Re-establishing Large Business Tax Unit to Boost Transparency at SARS

On 2 October, President Cyril Ramaphosa’s office confirmed that it had received the interim report from the Nugent Commission of Inquiry into governance and administration issues at the South African Revenue Service (SARS). The commission, which will deliver its final report in December, is likely to propose several significant changes, including removing suspended SARS Commissioner Tom Moyane.

SARS is already taking steps to rectify the damage to its operations that occurred under Moyane. These include its announcement at the end of August that the Large Business Center (LBC), which was disbanded under a restructuring ordered by Moyane, will be re-established. Although it will take time to reverse the institutional damage, the return of the LBC, alongside other expected changes, is positive for IOCs and other investors. In particular, the LBC will boost transparency in tax collection, which had increasingly become subject to ad hoc decision-making. We also expect tax compliance processes to ease, as the LBC relies on specialized skills and sectorial expertise.

Over the past few months, the Nugent Commission has heard considerable testimony from current and former officials from SARS and other government entities. In addition to accounts of the negative impact that Moyane’s leadership had on morale, the Nugent Commission also heard from several officials that SARS had experienced major challenges in corporate tax collection after the LBC was dismantled. Indeed, former LBC head Sunita Manik alleged that the unit was dismantled to allow for fraudulent activity. The LBC was responsible for around a third of total tax collections and, as a result, allegedly provided corrupt officials with significant opportunities. Manik also argued that the operational restructuring decreased efficiencies, causing significant revenue shortfalls. Nishana Gosai, the former head of the LBC’s transfer pricing unit, supported this view, saying that the restructuring had paralyzed decision-making.

Moyane was suspended in March and replaced by Mark Kingon as acting commissioner. Soon afterward, in May, Ramaphosa established the Nugent Commission to assess governance and administrative weaknesses in a bid to restore credibility to SARS. That same month, SARS indicated that it was considering reconstituting the Illicit Economy Team and the LBC. Thus, the August announcement following through on that was widely expected. The new SARS Executive Committee argued that these two units were pivotal to providing an “effective and efficient service to large corporate taxpayers, and in fighting illicit trade.” Hlengani Mathebula, SARS chief officer for governance, international relations, strategy and communications, will lead the process to reform the LBC.

Although SARS collected 1.2tn rand ($69.7bn) in taxes in 2017-2018, it failed to meet its target by 700mn rand ($49mn). In light of the growing budget deficit and worsening economic indicators, financial investors will be paying close attention to developments at SARS. Improved tax compliance will alleviate some pressure on the government as Ramaphosa looks to stimulate the economy.

On 21 September, Ramaphosa revealed several measures, including infrastructure development plans, in a bid to address weak business confidence. Once the LBC is fully operational again, companies can expect renewed scrutiny of their tax affairs. Transfer pricing is likely to be one area of focus. (The transfer pricing unit, which was part of the LBC, had also been disbanded under the restructuring exercise.)

The move to address issues at SARS highlights the progress under Ramaphosa in restoring good governance to key institutions, which is good news for the investment community and rating agencies. However, this progress will not be smooth, as illustrated by Moyane’s challenge against the Nugent Commission. Moyane is questioning the legal basis for the inquiry being held at the same time that he faces a separate inquiry into his fitness to hold office.