Howard Barrell
The South African Revenue Service (SARS) is turning its guns on tax fraudsters who are cheating the country out of up to R30- billion a year. Some large companies are also involved in fraudulent tax evasion schemes, according to SARS officials.
The SARS says it is poised to crack the fraudulent schemes these companies are operating across a number of sectors of the South African economy. The SARS’s capacity to investigate and prosecute tax fraudsters has been substantially upgraded over the past year though the recruitment of more specialists – from accountants to lawyers and investigators.
SARS officials say they are undeterred by the attempt by Metro Cash and Carry- one company in which there is allegedly large- scale tax fraud – to persuade the courts to declare the taxation principle of “pay now, argue later” unconstitutional. The principle holds that people owing tax to the state should first pay, and if they want to dispute their assessments, they can do so only subsequently. The Constitutional Court is due to hear the case on March 28.
The fraudulent schemes are seriously undermining government attempts to reduce the budget deficit and accelerate service provision, according to Minister of Finance Trevor Manuel. Recovery of the estimated R30-billion in tax lost to the government through fraud would add 15% to the estimated R194-billion in government revenues expected this financial year.
President Thabo Mbeki signalled the government’s determination to get even with tax fraudsters in his state of the nation address last week. “Tax criminality feeds other forms of criminality and will not be tolerated,” he told Parliament.
SARS officials say the major schemes being used to defraud state coffers include:
l Fuel substitution: mixing paraffin or similar solvents with diesel or oils and using the new mixture as fuel in engines. The illegal substitutes are marketed as duty free, and this practice costs the fiscus hundreds of millions of rands a year.
l Fictitious transactions: an abuse of the procedure covering VAT on exports. Honest vendors pay VAT (at 14%) on goods when they buy them, and they are entitled to deduct this from the tax charged on their sales before paying over their VAT collected to receiver. If they export those goods, they charge VATat a zero rate, and may therefore obtain a refund of the VAT paid on his purchases. Fraudsters create spurious purchase and export transactions in order to generate refunds to which they are not entitled.
l Round-tripping: pretending goods are exported, claiming the VAT refund on them, but then selling the goods locally at a 14% price advantage; and
l VAT fraud on livestock and meat: several methods are used. One is that trading in live animals is simply not declared, and so no VAT is paid. Another is that animals are sold in the names of vendors who are not registered for VAT (they are often employees of a farmer), with the same result. In both cases, the seller has a 14% price advantage.
Various other schemes which do not necessarily constitute fraud but can be classified as aggressive tax avoidance are being entered into. Most of them have as a principle the mismatching between income and expenditure, thereby claiming expenses up front and deferring accrual of income. An alternative tax planning technique is the recharacterisation of taxable income into non-taxable income.
SARS commissioner Pravin Gordhan said this week these schemes had been operating for many years, in some cases decades. “Businesses have been using these kinds of schemes to defend their bottom lines and to gain unfair advantage over honest businesses. In the past, the capacity and political will did not exist to tackle them. But I can tell you they do now. We are placing our emphasis on enforcement and clamping down on practices of this kind,” Gordhan said.
Last year SARS investigators raided the Johannesburg offices of Metro Cash and Carry, seizing thousands of documents. The swoop followed after the SARS uncovered what it alleged was a huge “fictitious transactions” fraud in which the company had falsely obtained R77-million in VATrefunds. The SARS then assessed Metcash for the payment of an additional R188- million in penalties, additional tax and interest. Metcash’s allegedly fictitious transactions included the sale of 76- million brassieres worth R209-million to Lesotho, which has fewer than 1,5-million people.
No court has yet ruled on whether the SARS’s allegations, which Metcash has rejected, are proven or not. The case goes before the special incomes tax court in late May.
Metcash, a large company with an annual turnover of about R29-billion, responded by asking the high court to declare certain sections of the VAT Act unconstitutional because they lay down the “pay now, argue later” principle.
Metcash relied on two sections of the Constitution to challenge the Act. One states that no law may permit arbitrary deprivation of property; another that everyone has the right to have a dispute that can be resolved by application of the law decided in a fair public hearing in a court or other independent tribunal.
Gordhan argued that these sections did not have that effect as the dispute in any VAT appeal is decided by a special court presided over by a high court judge. There is therefore no denial of access to courts, and even it was found that a taxpayer’s constitutional right of access to courts was infringed, this infringement was necessary, reasonable and justifiable.
The high court found in favour of Metcash, declaring certain sections of the VAT Act unconstitutional, but this order is not effective until confirmed by the Constitutional Court.