The Auditor General found that the SA Revenue Service in 2017 flouted the Income Tax Act by overstating its compliance figures in public documents.
The findings, in an AG report dated March 2017, came to light Tuesday during public hearings in Pretoria for the Nugent inquiry.
Tax compliance refers to making payments to the revenue service in full and on time in line with relevant legislation.
The commission of inquiry, appointed by President Cyril Ramaphosa, is probing the state of corporate governance, revenue shortfalls and allegations of misconduct at SARS.
Evidence leader Advocate Carol Steinberg highlighted the findings while leading testimony by Dr Thabelo Malovhele, who until 2015 was the agency's executive for tax, customs, risk and compliance analysis.
He was later asked to sign a contract that identifies him as a ‘Domain Specialist’ but says he still has no proper job function.
She referenced a confidential affidavit that pointed to who at SARS was responsible for the overstating of the compliance figures. While the correct figure is unkown, SARS apparently stated that its compliance level was at 91.14%, which according to the Auditor General is not true.
The findings relate to Corporate Income Tax (CIT) and Personal Income Tax (PIT).
“The indicators are that SARS overstated compliance in its public documents. There are legislative requirements on how to measure compliance, and they were breached,” Steinberg said.
Malovhele told the commission he had repeatedly warned his superiors of the risk but was seemingly ignored.
He was formerly the head of SARS’ Compliance and Strategy Research unit, which was responsible for measuring the revenue service's compliance figures according to the Income Tax Act.
This unit was disbanded under a new operating model instituted by now suspended SARS Commissioner Tom Moyane. The subsequent decline in compliance was directly correlated with a decline in revenue collection, Malovhele told the commission.
Compliance figures are key to determining which areas of the economy are least tax compliant, which in turn enables SARS’ enforcement divisions to focus on these areas to boost compliance and up revenue collection Malovhele explained in his testimony.
The definitions for tax types and entities were published in the Government Gazette he said, and those were strictly adhered to before 2015 in determining compliance figures.
But these definitions were updated under the new SARS administration.
“What happened was we were taken away from even setting compliance targets – other people took over that responsibility. The challenge was when definitions were changed to make compliance in PIT and CIT look better. One definition we fought but didn’t succeed was “economic active entities”,” he said.
“The definition pushed compliance in CIT, which was very bad, from 12% to 40%,” Malovhele said by way of an example.
“We knew that this definition was misrepresenting the true state of compliance,” he added.
Steinberg, reading from the AG report stated:
“What the AG finds is; As part of our completeness testing, we noted that the following tax payers were excluded from returns required the denominator, taking into account the economically active definition. However, the tax payers were claiming VAT payments and refunds of that same year.”
“Based on the legal requirements, these companies are legally required to submit corporate income tax returns and therefore should form part of percentage required to file CIT tax returns, as reported in annual reports, but were not,” the report continued.
“There is a very similar story in PIT where SARS has indicated that 91.14% did file their returns but the Auditor General finds that the indicators were wrong, and thus the figure is overstated."
Professor Michael Katz, a member of the commission, was incredulous that such a key factor of tax collection had been seemingly abandoned by SARS under the new operating model and questioned Malovhele on why this was done, and for whose benefit.
“I don’t know,” Malovhele conceded.* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER