/ 10 March 2017

Is taxman massaging the numbers?

Taxing task: On March 31
Former South African Revenue Service commissioner Tom Moyane appointed KPMG to investigate the allegations of a so-called ‘rogue unit’ in Sars. (Paul Botes/M&G)

Aseries of emails emanating from the South African Revenue Service (Sars) suggests the taxman may be manipulating its books, possibly so it can report a more favourable revenue collection figure on March 31.

But this was emphatically denied by Sars, which says the emails had been misinterpreted.

“Sars’s figures on its systems are factual, accurate and correct. Sars will not put its integrity and reputation at risk through fictitious facts and figures,” said spokesperson Sandile Memela.

On March 31, Sars commissioner Tom Moyane is expected to announce how much tax was collected in the past year, minus all refunds paid out. But this figure is now suspect and will reflect negatively on the perception of Sars’s ability to collect revenue, senior government sources said.

The correspondence, which the Mail & Guardian has seen, includes a directive, sent at a key stage of Sars’s collection year, instructing auditors nationwide to “delay the raising of [tax] assessments” that could negatively affect tax collection.

The directive apparently related specifically to cases in which the assessment exceeded R10‑million and would make a material difference to the final collection figure.

The instruction the M&G has seen relates to a month in the most crucial part of Sars’s tax year, and gives credence to a recent spike in complaints to the office of the tax ombud and public expressions of frustration about people’s tax refunds being withheld or delayed “without good and proper reason”.

This comes on the back of a R30.4‑billion shortfall in revenue collection being announced by Finance Minister Pravin Gordhan during his budget speech.

But the actual shortfall is expected to be much higher: a senior government source tasked with analysing tax collection was this month told by a team of tax analysts that the expected shortfall might rise to R38‑billion.

Sars is under severe pressure from the treasury and the ratings agencies to close the gap in the revenue shortfall.

The directive to “delay the raising of assessments” was issued by Desrae Lawrence, Sars’s group executive for investigative audit, on January 25. It was to apply to tax assessments between January 16 and February 15.

The M&G found no evidence that Moyane knew or was ever briefed about the instruction.

Providing extensive comment, Memela said there had been a “misinterpretation” of the emails in question.

He said the emails “relate to the debt book. Sars is not manipulating the debt book. It is important to note that the debt book has no direct impact on collection figures; Sars accounts for collections on a cash basis.

“Any delay in the raising of assessments beyond this period would have no impact on the reported collection figure for the current financial year … Sars’s debt book has not been manipulated through the delay of assessments, as all assessments are accounted for in the debt book.” (Read his full response below)

But three independent sources at Sars have challenged this official version.

Sars sources explained that it is only when an assessment is “raised” that the outcome of the assessment is uploaded, and in effect registered, on the Sars system and the taxpayer is formally notified of the outcome. When an assessment is not raised in a case where the taxpayer should be refunded, the taxpayer will, in certain circumstances, miss out on the interest owed by Sars.

The sources said Lawrence’s instruction ordered auditors to focus only on money that was “collectable” within the current financial year. It further allowed “reduced refunds”, seemingly reduced to an amount below R10‑million, to be paid.

Lawrence said in the emails: “Can we act accordingly [delay the raising of assessments] unless there are other critical factors affecting this … Note that collectable assessments and reduced refunds can be raised.”

What this meant, said the Sars sources, one of whom provided the emails, was that the directive was an order to roll over to the next financial year those tax assessments where Sars should pay refunds.

Said one source: “On March 31 Moyane needs to tell the nation how much Sars collected, minus the refunds. What Sars is doing is to artificially boost the collection figure for the current financial year and to roll over refunds to the next financial year.”

Memela denied that Sars is manipulating its books.

Two independent tax practitioners who analysed the emails agreed with the Sars sources and another disagreed. A fourth said it seemed that the instruction relates only to tax that the taxpayer is in a position to pay before the end of the financial year and does not relate to refunds.

The tax practitioners, who work for some of the biggest law firms in the country, have clients who are in negotiations with Sars and therefore asked not to be named.

The tax practitioners’ and government officials’ biggest concern was Sars’s decision to “delay the raising of assessments” unilaterally.

It is an “unprecedented” practice that shocked eight tax attorneys and practitioners to whom the M&G spoke. They described the delaying of assessments as “massaging the books in an underhanded way”, “unfair”, “suspicious” and “shocking”.

A source with 17 years’ experience in tax cases said: “Sars should not be permitted to delay assessments. How do they choose whose assessment to raise and whose to roll over? I understand they are under pressure but the process needs to be fair.”

Another tax lawyer said she is fighting with Sars over R26‑million in refunds and that her client stands the “very real chance to go under. Businesses who had factored VAT refunds into their annual financial planning are now struggling to pay expenses like staff salaries.

“Several clients have a severe cash flow problem, allegedly due to Sars inexplicably withholding VAT and other tax refunds. The emails the M&G has may provide the reason.”

But statistics offered by Memela challenge this version.

He said that, between January 16 and February 15, 712 small business and 47 large business cases were completed in line with the normal audit process. Only 14 small businesses and three large cases that could have been completed in the two-week period prior to February 15 were finalised after that date.

“These cases had large assessments that would not have been worked on for collection purposes prior to 31 March 2017,” Memela said. “The number of audit cases completed is in line with normal trends for the year and this period. All taxpayers that are audited through this process are engaged and continuously communicated with through the course of the audit. Any delay in assessments has not been impacted by the release of legitimate refunds under audit.”

But three senior government officials involved in the country’s tax collection said they were “extremely worried”.

Said the most senior of the three officials: “Sars has historically been tough on collections in February and March in order to get the best collection figure possible. But the proof you have is unprecedented. Our biggest concern sits with the refunds.”

The sources’ worries seem to be confirmed by statistics held by the tax ombud. According to tax ombud chief executive Eric Mkhawane, “preliminary investigations [into taxpayer complaints] show that more than 50% of the [current] complaints received by the tax ombud relate to refunds, as compared to 15% in the previous financial year”.

But he did say delayed tax refunds had always been one of the top three complaints received by his office.

The series of emails shows that at least 12 managers on group executive and senior management level in Sars’s audit and debt departments were aware of the decision to “delay the raising of assessments”. The instruction was also communicated to auditing teams across the country. The instruction emanated from a high-level meeting by the auditing department’s operations committee.

The series of emails starts with an operational data analyst explaining that tax assessments raised before February 15 will have a payment due date of March 31, just in time for the current financial year. Any assessment raised after February 16 is only payable in the next financial year.

A Sars official in the national debt enforcement department then sends the following to Lawrence: “As per Opsco [operations committee], can we look at delaying the raising of assessments for the period 16/01-15/02? Only assessments which are collectable can possibly be raised. Let me know.”

Three hours later, Lawrence sends the directive to several senior audit managers in various provinces: “Can we act accordingly unless there are other critical factors affecting this … Note that collectable assessments and reduced refunds can be raised.”

Sources claim that, simply put, this was an instruction to auditors to only raise tax assessments where the taxpayer owes Sars, as well as refunds reduced to less than R10‑million.

Each auditing manager forwarded Lawrence’s instruction to their auditing teams.

The M&G received the emails from a concerned official.

Last month the M&G exposed 16 letters between Moyane and Finance Minister Pravin Gordhan, detailing the deep rift and mistrust between the two officials holding the country’s purse strings. Moyane complained that Gordhan refused to shake his hand and treated him “like a child”. He lodged a dispute against Gordhan with President Jacob Zuma, asking him to appoint a retired judge to mediate and repair their broken relationship.