Introduction:
The compliance model and fairness
At SARS we have a compliance model based on international best practice and our own experience in encouraging compliance. This model is essentially a behavioural model which says that various combinations of service, education and enforcement are needed in order for people to comply with legislation. For those willing to comply, we must provide excellent service to make compliance as quick, easy and convenient as possible.
For those willing to comply but unsure of what to do we must provide excellent education to help them meet their obligations. And for those who are not willing to comply we must provide credible and effective enforcement as both a punishment to those not complying and as a deterrent to those considering not complying. But an efficient and effective enforcement capability is not only there for dishonest taxpayers. It also plays a critical role for honest taxpayers by ensuring the tax system is fair and seen to be fair. Quite simply, if you are paying your tax honesty and on time you want to know that everyone is paying their tax honesty and on time. And if they are not, you want the peace of mind that they face dire consequences for this.
Background: The service gains made in recent years
Within the SARS context we have focussed our attention in recent years on service and education. This was deliberate and strategic: firstly you want to encourage people to do the right thing and give them every chance to comply – before you threaten them with punishment. And the vast majority of taxpayer want to comply so any service and education enhancements have the widest impact. There was a second key reason: We needed to make critical changes within SARS to free up our resources in order to provide the capacity for enforcement enhancements. So over the past three years we have introduced significant changes to the income tax process through our Modernisation Programme which I hope you are all familiar with. These changes have not only made it much quicker, easier and more convenient for taxpayers seeking to meet their obligations to do so but they have also provided improvements to our ability to detect non-compliance through third party data and sophisticated risk rules. And they have freed up our own resources from push paper to more value-adding activities including service, education and enforcement.
There were two further reasons for leniency over the past few years, especially with regards the submission of income tax returns by the deadline. The huge number of changes introduced and different deadlines took a lot of getting used to for both us and taxpayers and we believed that we should be lenient during such times of dramatic transformation. And secondly, we did not have an automated system to implement administrative penalties fairly and consistently.
The current reality: An increase in non-compliance
The end result of all of this is that compliance has begun to slip over the past few years. Not only because of our leniency but quite simply because the existing penalty regulations were an increasingly inadequate deterrent. For first offences for non-submission of an income tax return the penalty was R350. That’s hardly a hefty fine when you earn R250 000 or are withholding a return which would result in assessed tax of R10 000 Even practitioners were starting to advertising that they would pay your penalty for you if you used their services! The end result was that last year over 1 000 000 taxpayers submitted their returns late.
In total we have over 5 million outstanding returns of all types including:
- Approximately 3 000 000 income tax returns
- Approximately 1 000 000 PAYE returns
- Approximately 1 000 000 VAT returns
This is ultimately unfair on all those who meet their obligations willingly and obediently each year or month. And it is a very serious form of non-compliance – not for the sake of meeting the submission requirements per se but more importantly for the non-disclosure of information which could have significant tax implications. This cannot continue.
The new administrative penalties: background
That is why new regulations for administrative penalties were first drafted in 2007 and following a process of public comment and consultation were gazetted in December 2008. The new regulations provide for much sterner penalties in respect of a range of administrative offences including:
- Failure to register as a taxpayer
- Failure to notify SARS of a change in address or other personal details
- Failure to submit a return and other required documents as and when required
- Failure by an employer to provide details of an employee,
and a number of others which are contained in the copy of the regulations which you will receive a copy of. The most significant changes to the penalties relates to the amount of the penalties which in most cases are now linked to the taxpayer’s income to make them more fair and equitable. So taxpayers who earn more receive a higher penalty. And the penalties accumulate over time – so there is no longer a once-off penalty but rather a new penalty is applied each month or part thereof that a taxpayer is guilty of non-compliance. So the longer your return is outstanding, the more your penalty grows. In fact, the regulations now allow for a penalty of up to R560 000 for the highest earning taxpayers if they fail to submit a return!
Phasing in of the new administrative penalties
The new administrative penalty regulations took effect from 1 January 2008. However, the effective implementation of the penalties has been postponed because the development of an automated internal system to administer the penalties has taken longer than anticipated. This delay has also allowed additional time for non-compliant taxpayers to fulfil their outstanding obligations. Now we are ready to proceed with the phased implementation of the new penalties. We are beginning with penalties for outstanding income tax returns.
The reason for this is two-fold: Firstly it goes back to the point about fairness: There are about 3.5 million taxpayers who are due to meet the deadline for submission of returns this year. It is only fair to them that those who do not make the effort to meet their obligations face the consequences. Secondly, these are the highest number of outstanding returns (3 million) and potentially equate to significant non-disclosure of tax - assuming those who have failed to submit an income tax return are more likely to be in an assessed tax position rather than a refund position. These penalties will effectively be applied from 21 November – the day after the deadline for the submission of returns for Tax Season 2009.
How will the penalty process work?
A further phasing-in of the penalties is also planned – namely to begin issuing penalties to those taxpayers who are repeat offenders (i.e. who have returns outstanding for multiple years). This is simply to ensure that we have the capacity to handle the penalty process and potential requests for remission and the anticipated objection and appeal process.
Once again on the basis of fairness we are choosing to start with the worst offenders. The penalties will work in the following way: SARS has already drawn up a list of all taxpayers with outstanding returns for previous years. Once the deadline of 20 November has passed we will identify all those taxpayers who have failed to submit a return for 2009 and prior years. First to receive a penalty will be those taxpayers who failed to submit for multiple years. They will receive a penalty assessment notice from SARS known as an ITP34 advising them that they have failed to submit returns in respect of the various years and imposing the relevant penalty (based on their taxable income) for each return that is outstanding. If they fail to submit these returns within a further 30 days of the issuing of the notice, a further penalty is imposed for each return and so on and so forth up to 35 months as provided for in the regulations.
Debt collection
An administrative penalty system is only as good as the debt collection system in place to enforce it. In this regard, SARS has a number of tools at its disposal to collect these administrative penalties from recalcitrant taxpayers – all of which we will use as necessary. These tools include – agent appointment, court orders and criminal prosecution. The first tool we will use is the agent appointment in terms of Section 99 of the Income Tax Act which allows SARS to appoint someone who is in control of funds of the taxpayer an agent to withhold amounts due to the fiscus on our behalf.
An example of this would be to appoint an employer as an agent to withhold the outstanding penalty amounts from the taxpayer’s remuneration and hand it over to SARS.
The economic context
An obvious question is why we are implementing the new penalty regulations at this time of recession and whether this has anything to do with our anticipated revenue shortfall this year. The first answer was covered earlier when I mentioned that these regulations have been in drafting and development for the past two years and so clearly have little to do with the current economic climate. But the second part to the answer is that the timing is entirely appropriate within the current economic climate. Revenue authorities around the world are facing the challenge of slipping revenue – and slipping tax compliance – and all of them are beefing up their enforcement capabilities during this time.
The IRS has indicated that it will hire an additional 10 000 auditors to investigate high-income earners and complex tax avoidance schemes to recoup revenue. And the disclosure of money stashed in off-shore bank accounts in tax havens is a very topical issue right now. The Global Forum on Transparency and Exchange of Information for Tax Purposes has been restructured in September 2009 as a self-funded body with its own decision-making powers. One significant change is the implementation of a system of peer reviews to monitor and review countries’ legal and regulatory frameworks (phase one); and the monitoring and review of the practical implementation of the transparency and exchange of information standards (phase two).
The UK’s HM Revenue & Customs (HMRC) recently underwent a process of reforming their penalty structures throughout their organisation. This was part of a much wider programme of reform, and the process in each case followed a similar pattern. They consulted as widely as possible upon the objectives and nature of the penalties before they legislated. The Malawi Revenue Authority has increased the level of penalties for non-compliance since the beginning of this financial year (July 2009). During tough economic times it stands to reason that the temptation to evade taxes increases and that revenue authorities must be extra vigilant.
If we are not, then government faces the prospect of having to borrow more or tax more to meet its spending requirements. That again is unfair on those who are meeting their obligations – even in tough times. We will not shirk our responsibility to these taxpayers. At the same time I do not plan to shed any tears if we manage to collect some revenue from penalties! Penalties are entirely avoidable. Taxpayers who meet their obligations will not be penalised – so no-one can complain about the penalties when they are in default.
Additional time for provisional taxpayers
This brings me to the final aspect of today’s announcement – more time for provisional taxpayers to submit their returns for 2009.
During engagements with the various tax practitioner representative organisations (namely the South African Institute for Chartered Accountants (SAICA), the South African Institute for Professional Accountants (SAIPA) and the South African Institute of Tax Practitioners (the SAIT)) it became apparent that meeting the obligations of their compliant clients before 20 November and submitting outstanding returns for non-compliant clients would prove a real challenge.
At the same time our own capacity in our branches is already fairly thinly stretched helping out taxpayers to file this year’s returns – let alone the potential flood of taxpayers arriving to submit outstanding returns. In conjunction with the practitioner associations (who are represented here today) we tried to find a way to provide more time for those with complex tax affairs. The solution was to allow provisional taxpayers – who are generally more complex and are required to submit three returns a year – until the end of February 2010 to submit their 2009 income tax returns BUT only if they meet two requirements:
- They must file using eFiling
- They must be compliant taxpayers (i.e. not have outstanding returns)
Conclusion
Our primary intention with the new penalties is to provide a credible and meaningful deterrent to ensure the full compliance of all taxpayers. We are announcing the penalties ahead of time to allow non-compliant taxpayers a last opportunity to meet their obligations and avoid these tough new penalties. In addition to your coverage of this, we plan a series of communications via radio and newspapers to alert taxpayers to the new penalties. And we will continue with our on-going direct communication with those taxpayers with outstanding returns via SMS, email and their practitioners to give them every opportunity to meet the deadline. Those who receive a penalty will have no excuse. You have been warned!
Source: South African Revenue Services
