POLITICS

Judge Dennis Davis' Mandate Is Clear -- Clean Up Sars

The extension of the Davis Tax Committee's mandate into tax policy is major and far-reaching. Tom Moyane won't take it laying down.

02/12/2016 08:32 SAST | Updated 02/12/2016 08:33 SAST
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Judge Dennis Davis, chairperson of the Davis Tax Commission.

ANALYSIS

Judge Dennis Davis' appearance before Parliament's Standing Committee on Finance on Tuesday was a low-key affair.

He has been to Parliament countless times before and was there to update MP's about the Davis Tax Committee's (DTC) activities over the last year. The update was wide-ranging: Davis told MPs 19 reports have been finalised, seven subcommittees are in place and the DTC is still considering the feasibility of wealth tax and issues around the taxation of trusts.

However, on slide 38 of his PowerPoint presentation, Davis says the DTC has been mandated by Minister of Finance Pravin Gordhan to scrutinise the South African Revenue Service (Sars), this amid the hostilities between Gordhan and Sars commissioner Tom Moyane.

However, on slide 38 of his PowerPoint presentation, Davis says the DTC has been mandated by Minister of Finance Pravin Gordhan to scrutinise the South African Revenue Service (Sars).

Gordhan established the DTC in 2013 to advise the minister on tax policy and tax issues. It is an advisory body and the minister can accept or reject any recommendation it makes to the executive. The mandate — as explained by Davis to MPs on Tuesday — is to consider "the role of the tax system in the promotion of economic growth, employment creation, development and fiscal sustainability".

The DTC's terms of reference set out its broad framework — and it all comes down to tax policy. The DTC focuses on the tax base and direct and indirect tax, the impact of tax on small business, the corporate tax system, the mining tax regime, elements of taxation within the financial sector, VAT, e-commerce, the progressiveness of the tax system, the funding of long-term infrastructure projects (like National Health Insurance) and enabling legislation.

But slide 38 in Davis' presentation on Tuesday notified Parliament that its mandate has been extended to make inquiries around Sars' operational capabilities. And it's a major development precisely because of the running battle between Gordhan and Moyane and within the broader political context of the assault on Treasury.

And it's a major development precisely because of the running battle between Gordhan and Moyane and within the broader political context of the assault on Treasury.

According to Davis, Gordhan has given "specific terms of reference" to the DTC to investigate whether or not the Sars accountability and governance model, developed by the Katz Commission in the mid-1990's and upon which Sars' model and independence was constructed, is still relevant "in 2016".

It is furthermore supposed to consider how the current operating model has dealt with the various recommendations from the DTC and accepted by the minister.

Lastly, and tellingly, the DTC must look at whether the current operating model — which was overhauled by Moyane after he was appointed commissioner in September 2014 — can deal with illicit financial flows.

Decoded and translated, this means Davis and his colleagues will look at Sars from top to bottom. The DTC is going to interrogate Sars' internal structures and processes to determine whether it is working effectively and to assess if it is functioning optimally to ensure effective and transparent tax collection.

Decoded and translated this means exactly what it says: Davis and his colleagues will look at Sars from top to bottom.

But more importantly, the DTC will consider how Sars' operating model deals with "illicit financial flows". These "flows" — that is, the losses to the fiscus because of illegal activities such as cigarette smuggling — previously were investigated by a range of internal enforcement units, like the High-Risk Investigative Unit (HRIU), the infamous "rogue unit".

Many of these units (like the HRIU) have been closed down and some (like Criminal Investigations and Preliminary Investigations) have merged. Sources within the Sars and Treasury environment insist Sars' enforcement capabilities have been crippled since Moyane's refit of the operational model. Davis will determine if that's true.

Davis, who also teaches commercial law at the University of Cape Town and has been presenting an irreverent television talk show for years, is nothing if not politically astute. He is very aware of the toxic and murky political machinations around Gordhan and Moyane and will try to keep his (and the DTC's) nose clean.

The judge is going to have to play politics and suffer semantics if he and the DTC are going to emerge on the other side of this inquiry unscathed.

On Thursday evening he told Bruce Whitfield on Talk Radio 702 he does not want to get drawn into "personal issues and disciplinary questions that may arise" and that he won't be investigating the closure of these units.

On Thursday evening he told Bruce Whitfield on Talk Radio 702 he does not want to get drawn into "personal issues and disciplinary questions that may arise"

Davis said the DTC decided to take a closer look at the Sars operating model after Sars officials explained it to him. He then said: "If that model, as we move forward in our investigation, shows that certain ... let's say units, are closed and others are opened, we'd like to know whether those particular decisions promote the collection of tax ... both from a legitimacy and efficiency point of view ... as well as it can."

That's pretty clear.

South Africa will have a projected tax-shortfall of R23-billion this year. According to Treasury, this is due to difficult economic conditions and "lower tax buoyancy". If authorities do not adjust their policies — which could range from higher tax rates to improved enforcement — this shortfall is expected to increase to R36-billion next year and R52-billion the year after that.

South Africa will have a projected tax-shortfall of R23 billion this year ... this shortfall is expected to increase to R36 billion next year and R52 billion the year after that.

That's a rather large chunk of our planned nuclear spend.

The move on Moyane and Sars undoubtedly is an effort to reimpose the minister of finance's influence on Sars, as determined in legislation like the Public Finance Management Act. Gordhan has been battling to exert himself ever since he returned to the ministry of finance in December last year. Just this week he added an unprecedented rider to parliamentary questions relating to Sars, saying he couldn't vouch for the answers provided by it "because of a lack of accountability and cooperation from Sars top management".

Davis' mandate is clear, and Gordhan's objectives equally so: to clean up Sars and ensure proper revenue collection with all means at Sars' disposal. Now to see how Moyane responds.