The downward spiral in tax revenue has again been confirmed by Finance Minister Gigaba’s medium term budget tabled on 25 October. Since the advent of democracy in the country, tax revenue used to increase year after year. This positive trend came to an end and was highlighted in Minister Gordhan’s 2017 Annual Budget Speech delivered in February this year. At this stage the annual revenue shortfall was at R30.4 billion which was then the largest shortfall since the 2008/9 global recession.
Finance Minister Gigaba now announced in the 2017 medium term budget policy statement a projected revenue shortfall of R50.8bn for the 2017 fiscal year. Tax revenue is projected to fall short of the 2017 Budget estimates by R69.3bn in 2018/19 and R89.4bn in 2019/20.
Surprisingly, Minister Gigaba has recognised that policy and administrative factors may be contributing to the shortfall. The medium term budget statement said: “Behavioural responses to tax increases may be larger than anticipated and revenue could perform below expectations even if taxes are hiked. Compliance concerns are mounting in the context of tax administration challenges and weakening tax morality.”
Ian Matthews, Head of Business Development at Bravura, an independent investment banking and advisory firm, comments: “These shortfalls substantiate expectations that Treasury’s tax buoyancy assumptions have been too optimistic in light of the weak outlook for growth, wages and corporate profitability.”
In February 2017, Minister Gordhan noted that for the first time since 2005, South Africa is experiencing a drop in revenue growth versus GDP growth.
By 2005, tax revenue as a share of GDP stood at about 22% and steadily climbed to 26.7% on the eve of the country’s 2009 recession, which was a consequence of the global financial crisis. At that time, South Africa’s revenue growth was significantly higher than the averages for central government tax yields of lower middle-income countries which stood at 18.6% and upper middle-income countries at 20.4%.
The medium term budget states that: “Tax buoyancy, which is an illustration of the expansion of revenue associated with economic growth, has fallen markedly over the past couple of years. In 2016, despite tax policy changes intended to raise R18 billion in additional revenue, it fell to 1.01. This year, even though tax policy measures were designed to add R28 billion to revenue, buoyancy is estimated at a meagre 1.02.”
In his February 2017 budget speech, Minister Gordhan cautioned that both administration and tax morality posed a risk to public finances. He highlighted the necessity of having a strong social contract between government and taxpayers given that the effectiveness of the tax system relies largely on the willingness of citizens to contribute and to be compliant. Therefore, two fundamentals must be in place: an effective tax administration and a willingness of Corporate South Africa to comply.
Matthews says that these words of caution are now ringing true. “The rising public concerns about corruption, wastage of public funds and inefficiencies in service delivery are clearly affecting the willingness of South Africans to comply and pay their taxes. Taxpayer trust and confidence levels have plummeted dramatically in recent times. There is a lack of trust among taxpayers due to fruitless and wasteful government expenditure such as Nkandla, the still unresolved sale of South Africa’s strategic fuels, the possible Russian nuclear contract and the billions lost through corruption and inept management at state-owned entities (SOEs) like South African Airways, Eskom and Transnet. South Africans need assurance that government will keep expenditure in check, and even cut costs at non-performing entities.”
In the foreword to the 2016/17 Annual Report of the Office of the Tax Ombud, Finance Minister Gigaba said: “We encourage all citizens and residents to continue meeting their tax obligations with pride, and where there are disputes with SARS, to use all the avenues provided to resolve such. Our economy continues to grow at a very slow pace, which in turn has direct implications for the capacity of the State to generate much-needed revenue. It is at times like these that we need to emphasise the need for tax compliance so that all revenue due can be collected and used to serve the needs of all people.”
These comments are in stark contrast with the comments from the Tax Ombud Judge Bernard Makgabo Ngoepe: “The benefits of an efficient and fair tax administration system that taxpayers trust are immense; so are the consequences of a system they distrust. A growing number of taxpayers, and the general public to a large extent, are becoming increasingly vocal about the way revenue is being used, or even abused, by those entrusted with its management. We all know that taxpayers need to be motivated to pay tax. …It is therefore vital that government be seen as being prudent and ethical in the spending of taxes collected.”
In difficult economic times one cannot close one’s eyes to corruption and the fundamental impact it has on tax morality. The days of blind trust in government are over.
The South African Revenue Service (SARS) has expressed concern about the level of non-compliance with the submission of tax returns.
In the last five years the number of non-submission of returns for Pay-As-You-Earn (employee tax) has increased by 77% and for Value Added Tax (VAT) by 32%. The number of outstanding corporate tax returns has grown by 87%, while outstanding personal tax returns have grown by 77%. Matthews says that this points to the falling levels of confidence in the system by growing numbers of corporate and individual taxpayers.
Randall Carolissen, head of research at SARS, said when economic growth lags, it is usual to find a dip in compliance. “The valley has however never been as deep as we have seen in the last five years. In pre-democracy times people used to boast with the fact that they were not paying their taxes. We have moved out of that era and we do not want to move back there.”
Undoubtedly South Africa’s tax administration system has come a long way since the 1990s but an over-zealous approach to tax collection poses some risks to the social contract between government and Corporate South Africa. There is a close relationship between fiscal citizenship and democracy.
Taxpayers have over the years been complaining that SARS unduly delays the payment of verified refunds. The complaints reached their peak in the period December 2016 to March 2017. The Tax Ombud released a report in September which found that the South African Revenue Service’s system allowed it to unduly delay the payment of verified refunds to taxpayers in certain cases, amounting in total to a whopping R25.86 billion. Ngoepe found that a number of the complaints related to unduly delayed refunds was justified. The medium term budget has now also recognised that: “Implementing the recommendations from the Tax Ombud’s report on delays in the payment of VAT refunds by the South African Revenue Service will help to improve taxpayer confidence in revenue administration.”
There is a lot of pressure on SARS to step up its game. The tax authority has lost high profile individuals, and its technical skills base has been eroded.
In the late 1990s Corporate South Africa bought into the good news story of the country, and recognised the moral obligation to paying taxes in support of South Africa’s development. The current wave of dissatisfaction is clearly affecting the tax morality of South Africans.
In weathering the effects of low growth and tax hikes, Corporate South Africa would be well advised to maintain a high standard in their tax risk management strategies taking into account all financial, regulatory and reputational risks. A company is allowed to look at new business opportunities in the most tax efficient manner. The common view of tax morality is that it is acceptable to reduce the cost wherever possible, but in a way that is based on a reasonable and purposive interpretation of the law.
Published: News 24