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SARS Targets Tax Fraud: Crackdown on Luxury Cars & Exotic Schemes Nets Billions

Published by
WIlliam Dube
  1. The South African Revenue Service (SARS) collected over R5 billion from audits, including lifestyle audits and investigations into luxury vehicles, and plans to further intensify its crackdown on fraudulent activities, such as tax refunds and “exotic” transactions.
  2. SARS has successfully utilized data science and artificial intelligence to augment the work of auditors, preventing R76.3 billion of fraudulent tax refunds in the past year alone, and will continue refining these techniques to enhance its enforcement efforts.
  3. The tax agency is focusing on emerging trends in tax evasion, including the growing use of complex business arrangements known as “exotic transactions,” which lead to a permanent erosion of the tax base, and is committed to improving tax compliance and maintaining a healthy tax base for the benefit of the South African economy.

The South African Revenue Service (SARS) has announced significant progress in its crackdown on fraudulent activities, having secured more than R5 billion from 854 audits, including lifestyle audits, over the past year. The agency plans to further intensify its efforts against various activities such as staff incentives, tax refunds, and “exotic” transactions.

In its report for the 2022/23 tax year, SARS revealed that it collected R5.4 billion from audits, which included lifestyle audits, investigations into religious organizations, and audits of luxury vehicles. The tax agency highlighted that luxury cars have become an increasingly popular means of money laundering.

Furthermore, SARS has observed a surge in the misuse of employment tax incentives and is consequently increasing its audits of these schemes. Commissioner Edward Kieswetter highlighted that the use of data science and artificial intelligence has played a crucial role in augmenting the work of auditors, preventing R76.3 billion of fraudulent tax refunds in the past year alone.

Kieswetter emphasized the effectiveness of the data-driven approach, stating that no legal challenges have been brought against SARS regarding these measures. He added that the agency will continue to refine and calibrate these techniques going forward.

SARS has also turned its attention to the growing trend of “exotic transactions,” which involve complex business arrangements that result in not only lost tax revenues for a single year but also the permanent erosion of the tax base. This has become a significant focus area for the tax agency.

Narcizio Makwakwa, the head of SARS’s large business unit, explained that the erosion of the tax base is no longer limited to profit shifting or transfer pricing. Businesses are finding ways to avoid capital gains and dividend taxes through schemes designed to bypass these taxes in specific transactions. According to Makwakwa, these schemes typically involve complex related company transactions that help businesses avoid capital gains tax by selling subsidiaries to newly formed internal structures and only selling to third parties afterward.

Makwakwa revealed that since SARS began closely monitoring these activities, the trend appears to be slowing down. However, he noted that “very clever” tax professionals continue to develop new schemes to sell to businesses and corporations for a fee, necessitating ongoing vigilance by the tax agency.

SARS has also raised concerns about individuals using trusts to carry out exotic transactions that enable them to evade tax liability. In response to the Covid-19 pandemic, the agency audited tenders for personal protective equipment, with 13 audits yielding R555 million this year.

Despite the progress made, Commissioner Kieswetter expressed concern about the persistently high levels of impermissible refunds. He emphasized that SARS is prepared to take more taxpayers to court to establish greater certainty regarding permissible tax refunds. He argued that establishing legal precedence in such cases would benefit everyone and help secure ongoing revenues in the future.

SARS Chief Revenue Officer Johnstone Makhubu pointed out that the domestic reverse charge levied on the gold industry has helped reduce fraudulent VAT refunds in that sector. However, he acknowledged that some leakage may still be undetected, and SARS is working to strengthen its ability to identify it.

Additionally, SARS collected R20.6 billion from over 28,000 cases involving businesses that had underpaid their provisional taxes, including 8,600 cases involving large corporations and international companies. Efforts to combat criminal and illicit activities contributed R6.6 billion, while voluntary disclosures added R3.7 billion.

SARS data indicates that tax compliance has continued to improve, with the tax register growing by 5.4% over the past year. The agency collected R227 billion in compliance revenues in the 2022/23 tax year, which represents an increase of R12 billion compared to the previous tax year. Compliance revenue is generated from targeted interventions, including debt collections, a focus on criminal and illicit activities, and declaration compliance among large businesses, among other measures.

In just one year, SARS collected R78 billion in tax debts and outstanding returns. The tax agency has intensified its debt collection efforts in recent years, as Commissioner Kieswetter noted that the longer a debt remains uncollected, the less likely it is that SARS will successfully recover the owed amount.

As part of its ongoing mission to improve tax compliance and combat fraudulent activities, SARS will continue to leverage data science and artificial intelligence to augment its auditors’ capabilities. The agency will also remain vigilant in monitoring and addressing emerging trends in tax evasion, such as the increasing use of exotic transactions and new schemes developed by tax professionals.

By enhancing its enforcement efforts and targeting areas of concern, SARS aims to secure ongoing revenues and maintain a healthy tax base, ultimately benefiting the South African economy and its citizens. The tax agency’s commitment to innovation and adaptation will play a crucial role in achieving these objectives and ensuring the fair and effective administration of the tax system.

WIlliam Dube

William Dube is a finance and economic news expert with over 10 years of experience in economic anaylsis, financial product assessment and market analysis. With a numerous certificates from prestigious universities including but not limited to Yale University and the University of Pennyslivenia. William specializes in providing insightful news developments in South Africa and commentary on investment strategies, risk management, and global economic trends. You can contact him on william@rateweb.co.za

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Published by
WIlliam Dube

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