The Nugent Commission of Inquiry into SARS heard on Friday last week what was arguably its most important oral evidence of the week, a masterclass from tax boffin Cecil Morden. The tax figures presented by Morden were complicated and dry to the point of being boring, especially given the sparks that flew earlier that morning when advocate Dali Mpofu told Judge Robert Nugent that he was presiding over a “kangaroo court”. But despite Mpofu’s questionable huffing and puffing which continued into this week, the devil that will haunt suspended SARS Commissioner Tom Moyane lies in the detail presented by Morden. To understand why, we must revisit Friday, Day 4 of the Inquiry.
Cecil Morden’s analysis of SARS’ tax data over the course of the past seven years shows that the tobacco industry is making a killing: Tobacco manufacturers are not paying their worth of excise tax, have increased their smuggling activities and are probably under-declaring their manufacturing figures. Morden also substantiated what business owners (except the Guptas) have been complaining about for the last four years: VAT refunds have been illegally withheld to artificially boost revenue income.
This tactic had a detrimental (but predictable) knock-on effect in the following years. Morden further showed that something is up with Personal Income Tax and warned that the effect of Tom Moyane dissolving the Large Business Centre (LBC) will probably be noticeable in the coming year’s Corporate Income Tax figures. Oh, and that R1-Trillion “psychological” revenue mark Moyane (and now Adv Dali Mpofu) often boasted about breaching? It is all “smoke and mirrors”, Morden said.
In short: SARS is less effective now than it was before Tom Moyane’s appointment as Commissioner in September 2014, and the effects of his disastrous tenure will probably reverberate in the years to come.
Friday morning, Day 4 of the Nugent Commission’s public hearings, started with suspended Commissioner Tom Moyane sitting in the gallery. It was a first.
Next to him was his three person-strong legal team including attorney Eric Mabuza and Adv Dali Mpofu. When the cameras of eNCA and SABC focused on Moyane, he sometimes sat with his phone plastered against his right ear without saying a word to the supposed person at the other end.
The commission is a “kangaroo court” that is biased, oppressive, a witch hunt and has “prejudged” a case that is “clearly against Moyane”, Mpofu offered in a stammering presentation that morning. Mpofu has since hit back at his detractors for saying he was unprepared and not at his best on Friday – but even jibes like “this commission is blatantly unlawful and no amount of timid questioning can mask that” were delivered with a stutter.
Mpofu reminded the commission that Moyane was the first SARS commissioner to collect more than R1-trillion in revenue by the end of the 2014/15 financial year. To an inquisitive mind, however, the argument rings hollow. Moyane has only been in the job for six months when SARS collected R1-trillion. No commissioner, especially not one who knew nothing about tax before taking up a new job, can claim the collection of R1-trillion as a success in their first six months. It mattered also not to Moyane or Mpofu that SARS was expected to collect more than R1-trillion – the figure was a goal set by National Treasury. Even worse: SARS collected just shy of R1-trillion in the previous financial year.
“It was inevitable that we would’ve reached the trillion mark,” Morden said.
“I mean the trillion mark level is just smoke and mirrors… the economy is growing and inflation increased… I don’t attach much value to the trillion rand level.”
Moyane wanted the commission to dissolve itself, Mpofu said, while he demanded that all records of the testimonies heard be expunged, that no testimony must be heard covering the same ground as his disciplinary matter, that his legal fees be paid by SARS and that Professor Michael Katz be kicked out as an assistant, because he is supposedly conflicted.
Nugent refused. He told Mpofu off for attempting to bait the media into resurrecting the rogue unit-narrative from the dead – a line that may have tipped off those who are interested in the commission as to what was actually going on.
Constitutional expert Prof Pierre de Vos has since argued in an opinion piece that Mpofu’s arguments were thin on law and high on emotion. Why would an accomplished advocate create hot air around arguments he probably knows are faulty in law, De Vos asked. The answer, he said, is to influence public opinion:
“If the public (or at least some gullible leaders within the governing party) could be convinced that the SARS Commission was somehow unfair or tainted in any way, the President would find it more difficult to use whatever findings the commission produces to make sweeping changes to SARS. It is for this reason that I would not be surprised if the legally unsustainable claims made against the commission are not being made to achieve a legal end, but rather to achieve a political end.”
The week found Mpofu unhappy. Especially with De Vos. He threatened legal action, but didn’t follow through. (Very much like Moyane has threatened legal action several times now, but didn’t follow through.)
The sideshow given by Moyane, Mabuza and Mpofu to this day overshadowed Morden’s testimony. The importance thereof can not be over-emphasised, even though tax figures are by their nature intimidating and complicated.
Daily Maverick consulted Morden privately this week, again working through his testimony before the commission, until we grasped what he was trying to get the country to understand.
Without getting too caught up in tax jargon, this is what he said.
How the tobacco industry is killing it
A “significant slowdown” in excise duty revenues from the tobacco industry between 2014 and 2016 and a subsequent sharp “decline” in these figures between 2016 and 2018 are “clear indications of problems with enforcement at SARS as well as increased illicit trade,” Morden argues.
Since Moyane took over SARS, the service had collected about 15% less in excise duties from the tobacco industry (measured from 2015/16, Moyane’s first complete financial year at SARS, to 2017/18). A modest estimate suggests this translates to a loss to the fiscus of more than R3-billion.
It doesn’t take a tax specialist to see the problem:
In the 2011/12 financial year SARS collected R10.8-billion in excise duties from local tobacco manufacturers. Then SARS head of investigations, Johann van Loggerenberg realised something was off after increasingly busting mega, medium and small players in the tobacco business for smuggling, transfer pricing and under-declaring manufactured stock and sales. When then president Jacob Zuma’s son Edward was appointed as a director of Amalgamated Tobacco Manufacturers you did not need to be a clairvoyant to know the game had changed. Van Loggerenberg refocused and sharpened SARS’s investigative capability, initiated Project Honey Badger and warned the tobacco industry in 2013 and again in 2014 that SARS has already drawn blood with longer and sharper teeth.
As a result, SARS collected R11.5-billion from tobacco manufacturers in the 2013/14 financial year, and R13.1-billion in the 2014/15 financial year – a 15% year-on-year increase in collection.
A success story by all measures. Except, things had just gone out of whack.
In a questionable procedure, Zuma appointed the prisons boss Moyane as the new SARS commissioner in September 2014. SARS was in the middle of an onslaught from the tobacco industry when Moyane landed: Belinda Walter, attorney and triple spy for British American Tobacco, government’s State Security Agency and small manufacturer Carnilinx (also a known EFF funder), first honey-trapped Van Loggerenberg and then accused him of using underhand tactics to investigate the tobacco industry.
Within about a month of Moyane’s appointment he met Sunday Times management and senior journalists. Walter’s accusations morphed into allegations (fuelled by the Sikhakhane-investigation and KPMG) of a “rogue unit” illegally spying on politicians while running a brothel. Two years later Sunday Times withdrew these allegations, but the damage was done. Moyane used Sunday Times’ stories as a battering ram to dissolve his executive committee and to bully and isolate the SARS’ old guard, the Nugent Commission heard from various witnesses last week.
Moyane described the work of the High Risk Investigation Unit (HRIU), the alleged “rogues”, as “vomit” and “a cancer” that needed to be cleaned up and eradicated. No reader will be surprised by now to hear that the HRIU was busy investigating the tobacco industry (along with other SARS units) and could already show some success for their labour.
Moyane decimated SARS’ investigative capacity. Former enforcement head Gene Ravele testified last week that Moyane’s right-hand man Jonas Makwakwa (that guy who famously stuffed the ATMs with mysterious and still unexplained cash) ordered Kumaran Moodley’s Technical Interventions Unit to “stop inspecting cigarette factories”. Moodley was later suspended, allegedly on spurious grounds. The allegations are untested so far, and Makwakwa has indicated that he will rebut the “lies”.
Morden’s numbers show something significant did happen:
In the 2015/16 financial year SARS collected R13.5-billion in excise duties from the tobacco industry. It was a mere 3% year on year increase from the previous year’s R13.1-billion – a significant slowdown from the previous years.
SARS collected less the following year: R12.6-billion.
And even less in 2017/18: R11.4-billion.
In summary: From 2014/15, SARS showed a year-on-year increase in its excise duties from the tobacco industry of 15%. Thereafter it slowed down to a 3% increase, and then showed a sharp decrease of -7% and another decrease of -9% in year-on-year growth.
“The problem with tobacco started in 2016/17 where you expected more increases and then specifically in 2017/18 there was a real problem,” Morden told the commission. “This goes beyond a decline in the level of smoking and a lower economy… we actually are not collecting what we’re supposed to collect.”
By Scorpio’s calculations, SARS collected about 15% less in excise duties from the tobacco industry since Moyane took over (measured from his first complete financial year in the job).
The tobacco figures are even more striking when measured against excise duties collected from alcohol manufacturers, showing a steady year-on-year increase between 2014/15 to 2017/18.
The tobacco industry’s deviousness has internationally been well documented. A perfect example is playing itself out on Thursday with the perfectly timed release of an Ipsos study “revealing” how the illegal tobacco industry “flourished” during Moyane’s time.
Ipsos came to the same conclusion as Morden and Scorpio, saying that their study “shows the illegal market exploded since SARS ordered investigations and the inspection of cigarette factories be stopped under suspended Commissioner Tom Moyane”.
The next line in Ipsos’ press release will, however, make anyone with a superfluous knowledge of the tobacco industry frown:
“The report also found that just one manufacturer’s products, Gold Leaf Tobacco Company, accounts for 75% of the illegal trade in the country.”
Gold Leaf Tobacco is locally seen as the biggest competitor of British American Tobacco. Read Ipsos’ press release, and no mention of British American Tobacco is made. Savannah and the Zuma-linked Amalgamated Tobacco Manufacturers also get a mention as the second and third “largest player(s)” in the illicit market.
Read even further, and you notice that the Ipsos study has been done in conjunction with an industry body, the Tobacco Institute of Southern Africa (TISA).
The tobacco members of TISA, lo and behold, include British American Tobacco and Imperial Tobacco.
The Ipsos study accusing Gold Leaf and co. of illegal activities has been funded by Gold Leaf’s biggest competitors and those who have a direct interest in its demise.
It is not the first time – locally and internationally – that especially British American Tobacco and Imperial Tobacco have been accused of underhand tactics against their competitors.
This possible manipulation of an otherwise reputable body like Ipsos by the big players in tobacco highlights the need for a strong and totally independent investigative arm in SARS – like the capacity Van Loggerenberg was building when Moyane forced him out of SARS.
Back to Morden’s figures
The tobacco industry – including the big players – are possibly under-declaring their manufacturing figures. When you manufacture 2,000 cigarettes, but only declare 1,000, you pay tax on only the declared 1,000. It allows you to sell your actual stock of 2,000 for a lower than market value price while making a killing.
Morden has combined the domestic manufacturing figures with tobacco products being imported to show – again – a shocking decline in the declared tobacco products circulating in South Africa.
In 2015/16 there was a 3.1% year on year increase in tobacco products; in 2016/17 only a 0.9% increase was recorded and in 2017/18 the declared tobacco products in South Africa decreased with 5.1%.
According to Morden, the Commission of Inquiry into SARS must hear sirens blaring and see red lights flashing right about now.
Moving on to the VAT question
Morden, as well as former chief operating officer Barry Hore and head of the LBC (Large Business Centre), Sunita Manik, have testified how SARS under Moyane withheld VAT refunds in order to manipulate its revenue income.
Business owners rolled their eyes when journalists reported on the testimonies: It wasn’t news to them.
He again denied that big VAT payments were illegally effected to the Guptas.
Whether Moyane alone can be hold accountable for this phenomenon is another matter. Moyane stepped into SARS cold. He had no knowledge of the business of SARS or how to make a simple tax calculation.
Morden’s figures show a sharp drop in VAT refunds in the 2015/16 financial year. It coincides with the time when Moyane’s new executive committee was at the helm. Moyane’s executive committee knew about tax almost as much as Moyane did himself – with the exception of his right-hand man Jonas Makwakwa and Dr Randall Carolissen.
The sharp decrease in SARS’ payout of VAT refunds is pronounced, especially in January, February and March 2016 – the time of year when SARS is scrambling to collect enough in order to reach its targets.
The head of the Large Business Centre, Sunita Manik testified last week that her units were the backbone of SARS’ collection strategy, collecting around 30% of revenue.
She employed the brightest and paid them their worth.
During the much criticised restructuring of SARS, Moyane and his sidekick Makwakwa dissolved the LBC and accumulated its powers under Makwakwa – effectively making him the most powerful official in SARS with unfettered access to mega taxpayers and their tax settlements.
South Africa will only feel the real impact of this decision in the coming years, Morden told Scorpio.
“Companies employ fancy top tax experts who can see tax loopholes very quickly. What happened to the LBC hasn’t reflected in the numbers just yet. It will be interesting to see what this year’s collection brings. It will take about 18 months for the effect to siphon through. If company income tax does not increase by the end of this financial year, it will be the start of a trend we should worry about.”
A theme Morden is frowning over is the slowdown in personal income tax since 2016. He doesn’t have an explanation just yet.
“Ordinary people could not have made significant under-declarations. Most of us are ordinary employees where our employers deduct our salaries automatically. Therefore the problem may be more towards the high income taxpayers,” Morden said to Scorpio.
“Can they be under-declaring their income? Maybe. But I’m not entirely convinced. If I were to search for the problem, I would look at the revenue estimation process first. If I’m happy with those assumptions and targets, I’d look at policy variables. Things like retirement savings and venture capital. Those may have increased, explaining the decrease in personal income tax. And if that seems to be okay, the problem may lay with SARS’ administration and collection. Or the upper income guys have seen a gap and are not declaring all their income.”
Morden had faith in the process and in SARS:
“Don’t underestimate the value of the staff that is still at SARS. They’re not all inefficient. At the top they created a lot of nonsense. But I’m not too negative about SARS now, there are still a lot of valuable people there.”
There is a lot of work the Commission of Inquiry still need to do. They received numerous written submissions, the commission informed Scorpio. Some were extremely defamatory, and some very helpful. The commission will, as far as is possible and legal, publish all submissions on a dedicated website once they are submitted under oath.
Ramaphosa is expected to stand firm against Moyane’s numerous demands. It means that the suspended commissioner and his legal representatives will have to initiate review proceedings in court if they are to influence or stall the commission’s work.
In the meantime, the commission will operate behind closed doors for the next few months, with the next phase of public hearings to start possibly in early August. DM