Article

What is SARS’ next digital transformation move?

Real-time access to organisations’ data will reduce the administrative burden for the taxpayer and increase compliance

Published: 03 February 2022

The primary objective of tax administrators, such as the South African Revenue Service (SARS), is to collect taxes from taxpayers to fund the fiscus. To be effective, this needs to be done in a manner that encourages, maintains and improves economic growth. In South Africa, the biggest challenge is to gather all applicable tax from all eligible taxpayers to offset the growing budget deficit.

Value-added tax (VAT) is one of the tax types with the biggest opportunity for SARS to increase its revenue collection. One of the reasons being that VAT is transactional in nature and therefore many transactions in a business will have a tax impact. We have experienced the worst couple of years of our times, personally and economically due to the Covid pandemic. Increasing the VAT rate will negatively impact the ordinary person in a time when they can least afford it. The alternative for revenue collection from VAT is for SARS to join the wave of tax administrators who have or are implementing regulation that enables more real-time reporting of transactions by organisations.

It is still difficult to imagine a world where there is no tax return, where tax just happens, and processes can be relied upon to produce the correct tax outcomes. However, this is what SARS should strive towards, in order to achieve a potentially radical improvement in revenue collection.

There are three VAT compliance models that revenue authorities across the world have adopted to assess taxpayers’ VAT positions. Below is a brief description of each and its characteristics.

  • Post-audit model - Review a company’s books or transaction after period-end and once VAT has been claimed:

o   Low visibility of transactions

o   Delayed audit

o   Manual invoicing or voluntary e-invoicing

  • Real-time reporting model - Obtain VAT-related transactions as they happen and calculate VAT liability or VAT due to the company soon after:

o   Extensive visibility of transactions

o   Immediate audit

o   Manual invoicing or voluntary e-invoicing

  • Tax clearance model - Invoices are provided to the tax authority before being processed by the recipient:

o   Full and instant visibility of transactions

o   Instant audit

o   Obligatory e-invoicing

South Africa is currently using the post-audit model, which is the traditional way that all tax administrators used in the past.

Several countries (e.g. Russia, Indonesia, United Kingdom, Kenya, Nigeria) have moved, or are moving towards the real-time reporting model. The objective of the real-time data driven tax environment has been to close the tax gaps through improved voluntary compliance. This is defined in the Organisation for Economic Co-operation and Development (OECD) guidelines for revenue bodies - Tax Administration 2.0. This model has been implemented in various ways by different countries. The least sophisticated method is the requirement to use electronic fiscal devices (EFDs). A study by the International Monetary Fund on EFDs concluded that “despite their widespread use, there is little documentary evidence to determine whether they provide a cost-effective solution to address the compliance risks that tax administrations in developing countries face”. The most progressive implementation of the real-time exchange of data with revenue authorities is enabled through e-invoicing and/or through direct application programming interfaces (APIs) from organisations to the tax administrators.

Countries such as Brazil, Italy and Turkey have passed regulations that enforce the tax clearance model. While relatively few countries have implemented it, those who have are still dealing with change management and adoption challenges, but the value generated is reported to be undeniable. André Cordeiro, Planning and Management advisor at the Ministry of Finance of Bahia says:” Before, audits used to be carried out by sampling: for example, out of every 100 companies, we selected five or six to verify their tax compliance. Now, we verify all 100, and in real time, with less staff and paperwork, and more efficiency and transparency”. In addition, a report by Inter-American Development Bank (IDB), states that the immediate results of digitising the invoicing process for Brazil were an increase in tax collection. This model involves the revenue authority being part of the transaction in the invoicing process of companies. For example, a company’s (seller/supplier) invoices are shared with the tax authority before it is provided to the recipient company (buyer/purchaser). Owing to the immediate release of transaction data, certain tax checks may already be performed the moment the transaction takes place, thereby ensuring that most transactions processed are tax compliant.

The real-time reporting and tax clearance models provide an opportunity for SARS to:

  • Reduce the administrative burden experienced by its employees in assessing compliance.
  • Reduce the obligations for taxpayers in preparing VAT returns.
  • Potentially eliminate the requirement for VAT reconciliation to support VAT claimed and declared.
  • Remove the need to perform manual audits after the fact.
  • Significantly reduce the risk of fines which could be imposed several years after the business transaction has taken place, resulting in pushback by taxpayers as well as possible litigation which costs time and money for both parties.

These models do not only make it easier to comply with regulation but may reduce the number of entities that are non-compliant. In the same way as Netflix made it simple to access a wide variety of movies legally, resulting in a reduction in pirated movies.

If we look back at an earlier Deloitte article  “SARS’ shift to the digital era”, it is imperative that should SARS embark on any of these models, the revenue authority should consider more than just the technology. The overall implementation should include goals and aspirations, objectives, culture, policies, people, processes, and data before mandating a specific technology that would support the change. This holistic approach would get the tax administrator ready for concepts discussed in the OECD’s Tax Administration 3.0 report (The Digital Transformation of Tax Administration). It’s a paradigm shift that prescribes the integration of tax authority processes with the processes and systems used by taxpayers, other government entities and by third parties alike. This will expand and improve on some of the models discussed, prescribing specific system requirements and changes in process - with emphasis on sharing data with revenue authorities.

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