What Nene doesn’t?know

2015-03-01 06:00

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Sars is taking years to assess the value of tax breaks, making parts of the budget guesswork.

When Finance Minister Nhlanhla Nene tabled his budget review on Wednesday, he was guesstimating in crucial parts.

This is because the SA Revenue Service (Sars) is taking at least five years to finalise assessments of company tax filings – so Nene and his Treasury colleagues don’t know how much of the country’s revenue shortfall was due purely to the sluggish economy instead of unexpected overexpenditure on a number of incentives.

For example, this year’s learnership tax credit figure for 2010 jumped by about 100% – meaning the figure that featured in the 2014 budget was wildly underestimated.

While there is always bound to be a lag between the figures presented in the budget and Sars’ processing of tax returns, such massive revisions make it impossible to know how much tax we are throwing at incentives.

This matters because the fiscus is in deep trouble: tax revenue in the financial year ending on March 31 is projected to fall R14.65?billion short of the target set in last year’s budget.

That hole in South Africa’s tax revenue is almost entirely due to the shortfall in company taxes of R15.9?billion. Personal income tax outperformed its target while the shortfall in VAT was far less severe.

Cecil Morden, the chief director of economic tax analysis at Treasury, said properly assessed data only became available “with a lag of two years or longer”.

“The reality is that companies submit their tax returns after the close of the tax year and sometimes get assessed a few months later,” Morden told City Press in a written reply to questions about the tax-break revisions.

He said the corporate tax shortfall this year was “largely” due to the general economic doldrums.

Delayed assessments do not affect the actual inflow of tax money, but do make it impossible to see the overall scale and impact of the various types of tax expenditure.

Authorities can’t be sure how much they are losing to economic troubles and how much is being lost because companies are scoring far more than anticipated from incentives. This problem was raised as far back as 1994 by the Katz Commission on taxation. Back then, estimates were impossible. Now they are still uncertain.

If you – or Treasury – want to know what South Africa’s growing suite of corporate incentives cost in 2014, you’ll have to wait four years or possibly longer.

A Treasury official who worked on the budget told City Press this week about his frustration with Sars’ inability to timeously assess who was getting what from the taxman. The official said authorities had fairly solid estimates up to 2010. He added that subsequent years’ numbers would likely still change a great deal.

This week’s budget revised last year’s estimates for just a handful of corporate tax breaks in 2010 up from R3.6?billion to R4.9?billion.

Last year’s initial “soft” estimate for corporate tax costs in 2012/13 went from R2.5?billion to R4.1?billion, which is likely lower than the real figure. Sometimes there are errors as large as R10?billion, especially when estimating the cost of import credits for car parts that underpins the subsidised automotive sector.

The cost of the Employment Tax Incentive (ETI) has been at least R1?billion more than expected.

Every year, a number of these estimates are massively revised – usually upwards – as Sars gets on with assessing corporate tax returns years after the fact.

Here are some of the big revisions that appeared in this year’s budget:

  • The 2013 budget review gave the 2010/11 total tax allowances for companies providing learnerships as R501?million. The next year, this was revised to R670?million. This week, the estimate was R1.14?billion;
  •  The same scale of revisions applies to research and development tax incentives. The cost of these has gone from R416?million to R646?million to R1.15?billion during the past three budget reviews;
  •  The cost of strategic industrial policy tax breaks in 2010/11 is now considered to have been R740?million. The estimate for that same year in the 2013 budget review was R138?million; and
  •  There was no estimate for the new ETI, but according to President Jacob Zuma’s recent state of the nation speech, it cost more than R2?billion in one year – making it the single largest corporate incentive South Africa has. But its influence on tax revenue is invisible in the budget.

The youth wage subsidy

For all the excitement it has caused, the Employment Tax Incentive (ETI) was almost completely absent from the budget review this week.

That is despite it already outstripping the estimated cost of a variety of older incentive schemes, among them the special small business tax dispensation.

Unlike most corporate tax breaks, the ETI’s overall value is easy to measure on time as it works through the payroll tax system, not company tax returns. In reality, however, Treasury knows little about what is happening with the subsidy.

Treasury has no way of identifying the sectors in which the subsidy has been claimed – or by which companies.

It also doesn’t know the workers’ ages and their educational levels.

The number of workers being subsidised also seems to be a dubious estimate.

Duncan Pieterse, Treasury’s director for microeconomic policy, said estimating the number of people who had their wages subsidised was becoming a lot harder.

All Treasury received from the SA Revenue Service (Sars) was a rand total of ETI claims per month.

Until now, Sars has insisted every claim is against a maximum amount allowed – R1?000 a month. That is despite the subsidy being designed to fall on a scale.

“According to Sars, everyone gets the maximum,” said Pieterse.

That’s how Treasury managed to come up with figures for the number of people being subsidised – the rand totals were just divided by 1?000 every month.

As far as Treasury knows, the most expensive ETI month was last August – when R268?million was claimed.

If every claim was for the maximum of R1?000, it meant 268?000 workers were subsidised.

That was the number President Jacob Zuma slightly exaggerated in his state of the nation speech last month, bragging that the ETI was “paying off” and had been used to subsidise the wages of 270?000 workers to the tune of R2?billion.

Since then the numbers have come down, to 216?000 in December (again assuming no one received less than the maximum R1?000).

There is another concern.

The ETI was designed to subsidise a worker to a maximum of R1?000 per month during their first year on the job. That falls to R500 per month in the second year.

Dividing the total claims by 1?000 is now no longer possible, says Pieterse.

The result: neither Sars nor Treasury know how many people are being subsidised this month.

In future, anyone wanting to say how many workers are benefitting will have to wait on proper assessments, which history shows can take a long time.

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