In a bid to recover more than R15-billion worth of debt, the South African Revenue Service (Sars) has handed confidential taxpayer information to third-party debt collectors who stand to net an estimated R1.5-billion for their efforts.
Sars announced at the end of last year the appointment of 11 firms to collect unpaid taxes, including pay as you earn (PAYE) and Unemployment Insurance Fund contributions and skills development levies outstanding for longer than four years by private companies and individuals.
It is unclear what brought about this change of heart as the institution has resisted outsourcing this function to third parties for many years.
A major concern has always been how this can be done effectively without compromising confidential taxpayer information by sharing it with third parties.
In addition, Sars has an internal debt collecting unit, at some point staffed with about 600 people, which survived the R300-million restructuring of the institution that saw the closure of other divisions following the so-called rogue unit matter.
This is the first time in more than a decade that the collection of outstanding taxes is being outsourced.
The South African Institute of Chartered Accountants (Saica) and other industry roleplayers have already expressed reservations about the appointment of the debt collectors, who started work on June 1.
Saica confirmed that it is worried about, among other things, whether there had been sufficient notice to the public about the appointments, the legality of outsourcing Sars debt and whether there were sufficient systems in place to prevent potential fraudsters abusing the process.
Saica confirmed this week that some of its members had met Sars to discuss their concerns, and the talks are continuing.
Sars advertised a request for proposals last year and 40 companies including law firms specialising in debt collecting, submitted bids by the November deadline.
In response to questions, Sars said the debt collectors were hired in line with section 1 of the Tax Administration Act.
It confirmed that 11 out of the 40 companies had passed the evaluation phase, allowing them to be appointed to a broader panel. Of those, three have been appointed in a pilot scheme for Sars to determine the success of this exercise before it is rolled out.
To trace tax defaulters who have owed the South African Revenue Service (Sars) for longer than four years. The debt book is worth about R15-billion.
|• NDS Credit Management: “A world-class collections company.”|
|• CSS Credit Solutions: Specialists in both prelegal and legal collections.|
|• Lekgotla Trifecta Collections, a partnership between Trifecta Capital Collections and Lekgotla Outsourcing.|
The job specifications are contained in an extensive bid document and require strict adherence to confidentiality for the deal, which Sars had said may run for up to three years.
The bidding companies had to indicate what percentage commission they would expect to be paid for collections, on a sliding scale depending on the size of the debt book awarded. The debt books on offer range from R2-billion to more than R7-billion.
It is impossible to speculate on how much the companies stand to rake
in from this deal because commission would vary depending on their individual recovery rate – and because Sars is not a normal creditor its penalties and interest are statutory.
Clark Gardner, the chief executive officer of Summit Financial Partners, said, although the fees for such deals are generally negotiated case by case, he estimated the income from the Sars debt book to be about R1.5-billion.
Gardner, who has developed a reputation as a consumer champion in the debt-collecting industry, said he found Sars’s decision to outsource this function strange, as it had the best and most up-to-date database of employed consumers in the country. Sars merely needed to match its list of outstanding debtors to the regular payroll information it received from employers.
“Once matched, Sars has the luxury to escape the legal collection process by merely issuing an AA 88 instruction to the employer. This would mean the employer would have to deduct the instalment from the debtor’s salary, similar to that of an emolument attachment order.”
The AA 88, Gardner said, could go beyond employers and target the debtor’s pension fund, annuity, social security grant or other source of revenue.
“Therefore, Sars would only rely on agents or perhaps legal outsource solutions where the debtor is not formally employed, and I am not convinced they would want to chase this type of debtor unless they are sitting in the entrepreneur category or have a large balance outstanding,” Gardner said.
Patricia Williams, a tax specialist at the law firm Bowman Gilfillan, was equally doubtful about how Sars could delegate its tax collection duty to third parties without navigating various legal complexities.
Williams said a member of the public would presumably “not be obliged to provide information” to a person purporting to represent Sars but is unable to provide an identity card, a provision in the Tax Administration Act.
In addition, the controversial “secrecy provisions” emulated in section 69 of the law further prohibits taxpayer information from being revealed to any third party who is not a Sars official. The debt collecting firms would mainly rely on their call centre staff to handle this debt recovery work.
Therefore, regardless of whether or not Sars could delegate certain duties to nonemployees, Sars “would be prohibited from disclosing taxpayer information to nonemployees, thereby making it practically impossible for such delegation to take place lawfully”, said Williams.
CSS Credit Solutions, NDS Credit Management and Lekgotla Capital Collections, a consortium comprising Lekgotla Outsourcing and Trifecta Capital Collections, have been confirmed as the initial three firms for the deal.
Guy Brooks, the chief executive of CSS Credit Solutions, said questions should be directed to Sars because of strict confidentiality requirements. He confirmed that Sars staff had assisted with the training of their staff.
Lekgotla Trifecta Collections boasts on its website of its ability to trace debtors, including individuals, families, sole proprietors and private and public companies.
The company lists among its clients various municipalities and state-owned enterprises.