What’s Behind The SARS Inquiry?

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The Minister of Finance has announced that the President has agreed to an independent inquiry chaired by a judge to probe why SARS is missing its revenue targets – this year it is forecast to miss budgeted tax collections by R50.8 billion and in excess of R200 billion in the next three years.

With the country facing a funding crisis and some credit rating agencies having downgraded South Africa’s debt, the Minister considers it imperative to investigate if this shortfall is due to:

  • The economy, where low growth is impacting revenue collections,
  • Inadequate tax collection systems and governance at SARS,
  • Increasing reluctance by taxpayers to pay tax.

Tax experts reckon that just over one third of the shortfall (about R18 billion) is due to poor economic performance, with the balance explained by declining tax morality and administrative difficulties within SARS.

The decline in tax morality is driven by incessant stories of government corruption and by the fact that the income tax rate is reaching a point whereby further increases could result in further declining tax collections (the “law of diminishing returns”).

SARS has lost many of its most skilled staff over the last few years. This is particularly concerning considering that SARS should be focusing on complex areas of taxation, for example, Base Erosion and Profit Shifting (BEPS), whereby multi-national enterprises (MNEs), among other things, move their profits to low-tax countries. As tax practitioners globally are sophisticated and well resourced, tax consultants have expressed concerns over SARS’ ability to counter these practices.

One also has to question if the rating agencies will respond favourably to the inquiry. Their recent pronouncements indicate they require evidence of growth strategies and cost cutting.

Let’s see how this unfolds.

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