIT returns reduced to only 130 s1 000 Declaration variance cases created Refine the risk rules in the Risk Engine Yield R 2.1bn Introduce new 3 rd party data : Interest Income and Directives for lump sums Declaration variance cases created Year- on- year increase in cases resulted from Lump sum directives and Interest Income cases Refine the risk rules in the Risk Engine Estimated Yield R 1bn (Actual Year to date R750m)

8 Diapositiva 27 s1 Fewer cases created due to the elimination of finger errors made by TPresulting from the accurate reflection of IRP5 data s ; 09/04/2010

9 29 TAXPAYER ACTIVISM WORKS! SARS developed special initiatives programs to address tax gap and a optimise revenue collections. In 2009/10 Financial Year Improved management of Compliance and Debt; A total number of 368k courtesy calls, 745k follow-up calls and a further 333k SMS s were sent with 121k se issued to existing e-filing e customers. Within debt management 565k audit contacts, 46.5k Final Demands issued, 3.4k Civil Judgments and 0.4k Warrants of Execution Structured management of the 80% requirement on second payments for provisional tax; as well as and following-up on defaulting taxpayers using the 19.3 provisions of the Act. Tighter management and monitoring of VAT collections and refunds. Improved reconciliation of company returns and payments leveraging the SARS Modernization Program 3 rd party data validations Introduction of penalty regime Customs Acquittals, Schedules and Clothing and Textile initiatives Yielding overall R24bn 30 Summary and Conclusion Investment in Compliance programs sustained SARS when Global Recession kicked in Exponential increase in e-channels e to transact continued Improved refund methodology and Turnaround times and systematised deferment agreements assisted struggling taxpayers Widening of tax net through Risk Management especially 3 rd party validations Better collections from Medium and Small companies Containment of suspicious VAT refunds and prosecution of criminal activity Significant improvement in provisional payments of individuals However the global challenges remain 31