In one of his first media appearances after taking over the leadership of the South African Revenue Service (SARS) at the start of this month, commissioner Edward Kieswetter was cleareyed about the challenges that lay ahead for South Africas beleaguered tax system. As he explained to radio host Bruce Whitfield: We cannot demand trust or confidence; we have to work hard to earn it. And so it wont happen with one single event. I think the public will gauge and evaluate every single thing that we in the revenue service… say or do. And ultimately whether we say what we mean and mean what we say, thats important… it is important for us to reconnect and earn respect in order to create confidence and provide clarity.
If Kieswetters tone was humble, it is because the challenges facing him are substantial. The veteran taxmans appointment at the end of March has been much welcomed by South Africas banking and business associations, raising expectation that SARS will be able to overcome the damage done under Kieswetters disgraced predecessor Tom Moyane.
The damage done
Moyanes three-and-a-half years in charge did not just leave the country saddled with a R50 billion ($3.5 billion USD) tax shortfall in 2017. His tenure also effectively dismantled the revenue service from the inside out, with Moyane allegedly using his powers as the head of SARS to target officials he deemed as a threat to his own enrichment.
To undo that legacy, Kieswetter certainly has his work cut out for him. Prior to Moyanes 2014 appointment, the decade-long tenure of Pravin Gordhan now Minister of Public Enterprises saw a centralisation of the services investigative units in 2008, improving efficiency and helping them pass two compliance audits in 2010 and 2013. Moyane, however, quickly drafted consulting firm Bain & Company, who recommended the immediate dissolution of several units, including the large business unit that had been responsible for collecting over 30 percent of all national taxes.
This illogical restructuring policy led to a massive loss in tax revenues, compounded by Moyanes shift from fighting corruption to chasing alleged behavioral issues. The new tack may have been enacted simply to isolate Moyanes rivals. Senior fraud investigator Yousuf Denath, for example, claims he was suspended for 15 months on trumped-up charges before a court ultimately found him innocent.
Big Tobaccos double game
As a result of multiple controversies, Moyane was suspended from his position in March 2018 and, following an official inquiry, fired in September of that year. Since then, it has become clear the damage inflicted by his mismanagement was not only fiscal but functional, with tobacco companies aptly exploiting the Moyane-induced chaos within SARS to position themselves as the strongest voice against a lack of enforcement of the trade.
While Moyane dismantled the National Projects division, which was responsible for investigating and combating the illicit tobacco trade, the tobacco industry blamed rival producers and the prevalence of illicit cigarettes for undercutting prices, even though they themselves have long dabbled in smuggling worldwide to secure market share. With two-thirds of cigarettes sold on the black market being legitimate products from the industry, rather than counterfeits, the logic behind the industrys move is glaringly simple: tobacco firms are not so much opposed to illicit trade as they are concerned about sin taxes and their proven efficacy in cutting down smoking rates.
With research suggesting every 10 percent hike in cigarette prices results in a 3 to 5 percent drop in smokers, Big Tobacco has responded by claiming higher prices unfairly disadvantage poorer citizens. Earlier this year, for example, the industry pushed back against the most recent announcement of sin tax increases by claiming it would directly fuel the black market and jeopardise 10,000 jobs.
Building for the future
A refocused revenue service, however, means that South Africas tobacco producers may soon be called to account for their previous obfuscation. Within the first week of taking office, Kieswetter faced called from anti-smoking campaigners to force major tobacco companies like British American Tobacco (BAT) to pay their fair share in taxes, especially after two new reports shed a harsh spotlight on the companys actions in markets like South Africa.
The first, released by the Tax Justice Network and funded by the Campaign for Tobacco-Free Kids, laid out a range of mechanisms used by BAT to avoid tax to low- and middle-income countries, citing the companys dispute with the South African state over debt financing as an example.
The second, authored by Simone Haysom the Global initiative against Transnational Organised Crime, explained how excise revenue generated by tobacco sales fell 16% from 2014-17, but also how BAT has applied some of its tried-and-tested methods for tax avoidance in the South African context including profit shifting (from high-tax to low-tax locations) and transfer pricing (between the parent company and subsidiaries). Haysoms report also highlights BATs financing of the private firm Forensic Security Services (FSS) as part of an alleged campaign of corporate espionage; former FSS employee Francois van der Westhuizen has accused the company of bribing members of both SARS and the police.
Given this pattern of behavior, its quite clear the tobacco industry needs to be footing a bigger tax bill. The Finance Ministrys declaration that a new large business unit would accompany the appointment of the new commissioner was certainly a welcome step forward. New sin taxes will also three major benefits: raising much-needed capital for the public purse, but also reducing health expenditures and slashing smoking rates.
To get the country back on solid financial footing, Kieswetter will need to withstand powerful outside pressure from entrenched interests like the tobacco industry and make sure the SARS agents under his leadership are able to do their jobs properly. Only then will they be able to regain the publics trust.
The featured image was taken from Unsplash.