Diane Lalor was a member of the high court litigation unit of the SA Revenue Service (Sars) — a crack team at the tax agency that, by rights, should have been part of the high-profile court victory that Sars scored over alleged Western Cape gangster Mark Lifman this week.
Here, the Supreme Court of Appeal ruled that Lifman had no reasonable prospect of success in his attempt to stop Sars from seizing assets to settle his R352m tax debt.
Though it has now been reconstituted, Lalor’s unit was among the victims of Sars’ dismantling under former commissioner Tom Moyane
Back in 2015, an attempt was made to suspend Lalor after she had a run-in with Kelly-Ann Elskie — the girlfriend of Moyane’s then second-in-charge, Jonas Makwakwa. Elskie had been transferred to Lalor’s unit, only for it to emerge later that she had lied about having a law degree.
Lalor uncovered the discrepancy — but was then told that she herself faced suspension.
Lalor’s story is an example of how Sars was run under Moyane and Makwakwa — both of whom have yet to face real consequences for their actions, beyond simply being axed. In just four years, the revenue authority disintegrated, going from being one of SA’s best-run government entities to a basket case.
While that ignoble period in Sars’s recent history is over, with the departure last year of the bulk of the Moyane-era executives, the rebuilding of the agency is slow.
"The work of the Sars commissioner on any given day of the week is a tough job," says commissioner Edward Kieswetter, in an extensive interview with the FM.
Kieswetter should know. He was appointed nearly a year ago, and has been at the coal-face of this rebuilding.
The erosion of tax morality has as much to do with the behaviour of politicians as it does with the shenanigans that unfolded at Sars
— Michael Sachs
He says the magnitude of the damage at Sars — which retired judge Robert Nugent starkly described as "reeking of intrigue" and ridden with "fear and mistrust" — is still not fully understood outside the organisation.
And the rebuilding process is also still being undermined, by those inside the organisation who remain loyal to Moyane as well as by outsiders.
"We are constantly undermined and attacked for the work that we do," says Kieswetter, "whether it is by political parties that in my view mask their own ulterior motive, or another public institution with their own agenda. It’s all a reflection of the state of the body politic in SA."
The EFF has taken a particular interest in Sars, and was hell bent on challenging Kieswetter’s appointment last year, throwing its weight behind Moyane in his bitter battle with President Cyril Ramaphosa.
Kieswetter is also facing off against public protector Busisiwe Mkhwebane in court, after Sars refused to give her former president Jacob Zuma’s tax records. Mkhwebane also found that Sars’s high-risk investigation unit was indeed a "rogue unit", and ordered Ramaphosa to discipline public enterprises minister Pravin Gordhan (Sars commissioner at the time) over its establishment. Her report is before the high court for review.
But there is good reason Kieswetter can’t afford to be distracted from rebuilding Sars. This year, it is projected to undercollect on taxes by R63.3bn, against last year’s estimates, according to finance minister Tito Mboweni’s budget, tabled last week. This is an immense hole — greater even than the shortfall recorded in the aftermath of the global financial crisis (see graph on page 26).
The Budget Review says that even though the government implemented chunky tax increases in the past five years, the difference between the actual tax collected and the initial projections has widened, "in the face of a persistent slowdown in economic growth and a weakened Sars".
Take the idea of tax buoyancy. This is really just a measure of how efficiently a country collects tax, calculated as the ratio of the growth in tax collected, compared with its economic growth. The point is, SA’s tax buoyancy has been weakening, particularly between 2016 and 2018, when Sars’s operational health was severely compromised.
For the 2020/2021 tax year, tax revenue is expected to grow by 4.9%. But tax buoyancy is expected to fall, as the amount of revenue Sars collects from personal income tax drops, thanks to the expected reduction in civil servants’ wages.
Kieswetter is clear: at the heart of SA’s, and Sars’s, revenue woes is the browbeaten economy.
It’s a point Mboweni made during last week’s budget debate.
"The context is one of a very low economic growth environment, which translates into lower revenue collection," he said. "That is setting aside whatever difficulties we might be having at Sars. Even if Sars was at full steam, lower economic growth would have meant lower collection."
Kieswetter sees the state’s revenue conundrum as three-pronged: first, there’s the stagnant economy; second, slipping compliance among taxpayers; and, third, capacity problems at the tax authority itself.
The lower salaries, retrenchments and lack of bonuses hit pay as you earn (PAYE) tax, while lower retail sales affect VAT, and lower profits mean lower dividends.
The emigration conundrum
There’s another growing problem contributing to the decline: emigration.
Though Sars will only report figures at the end of the year, Kieswetter says the agency has "seen an increase in emigration through the number of people who are applying for tax clearance and the number of people applying to take their money offshore. It is definitely contributing to some of the short-term erosion of the tax base."
SA can ill afford a wave of emigration, given how remarkably lopsided the tax base is. In reality, just 125,000 people — 0.2% of the population — paid R150bn last year in personal income tax, equal to a quarter of all the income tax collected.
If there’s a sizeable departure in the category of professionals who earn more than R1.5m a year, it would burn a serious hole in Sars’s pocket.
There are a number of reasons why people are leaving, but two factors most cited are the government’s determination to implement National Health Insurance (NHI), and the possibility that it may decide to "prescribe" that part of your pension be invested in state-owned companies.
Last October, RMB Global Markets Research released a report, "NHI: The Cost of Emigration", which said that 4,519 of SA’s 530,226 medical professionals could leave the country by 2020, rising to 15,202 by 2025.
"The economic impact, particularly if we consider that many medical professionals, principally specialists, who emigrate are in a higher earnings demographic, is a significant outflow of wealth, a decline in the tax base and, critically, further erosion of SA’s skills base," it said.
By RMB’s calculations, just the emigration of these medical professionals would "reduce personal income tax receipts by between R5.2bn and R23.3bn".
A study by insurance firm PPS late last year found that 72% of the 3,300 professionals surveyed said they’d emigrate if NHI were implemented in its current form.
Ismail Momoniat, the National Treasury’s deputy director-general for tax and financial sector policy, says that to mitigate the loss of higher-income taxpayers, the Treasury has removed the provision for "forced emigration".
This rule forced South Africans who wanted to work overseas and not pay tax to "financially emigrate".
By changing this, Mboweni wants people working outside SA to "maintain their ties to the country".
According to the budget, the government will hike the cap on the exemption of foreign remuneration earned by SA tax residents to R1.25m a year from March 1 2020.
Tax compliance and Sars’s capacity are two other areas to which Kieswetter is paying keen attention. When it comes to compliance, you can understand how years of witnessing state capture and corruption have made many South Africans reluctant to pay their taxes.
Kieswetter says taxpayers are asking: "If senior politicians and state-owned enterprises executives are getting away with it, then why do we pay taxes?"
The result, he says, is that "even generally honest taxpayers begin to feel morally justified to withhold their taxes or at least to fiddle [with them]".
In addition to that, or perhaps related to the general unwillingness to pay Sars, the tax agency has also noticed a marked increase in the audaciousness of criminals seeking to defraud the taxman. It’s been "significant", says Kieswetter.
"Whether it is customs underdeclaration, whether it is VAT fraud, whether it’s all kinds of criminal behaviour that compromises the fiscus — they are clearly on our radar. We are developing our capability," Kieswetter told parliamentarians last Thursday.
It’s the economy, stupid
Michael Sachs, adjunct professor at Wits University and former head of the Treasury’s budget office, says that while you can’t rule out state capture and corruption as factors in the decline of Sars, the main factor driving poor revenue collection is the economy.
"The collapse of tax revenue has very little to do with state capture or problems at Sars, particularly because it is concentrated in personal income tax, which is a highly automated process that has inertia behind it," he says.
Controversially, Sachs is also not entirely convinced by the narrative that a lack of capacity is driving lower collections.
"The continuous claim that the reason for the shortfall is the capacity of Sars is naive and, frankly, self-serving," he says. "The projection of a R63.3bn decline in revenue is not due to corruption, but economic performance."
He explains that from 2013 to 2016, tax collection was "extraordinarily buoyant". Thereafter, however, it began to collapse.
He says the downward revision to tax collection can be fully accounted for if one looks at PAYE, for example.
If you look at the VAT refund manipulation, then the state capture argument may hold — but even that is simply a matter of "kicking figures" forward from one year to the next, he says.
And while an argument around inadequate capacity could be made when it comes to the destruction of the large-business centre, company tax collection has actually been pretty dismal for many years.
"Whatever administrative problems you have at Sars, you wouldn’t expect them, on the face of it, to translate [into a fall in revenue] ... the real driver of the fall in revenue has been personal income tax and that has a lot more to do with underlying economic conditions."
Though capacity issues and state capture are not entirely irrelevant, Sachs says these are more medium-to long-term issues than a short-term one, which affects revenue collection from one year to the next.
The Treasury, however, believes that Sars’s capacity and wider tax compliance are key to the agency’s performance.
Momoniat says Sars is making good progress, despite the difficulty in rolling back the damage and getting rid of people who remain loyal to Moyane. "The good guys have to follow the rules or get challenged themselves, so it is indeed tough," he says.
It’s clear why the Treasury flags rebuilding Sars as one of its top priorities: the Budget Review says improved capacity at the agency may yield revenue increases, which "are not included in current projections".
Momoniat says he still sees "huge areas of weakness" in Sars, which largely resulted from a disastrous restructuring carried out under Moyane — and in cahoots with Boston-based consultancy Bain & Co.
"It’s about changing the culture of the organisation," Momoniat says. But he adds that it’s just one of many state institutions which are a mere shadow of what they were, even as recently as 2009.
When it comes to getting people to pay their taxes, it’s clear that the government’s abysmal record on wasteful or irregular spending has had an effect.
Sachs argues that the erosion of tax morality has as much to do with the behaviour of politicians as it does with the shenanigans that unfolded at Sars. He cites the spending on Nkandla, former president Jacob Zuma’s splurge on his private residence — a scandal that engulfed much of his nine-year presidency — as one example.
Kieswetter echoes this, saying his work is affected by the public perception of the quality of the government’s spending. Those pricey overseas trips, splurges on ministerial homes and vehicles over the years all take their toll during straitened economic times.
He has appealed to his government colleagues to be mindful of their spending — taxpayers want to know their cash is being well spent. "If citizens don’t get the experience of goods and services they are paying for, and on top of that they see how billions of rands are being looted at Transnet or Eskom, for example — or any other state-owned entity — they see it as effectively abusing their hard-earned money."
This, he says, "undermines the very purpose for which Sars was created".
Longer than expected
In the immediate aftermath of Moyane’s removal, the Treasury felt it would take about two years to turn the situation around. Now, it seems, that road could be longer.
So what has Kieswetter done so far?
For a start, there’s been a cleansing of the ranks, after a number of Moyane’s executives were identified in Nugent’s report for misconduct.
Three senior officials — chief officer for human capital Teboho Mokoena, former head of IT Mmamathe Makhekhe-Mokhuane and former group executive for employment relations Luther Lebelo — all resigned after being placed on suspension ahead of possible disciplinary action arising from revelations at the Nugent inquiry.
Refiloe Mokoena, the former chief officer for legal counsel who reportedly played a role in the granting of an irregular VAT refund to the Gupta family, was dismissed in November after being found guilty of misconduct.
Kieswetter has also focused on rebuilding capacity. From 2014, Sars was significantly compromised: more than 60 experienced managers were sidelined; upwards of 115 specialised auditors and investigators in the large-business centre left; and more than 200 compliance auditors, 60 customs officers and more than 200 debt collectors also departed, he tells the FM.
In all, Sars lost about 2,000 staff with highly sought-after technical skills during that period — it has lost 3,000 in total — and is now trying to rebuild its staff complement.
Kieswetter hopes to bring back some of those who left, along with some new blood. So far, he’s has advertised 29 senior posts (some entirely new), hired a chief data scientist, a chief technology innovation officer and a chief revenue officer to anchor the collection-recovery process.
He has also decentralised the organisation into 12 regions — nine geographic and three segments such as the large-business unit — with a director in each region responsible for revenue collection in that area.
Importantly, he’s also redesigning Bain’s botched operating model — and, this time, Sars isn’t paying consultants to do the work.
"Bain cost us R150m … we have now done a strategic review of the operating model ourselves without costing a single cent to the taxpayer or Sars."
Working with 50 to 60 managers, he’s looking to design an organisation that can deliver properly and collect revenue.
"That’s the work we have been doing over the past eight months," he says. "This is work we shouldn’t be paying consultants to do. [It’s] our thinking, for us — that is what we are employed to do."
The new design will soon be submitted for ministerial approval, he adds.
At the heart of the near-collapse at Sars was the upheaval caused by the operating model Moyane commissioned from Bain. As it turned out, Moyane and Bain had started that redesign before Moyane had even been appointed as commissioner by Zuma.
That redesign, the Nugent inquiry heard, did not improve Sars’s efficiency, but rather hobbled its ability to, among other things, investigate high-profile tax dodgers.
Two Sars staff who were directly affected by the Moyane-era restructuring spoke to the FM on condition of anonymity.
One says while major changes are clearly under way today, there are still staff who are demoralised at not being put back in their old posts. There is also a lack of communication and a poor understanding of Kieswetter’s overall vision, especially among lower-level staff, the insider adds.
Another employee is more upbeat. He says the changes so far "look positive" because key units, such as enforcement, the large-business centre and compliance, have been reinstated.
Kieswetter’s "vision 2024" strategy is, the official says, a "good start" for Sars.
The changes so far are being felt in the upper echelon of the organisation.
But, the official says, while the Public Servants Association — which represents roughly half the staff at Sars — is enthusiastic about the improvements, the National Education, Health & Allied Workers Union (Nehawu) continues to approach Kieswetter’s administration with hostility.
Nehawu, considered a key Moyane ally, kicked off the first wage strike at the tax agency in almost a decade after his departure.
Kieswetter says the actual damage to Sars was worse than has been portrayed, and he concedes that there are those who continue to undermine the work he is doing.
"There are those who continue to question the legitimacy of the appointment I have, or question the motive for pursuing high-profile tax payers, or just question everything we do. Sadly, some of that undermining comes from within Sars and from former Sars employees … you will notice I do not respond to these things because they are deliberate and meant to distract me," he says.
He remains unmoved.
"The path forward is very clear, and we are beginning to see little green shoots of results," he adds.
Ensuring accountability
Those implicated in state capture and corruption must be afraid of the tax agency regaining its former bite. Kieswetter is acutely aware of the role Sars can play in helping the justice system bring them to book.
Early on, he established a dedicated unit to focus on the various commissions — such as the Zondo commission into state capture and the Public Investment Corp (PIC) inquiry — and respond directly to issues that arise. So far, Sars has had 180 requests for information from these inquiries.
"We have had requests from the investigative directorate [investigating state capture] in the National Prosecuting Authority, [NPA]; we have signed a new memorandum of understanding with them," he says.
Sars will continue to come under fire from those likely to face consequences for their role in state capture and corruption
— What it means:
The request from the NPA involves 1,385 taxpayers, with almost 3,000 linked entities relating to 24 cases under investigation. To date, 19 criminal cases have been referred to the NPA from Sars — including cases linked to state-owned companies.
The stakes are high, which goes some way to explain why Kieswetter and Sars will continue to come under attack from those likely to face consequences for their role in state capture and corruption.
But the commissioner has a greater responsibility, since Sars has a frontline role to play in addressing the lack of accountability in the state, after nearly a decade of wanton spending, looting and corruption.
Sars, with its ability to bring into line those who flout the country’s tax laws, is uniquely placed to usher in the justice that ordinary citizens have been demanding for years.
This is the upside.
But on the downside, the unique position Sars occupies means it will also probably remain under fire from corrupt quarters. Watch this space — things will get interesting when the NPA eventually moves.
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