Address by Commissioner of the South African Revenue Service, Mr Oupa Magashula on the launch of tax season 2010

Introduction

Members of the media, ladies and gentlemen, I would like to welcome you all here today for the launch of tax season 2010 for individuals and trusts.

I know that there are many newsworthy events that compete for your time and attention, not least of which is the 2010 FIFA World Cup. So I am particularly appreciative of the effort you have made to spend time with us today to talk about the start of our annual income tax return filing season and some of the exciting enhancements we are introducing as part of our continued journey in the quest to provide taxpayers with a simple, effective, efficient and convenient tax compliance experience.

I also want to welcome you to one of our oldest and newest branches. The Rissik Street branch first opened in the 1950s and has recently undergone a comprehensive restoration to restore this beautiful building to its former glory and I think you will all agree with me that it has been a huge success and is now one of the nicest taxpayer centres in the country.

The branch opened again in March this year, replacing the Carlton Centre as the main downtown Johannesburg branch. We will be taking a short tour of the branch immediately after this media briefing where you can witness for yourselves the new branch and some of our innovations for tax season 2010.

The South African Revenue Service (SARS) compliance approach

But first I think it is important to remind us all about where we have come from and where we are going in our on-going modernisation journey which we began in 2007.

The foundation of this journey, and indeed for the entire SARS strategic approach, is our compliance model which I hope those of you who cover tax affairs and SARS frequently are becoming quite familiar with.

It is an approach to compliance which is in use in many countries around the world which says that there are two key ingredients to achieve the desired compliant behaviour by taxpayers and traders.

Those ingredients are service and enforcement or in different terms, "a carrot and a stick". On the service side, this approach says that compliance will improve if we make it as easy, convenient and quick as possible for people to meet their obligations.

It makes logical sense that if it is a big hassle, really complicated and really difficult to comply you are less likely to be compliant. So that's the first ingredient in the recipe for compliance.

The second ingredient is credible enforcement and punishment for those who choose not to be compliant. This is about making it as difficult as possible for people to get away with non-compliance and having a credible threat of detection and punishment for those who fail to meet their obligations.

This enforcement side is not just about convincing those who don't want to be compliant that the risks are not worth taking. It is also about fairness for those who choose to be compliant.

Because if you are paying your tax and meeting all of your obligations, you want to be sure that everyone is. So everything we do at SARS is based on this foundation of the drivers of human behaviour and if you read our latest strategic plan or any previous strategic plan for that matter. You will see that all of our objectives are aimed at either improving service or enhancing enforcement or both.

Our modernisation journey

The same is true for our modernisation programme which we started on in 2007. This programme looked at how we could harness technology and process change to make it easier for people to meet their obligations and easier for SARS to detect and deter non-compliance.

By automating the income tax process over the past three years, we have been able to make incredible strides on both the service and enforcement fronts, with the resultant huge gains in compliance. These gains have also come from freeing up people in SARS from mundane capturing and processing work to be deployed into the service and compliance areas.

Over the past three years we have seen:

• SARS becoming a world leader in the growth of electronic submission of income tax returns with 93 percent of all submissions received in the 2009/10 tax year having been received electronically, to the point where SARS only received approximately 270 000 manual returns last year.
• A spectacular reduction in the processing time of returns from an average of ± 55 working days in 2006 to an average of just 1.8 working days last year with 96 percent of returns processed within 24 hours.
• A remarkable improvement in the speed of refund processing from an average of only 45 percent within five working days in 2006 to an average of 83 percent within five working days and 71 percent of those being refunded within 48 hours last year.

At the same time, the automation of the process and the expanded use of third party data have allowed the use of sophisticated risk engines to enhance our ability to detect non-compliance.

Among the gains we have achieved on the enforcement side over the past three years are:

• The introduction of the automated risk engine has resulted in a doubling of the audit coverage ratio from 0.97 percent in 2007/08 (69 118 cases) to 1.88 percent in 2009/10 (159 832 cases).
• Since its inception, the automated risk engine has yielded adjustments to the value of over R4 billion in SARS' favour.

Of course, the ultimate test of whether this is having the desired impact is whether these changes are translating into compliance gains.

In this regard, I think we can answer with a resounding "yes". Despite the economic downturn during the past year, which experience around the world has shown tends to result in a drop in compliance when times are tough, SARS bucked the trend and recorded an increase in taxpayers filing their returns on time from 58 percent in 2008/09 to 79 percent in 2009/10.

Voluntary compliance grew by 21 percent year on year. In part, this helped SARS to collect almost R8 billion more in revenue than anticipated.

Ladies and gentlemen, I think at the end of the day one of the best measures we have of the success of our journey to date is the experience of ordinary South Africans.

I would like to read you just one or two of the responses we have had from taxpayers to the new process:

• Louise le Grange wrote the following: "I would just like to congratulate SARS on the excellent quality and user friendliness of this webpage. It took me about 10 minutes to complete my tax return and to calculate my estimated tax position using the tax calculator. I am currently working in the United Kingdom and HM Revenue and Customs can learn an awful lot from SARS! Keep up the brilliant work!"
• And Leo Tuttelberg wrote the following note: "Your service is absolutely outstanding. This is the third year I have used e-filing and it is very user friendly, easy to use and is improving continually. Congratulations keep up the good work.

• And finally a note that appeared on the Hellopeter website: Well done to SARS for the way your systems have improved and for aiming to make it easier for us all. Never thought I would say this, but I am starting to love the tax man".
  

I hope that all of you as taxpayers have experienced these innovations and positive experiences for yourselves!

Challenges which remain

While we are confident that the vast majority of taxpayers are experiencing the benefits of these service and enforcement enhancements, at the same time we must be honest and say that there are those who have not enjoyed all the benefits of a more efficient, effective system.

And there will be those this year and indeed for some times to come that don't get the kind of service that we wish to give them. I think it is important for a moment to reflect on the process of continuous improvement and how we approach this in terms of the 80 to 20 principle.

When setting out on a continuous improvement journey, we identify the improvements we can introduce which will have the maximum impact by affecting 80 percent of our clients. But this still leaves 20 percent of exceptions which don't benefit.

But continuous improvement is exactly that, after fixing the system for 80 percent of users, you then turn to the 20 percent who were not fixed and you introduce improvements for 80 percent of them.

That leaves four percent of the original number that still need assistance and again we set out to tackle 80 percent of those, which leaves us an ever diminishing number of taxpayers who are not enjoying the benefits of the enhancements as they should.

So after three years of continuous improvement, we are down to around one percent of taxpayers who are the exceptions, of course, that still means 40 000 frustrated taxpayers! So what were the areas which presented challenges for us and taxpayers last year?

(a) Exception management:

Our exception management and our ability to provide swift resolution to taxpayers with a problem was a challenge for much of the year and especially during peak processing times.

Progress has been made in the updating of bank account details which are often an inhibitor in the timely payment of refunds to taxpayers.

Increased compliance by taxpayers in updating their banking details coupled with internal efficiency gains helped to reduce inventory levels from around 180 000 backlog cases at the end of 2008/09 to only 70 000 backlog cases in 2009/10.

But a large backlog remains and we must work with taxpayers to remove it. You can assist us by promoting the importance of providing accurate banking details on tax returns.

The processing of assessment exceptions inventory has also improved from over 280 000 cases at the start of the 2009/10 tax year to less than 20 000 at the close of the 2009/10 tax year.

But this is likely to grow again as tax season gets underway and is an area where we need to do more. And we are well aware of the length of time it can take for resolution if you find yourself in audit and verification and resultant delay in the issuing of refunds.

This too is an area we have been working very hard to improve. The average time for an audit last year was well over 200 working days. We have managed to decrease this to an average currently of only 55 working days.

And for the less intensive process of verifying supporting documents, the process had reduced from over 200 days to just 32 days which includes the time we wait for taxpayers to provide these documents.

Of course, these are averages and some audits can take far longer than the average, depending on the complexity of the case but the majority of taxpayers are already experiencing a significant improvement in our compliance process.

(b) Escalations

Another area of concern is our escalation process in terms of which taxpayers can escalate problems for resolution in an orderly fashion.

One of the challenges we face in this regard, and it is a challenge that many service organisations face, is how to build a process of escalation without opening a short cut in the system.

Because as soon as people find out that e-mailing the Commissioner of SARS gets your problem solved quickly, then that is a new channel of interaction with SARS which by-passes all the other channels and we are back to square one!

This issue of escalation of service failures is an issue we are working on and hope to improve as part of our on-going modernisation journey.

(c) Skills of our staff

Another of the challenges we face which is shared by many organisations is resources and skills. As we free up people from our on-going automation, we are re-skilling them and deploying them into service and compliance focused activities.

This is an area which needs improvement, particularly in our taxpayers facing areas. Our contact centre, which a few years ago was the source of widespread frustration among taxpayers due to its limited ability to handle call volumes, is now able to answer all the calls we receive promptly, including more than 100 000 calls on our peak day last year.

But the ability of our agents to help taxpayers on the other end of the phone, especially in complex cases, still needs improvement.

This will come from providing the agents with the information at their fingertips and will come from increased training and skills development.

(d) Lengthy queues

Another area where we can improve is our queues at branches, especially during the deadline peaks of tax season last year which were far too long in many instances.

The queue management system we introduced last year to help manage these flows and our own resources has been an improvement in most cases, but did not always deliver on the improvement we had hoped for last year and we have made changes to the queue system which we hope will better meet taxpayers expectations this year.

(e) Account maintenance

A further area of frustration for taxpayers, most especially employers, is the issue of account maintenance. SARS currently handles many millions of journal entries each year attempting to resolve payment allocation problems relating to different payment periods and tax types.

This is enormously labour intensive for both us and taxpayers and can result in interest and penalties being incorrectly allocated because a payment was made but was incorrectly allocated.

Key improvement for tax season 2010

So what are we doing about these issues and the further continuous improvement of our income tax process this year?

Let me talk first about our improvement to service side of our compliance model.

(a) Service enhancements

• E-case tracking

We hope that improvements to our case tracking system will significantly enhance the ability of our contact centre and branch staff to not only track a case but to see a full history of interaction over a case to better inform taxpayers and to better help with resolving their queries first time.

And taxpayers themselves will also have a better view of progress of their returns via e-filing where they can get the same information in real time that our call centre agents have access to.

• Electronic signatures

In the past when taxpayers visited a branch to have their returns captured electronically, we printed two copies of the final return, one for the taxpayer's record and one to be signed by the taxpayer for our records.

These were then scanned by SARS for safekeeping. This year we have introduced electronic signature pads which allow the taxpayer to sign their electronic returns.

This both enhances the security of the system and saves SARS and the environment from having to print over one million copies of income tax returns of at least two pages. That's a lot of trees saved!

• Electronic filing enhancements

We have further enhanced the speed by which income tax returns are generated on e-filing and our branch systems by converting to Adobe Flash Player which massively reduces the time taken to request a return or to retrieve a saved return.

E-filers simply need to download the latest version of Adobe Flash Player free from the e-filing website and then select this as the preferred option for downloading their return. The returns in Adobe Reader still remain available for those who do not want to use the latest Flash software.

• A new simplified IRP6 provisional return

We have made significant changes to the provisional tax system this year, including simplifying the IRP6 provisional returns.

These are now dynamic returns which come pre-populated with taxpayer information and key tax information including the basic amount from the prior year and relevant rebates.

Provisional taxpayers only need to complete five fields and the return calculates automatically the provisional amount to be paid.

• Reducing the number of IRP6 provisional returns to be submitted

Twice a year SARS issues over one million IRP6 provisional returns which are either not submitted at all or are sent back with a zero provisional liability.

That's because there are a large number of people who for one or other reason registered for provisional tax at one time or other and are now trapped in the provisional tax register.

Anyone who has found themselves registered as a provisional taxpayer will know that it can be really frustrating to de-register!

To address this issue, we will no longer be issuing IRP6 provisional returns. Instead, those who are liable to submit an IRP6 provisional return must request one either via e-filing or the contact centre. This is the same approach as we have applied to ITR12 returns over the past few years.

And if you don't need to submit a return because you have no provisional income to declare, even if you are registered for provisional tax, then you simply don't request or submit one.

There is a proviso, however, and that is that the responsibility and obligation for submitting provisional returns rests with the taxpayer.

At the end of the year when you submit your ITR12 return, we will see on the basis of what you declared whether you were liable to submit provisional returns and if you were liable and failed to do so you will find yourself facing penalties and interest charges.

• Statement of account for provisional taxpayers

Following the big success of the introduction of a statement of account for non-provisional taxpayers last year, this year we are extending this facility to provisional taxpayers to give them a view of all their recent transactions with SARS and a balance of payment.

• Towards a taxpayer centric approach

One of the challenges we have faced over the years is how best to authorise access to taxpayer information by tax practitioners while still providing the taxpayers themselves with view of their own tax affairs and status with SARS.

We have encountered a significant number of cases where we approach taxpayers about non-compliance and they insist that they have given all their information to their practitioner who failed to submit it.

The taxpayer then claims they had no knowledge of their non-compliance or repeated warnings from SARS since their practitioner handles all their affairs.

In other cases, taxpayers have changed tax practitioners or opted to complete their return on their own only to find that they don't have access to their own income tax return because it is in the hands of a practitioner.

• Improvement to the payment process

To address the issue of account maintenance which I mentioned earlier, SARS is planning to make significant enhancements to the payment process starting with pay as you earn (PAYE) where the most challenges lie.

We plan, from September this year, to introduce a new payment system in which the taxpayer is given far greater control over the allocation of payments.

So instead of making three separate payments for PAYE, Unemployment Insurance Fund (UIF) and skills development levy (SDL), employers will make one payment but will provide an instruction to SARS about how they want this payment allocated against the various tax types and periods.

This will be accompanied by a statement of account for employers which will give them a history of payments and allocations to help them manage their tax affairs.

(b) Enforcement initiatives

Let me now turn to the other side of our compliance approach and give you some insight into our plans to improve our ability to detect and deter non-compliance.

• Third party data enhancement: registration of all employees in formal employment

As announced last year, in October this year, we will introduce the first bi-annual PAYE submission for employers in which they will be required to submit reconciliation for the first six months of PAYE along with employee tax certificate information for their employees for this period.

As part of this reconciliation process, employers will be required to provide expanded demographic information in respect of all employees including a tax reference number for each employee along with full names, ID numbers and home and work addresses.

This will double the number of registered taxpayers from approximately six million currently to around 12 million and will greater enhance our ability to match employment income to taxpayers as well as to improve our ability to track and trace all those earning employment income and other income.

Using new e@syFile software under development which will be released by September, employers will be able to register any employee who is not currently registered with SARS and receive an income tax number for all employees as well as to verify income tax numbers of employees already registered.

It is also important to note that registration with SARS does not mean all these taxpayers will be required to submit a return. The requirement to submit a return depends on the nature of a taxpayer's tax affairs and income generation.

Currently, you are not required to file a return if you earn under R120 000 a year from a single employer and have no income or deductions not reflected on your IRP5.

• Progress on administrative penalties

In October last year, we announced that we would be introducing new administrative penalties beginning with monthly penalties for taxpayers who had outstanding returns for multiple years.

After allowing non-compliant taxpayers a period in which to submit outstanding returns and avoid these stiff penalties, in January this year we issued the first round of penalties to approximately 230 000 taxpayers who had returns outstanding for multiple years.

These penalties ranged in amounts from R250 per month per return to over R16 000 per month per return depending on the income of the individual. The first month's penalties totalled some R130 million.

Since these first penalties were issued, the following results have been achieved:

• Approximately 60 000 outstanding returns were submitted in respect of 2007 and 2008 years of assessment
• Approximately 20 000 penalty payments have been received to total value of over R16 million
• Approximately 8 800 requests for remission have been received and about 8 000 approved

Unfortunately despite significant publicity around this issue and the mailing of almost 1.000.000 penalty notices and reminders to taxpayers, the majority of these recalcitrant taxpayers have failed to remedy their non-compliance.

In introducing the new penalties last year, we had warned that where taxpayers failed to pay the penalties and rectify their non-compliance, SARS would make use of Section 99 of the Income Tax Act to recover amounts due to SARS from agents in control of taxpayers' assets, including debiting salaries from employers.

SARS is left with no option but to carry through on this warning. Next month we will be communicating with the employers of those non-compliant taxpayers who have failed to respond to alert them to the intended action of attaching these employees' salaries in September.

These taxpayers have one last opportunity to avoid this severe action, and that is to contact SARS urgently to arrange the submission of all outstanding returns and to pay all outstanding penalties.

We believe that our approach to compliance only works if we have a carrot with real benefits and stick with real bite. We believe that the majority of compliant taxpayers in South Africa who have embraced the service enhancements to willingly meet their obligations especially in the most difficult of economic circumstances deserve to know that those who have failed to do so will not get away with it scot free.

• Voluntary Disclosure programme

 As part of our compliance approach, SARS has always adopted what we call the "proportional response model" in response to taxpayer behaviour. This model says that our response should be proportional to the behaviour of the taxpayer.

So where a taxpayer makes an honest mistake they should be provided an opportunity to correct the mistake and be treated leniently. But where a taxpayer deliberately and knowingly evades tax and seeks to hide this from SARS for as long as possible, they should face the full might of the law.

In line with this, SARS has traditionally applied leniency to those taxpayers whose conscience got the better of them and who voluntarily come forward to disclose previous non-compliance which SARS was not yet aware of or investigating.

This is in line with the approach by most modern tax administrations around the world. This approach is now being formalised in a Voluntary Disclosure programme (VDP) which will be offered from 1 November 2010 to 31 October 2011.

Taxpayers may come forward during this period to disclose their defaults and regularise their tax affairs. Successful applicants will have to pay the full amount of tax due but will not be faced with additional tax, penalties and possible criminal prosecution.

In addition, depending on the circumstances of the case, they will not be charged either 100 percent or 50 percent of the interest that would otherwise be due.

Tax season 2010, key dates

Finally, let me tell you about the tax season dates for this year and the future.

As part of making it easier and more convenient for taxpayers to submit returns, we are moving towards a more predictable and stable tax season in which the dates are known well ahead of time to allow taxpayers, practitioners and SARS to plan their lives.

In this regard, the dates for this year's tax season largely match those of last year and will remain fairly constant into the future. The tax season calendar for employers will see them submit their annual PAYE reconciliations at the end of May and their bi-annual reconciliation at the end of October.

This first phase of tax season 2010 in which employers submitted reconciliations and copies of employee tax certificates to be used for the pre-population of income tax returns for employees ended in May and we were very satisfied with the response of employers especially given the significant changes in the format this year.

The results from this first phase show that by 31 May 2010, SARS had received over 226 000 employer reconciliations accounting for over 13 million certificates.

We are particularly grateful to those employers who made the effort to provide demographic details of employees even though this was voluntary and will only be mandatory from September.

Many employers already went the extra mile and provided us with this data which has greatly enhanced our ability to pre-populate the returns of their employees.

Today we begin the second phase of tax season in which taxpayers submit income tax returns.

For non-provisional taxpayers (both individuals and trusts), the deadline for submission of electronic returns either at a branch or via e-filing is 26 November 2010.

For provisional taxpayers, the deadline for submission of electronic returns either at a branch or via e-filing is 30 January 2011. For all taxpayers who choose to submit postal returns, the deadline is 30 September 2010.

Conclusion

Ladies and gentlemen, tax compliance is the cornerstone of any nation's developmental agenda and is a fundamental responsibility of each and every participant in an economy.

I would like to thank the vast majority of taxpayers who continue to play their willing part in this social contract. Through tax compliance, South Africa has been able to fund its growth and development, including the 2010 FIFA World Cup which we are currently hosting to widespread praise from around the world.

The world cup has shown what we can do when we stand united as a country and play our part as citizens and supporters. As tax season starts, let us continue that feeling of national pride, of ownership, of participation in our country by meeting our obligations honestly and on time. As Tax Season starts let us together shout: "Ke Nako! File it! It is here!"

Thank you.

Source: South African Revenue Service