The initial leg of the Nugent commission’s public hearings focused on how the South African Revenue Service (Sars) was built up and, after the arrival of now suspended commissioner Tom Moyane, then broken down.
The second leg, which kicked off this week, revealed how tax fraudsters took advantage of the now weakened Sars.
Sars officials from enforcement units that had focused on high-value and high-risk individuals told the commission how they could no longer investigate tax compliance in the illicit sector after Moyane introduced a new operating model in 2015, reportedly based on the advice of consulting firm Bain & Company.
The officials’ testimonies were corroborated by at least five other officials, some of whom chose not to appear before the commission and submitted affidavits instead, one of the evidence leaders, Carol Steinberg, said before the start of Tuesday’s hearings.
“At this stage, we are reasonably comfortable that it is not an individual opinion or grudge,” she said, adding that there was still room to test the evidence.
The kind of cases that would have be investigated by these units involved key players in organised crime, smuggling, poaching and the tobacco and liquor fields, as well as high-net-worth individuals with offshore entities and special vehicles to hide their income streams.
Keith Hendrikse, a former senior manager for the national projects office in the Western Cape, highlighted how the case of “one of the biggest [crime bosses] in South Africa”, who owed Sars about R400-million, was derailed with the help of some Sars officials.
He said that, when he was at the Cape Town office after his unit was broken up, he had bumped into an Sars auditor from the newly formed internal investigations unit who had come to collect the audit files for this notorious taxpayer.
“I asked whose instruction this was and he said he was not sure but as far as he knows he has been told it’s at the instruction of the commissioner.”
Hendrikse said the files, which filled a room, were being used for evidence in high court litigation and the auditor could not walk away with them.
He later found out that the auditor had been instructed to write to the taxpayer saying that his audit was being reviewed. The taxpayer produced the email in the court, saying Sars could not proceed with litigation because of the audit review being done.
“That was to my mind a deliberate attempt to derail that process. We were stopped in our tracks,” Hendrikse said. “Let me tell you upfront there is no such thing in our tax legislation called an ‘audit review’ … That prevented Sars from collecting any money for two years. To date, that taxpayer has not paid one cent [and] has not submitted tax returns.”
Evidence leader Lunga Siyo, reading an unnamed official’s affidavit, said operational efficiency and effectiveness in the national and centralised projects and the tactical intervention units appeared to be “constrained or lost” under the new decentralised model.
The unit used to be an end-to-end facility, with auditing, legal and debt capacity all under one roof, which allowed them to work on complex projects, so, if a taxpayer was linked to 30 entities and income streams, they could investigate all their tax affairs in full and could act quickly.
Pieter Engelbrecht, the former head of the centralised projects unit, who was demoted to a senior specialist in the legal counsel division, confirmed the affidavit statement.
He said that the capability to deal with the illicit economy and the focus areas they investigated was lost when the new operating model was introduced. Dion Nannoolal‚ the senior manager responsible for high-value audit debt collection, told the commission the fragmented model had weakened Sars’ legal capacity, particularly after it disbanded the high court litigation unit, which used to work closely with debt collection from high-risk taxpayers in the illicit economy.
He said he was now working with legal consultants who were not sufficiently experienced to deal with complex matters.
A clear result of this was a loss that Sars suffered in the high court in May against security and eviction company the Red Ants. Sars was ordered to reinstate the company’s tax compliance status.
Nannoolal said the case, which involved hundreds of millions of rands, had enormous implications for Sars because of a “poor submission” made by Sars’ legal counsel to the court. “Worse is that I had to authorise a tax clearance certificate to a noncompliant taxpayer.”
The enforcement units did not necessarily bring in a lot of revenue for Sars, Engelbrecht said, but they did a great deal to drive the message of compliance in the high-risk areas, because taxpayers were aware that Sars had the capacity to catch them.
Over and above the money collected from countering illicit activities, Engelbrecht said In its prime the centralised specialised unit would be able to collect R500-million to R600-million a year on Sars’ debt book, Engelbrecht said. The debt book refers to money owed to Sars.
On Monday, former Sars group executive Randall Carolissen told the commission, “since roughly 2015, the debt book has soared by 50% from about R85-billion in 2015 to R135-billion”.
Carollison further testified that the four suggested operating models, which hardly differed from Sars’ 2008 conceptual model, that Bain & Company put forward to the commissioner, were rejected. He said the million-dollar question was where the final model came from.
The company is expected to answer questions before the commission on Friday, August 31.
Tebogo Tshwane is an Adamela Trust business reporter at the Mail and Guardian