Address by Commissioner of the South African Revenue Service Mr Oupa Magashula to the inaugural Nkonki Annual Audit Committee Conference

Fellow participants, ladies and gentlemen:

  • Yes, there is a great global financial crisis!
  • No, it wasn't a 'freak' accident that no one could have predicted!
  • No, it hasn't been solved!
  • Yes, the countries with stronger cultures of compliance are showing more resilience in facing the crisis!
  • Yes, audit committees have a powerful role in strengthening corporate compliance and morality!
It is against this background - sobering but replete with opportunity - that I thank you for the invitation today to share with you the South African Revenue Services' (SARS) expectations of private sector audit committees.

The Minister of Finance, Pravin Gordhan, set the scene in the 2011 Budget Speech. He said:

“It is about recognising that now is the time to do extraordinary things, in dealing with our particular development circumstances. It requires new ideas and bold efforts from all: government, business, labour, communities and every family. We must show, across the economy, the game-changing strengths we have shown on big  issues, from creating our democracy to hosting Africa’s first Soccer World Cup festival.

Now we have to ignite the flame of higher inclusive growth, and sustain it.

There you have it, ladies and gentlemen: Audit Committees, as instruments of corporate governance, are indisputably role players, thought leaders and drivers in contributing to the “extraordinary things” and sustaining the “flame of higher inclusive growth” to which Minister Gordhan refers.

But, how ready are private sector audit committees to face this challenge head on? To answer this question, we need to ask ourselves:
  • What has already been achieved?
  • What is missing? and
  • What still needs to be done?
What has already been achieved?

We have a comprehensive regulatory framework in place to regulate the establishment and functioning of audit committees. The Companies Act of 2008 and the King Report III provide fundamentally important directive rules for companies and audit committees.  We just need to glance at the Annual Reports of institutions and corporations to see that we have an impressive record of formal compliance.

Whilst we can give ourselves a small collective pat on the back for all the formal compliance, I believe, we still have a lot of work ahead before we can proclaim that audit committees are passionately and indefatigably driving exemplary or even adequate levels of national corporate morality and social responsibility.
 
What is missing?

Formal compliance is a necessary first step towards corporate compliance – but on its own it is inadequate.

You will recall for example that Leisurenet reportedly had an audit committee comprising six chartered accountants who oversaw corporate compliance. Yet despite being formally compliant, Lesiurenet went on to fail dismally. There are many other examples where being formally compliant has just not been good enough.

Whilst no effort has been spared in entrenching audit committees statutorily, not a word is uttered about an obligatory code of ethics. The subliminal message is: You SHALL exist but you MAY behave how you deem best!

So what is missing?

First: We lack an all pervasive “culture  of compliance” namely the right person should do the right thing in the right way at the right time - even when nobody is watching!

We should be aware that unless we make the commitment to development AND the accompanying commitment to pay taxes, build good corporate citizenship, integrity and sound ethics among professionals and make tax and customs evasion and aggressive avoidance a social and moral crime, we will undermine our progress and lose gains made over the last 17 years.

We are often strong in words but lack action. In word, we are all against corruption. In deed, we are hesitant and even quiet. It is not only the public sector that must clean up its act but also the private sector. The public sector does not corrupt itself. It is ably aided and abetted by the private sector!

From SARS’ side, I have given public notice to those who boast about being able to evade tax. Their days are numbered. SARS has tools to identify such people and is using these tools. These are the people with the most potential to use and abuse
trusts. There is a section of the society that believes that it is proper to show off that they are not contributing their fair share. In the US such people are called “unpatriotic”. In the UK they have been likened to “drunken drivers”. I call them plain criminals!

The challenge for all South Africans is to make it clear that such anti-social and destructive behaviour is nothing to be proud of and that such people should be ostracised and kicked out of golf clubs and other such institutions. This is a social challenge and the country should decide what kind of culture is acceptable. Crime is crime and one cannot and should not distinguish between hijackers and those involved in tax evasion.

A crucial challenge for SARS and indeed all of us is to avoid the following in South Africa:
  • Tax them, not me!
  • Catch me if you can!
  • Tax me if you can!

Let us be frank, by avoiding payment of tax in any way, companies and individuals profit from activities that foster poverty and undermine the notion of democracy.

Secondly: Tax risk is still not sufficiently understood at board and audit committee level

How often do we not hear that although directors know that tax should be on their agendas, the CFO is left to deal with it? We still encounter the view that tax is a purely financial matter and its reputational and strategic implications do not merit board discussion. Granted, the complexity of tax legislation may make it harder to explain and understand and simplifying tax legislation and reducing the cost of compliance remains a real priority.

I recently did a mechanical scan of the King Report III. I can’t trace the word “tax”. Surely, tax compliance deserves to be mentioned expressly?
 
I also scanned some of the training materials of the CGF Research Institute on Fast Tracking Company Officers. Once again, there is no express reference to tax compliance -with the exception of the reminder that shareholders need to approve tax free remuneration of directors.

Those who consider tax as a purely financial matter have failed to learn anything – or it would seem read any newspapers – during the economic crisis over the past few years.

The taxpayers who around the world have been expected to foot the bill for financial mismanagement and excessive greed are not doing so lightly. We are witnessing some  of the strongest negative  public sentiments around financial institutions – which are being raised by taxpayers whose hard-earned money is being used to bail out banks and other financial institutions.

And it is not just these institutions who are coming in for criticism. Taxpayers have organised public protests against a range of companies who they perceive – rightly or wrongly – as not paying their fair share in taxes. In this regard, the reputational risk of perceived non-compliance with tax and meeting ones moral obligations is rapidly rising.

Thirdly: The disconnect between internal audit, executive management and audit committees poses challenges and creates opportunities for audit committees. Executive management and audit committees sometimes have a false sense of reassurance  as  to the scope and depth of  internal audit’s activities. Audit Committees have the opportunity to ensure that the obvious is understood. There are no stupid questions. Make sure everybody understands what work is being done and what is not being done, why and what are the risks. Audit committees hold an additional power they rarely exercise
 
So, what can private sector audit committees do to close the gap?

One: Make sure audit committee members pay your taxes!

Two: Oversee and interrogate the board to ensure that it promotes a progressive and enlightened approach to business and empowerment that mainstreams “development” as a national business ideology and makes tax and customs evasion and aggressive avoidance a social and moral crime we will undermine our progress.

Thirdly: Oversee and interrogate the board to ensure that it entrenches payment of taxes as the “throbbing heart” of corporate responsibility. “Tax cannot remain in the “splendid isolation to which its technical nature and its perceived independence from the business mainstream have placed it”. (Tax on the Boardroom Agenda).

Four: Mobilise, energise and commit CEOs, directors and boards as progressive business activists driven by the desire to comply with tax laws. It is important that boards of directors understand what tax planning arrangements are in place for their companies and that they do not simply leave it to others to take care of. In particular, it is important that boards understand the extent to which tax planning undertaken on their behalf is aggressive or not, and what their home tax authority’s attitude to it might be.

Five: Agitate for the creation a framework of anti-avoidance principles within taxation and related laws.

Six:  Interrogate  and  ensure  proper  understanding  of  the  breadth  and  depth  of internal audit coverage and where necessary intervene to ensure optimal coverage in support of tax morality.

Seven: Promote the partnership role of business in actively fighting commercial crime and unfair trade practices.

Finally: Energetically promote domestic investment and entrepreneurship among small business.

Conclusion

From SARS side, we are always ready for a robust debate on how to improve overall compliance with tax legislation.

We await your input and advice on how to make it even easier to comply with tax legislation and where possible further cut compliance cost!

Please engage us on these.

The words of the ancient sage Hillel are now more apt than ever: “If not we, who? And if not now, when?”

How apt the challenge to us all!

I thank you.

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