SARS is coming for these tax dodgers

The South African Revenue Service (SARS) is cracking down on tax dodgers with stricter enforcement, harsher penalties, and a focus on high-net-worth individuals, multinational corporations, and the illicit economy.

Tax Consulting SA said SARS has become far more rigorous in its collection efforts in recent years, including resorting to extreme methods like jail times and massive fines as punishment for non-compliance.

SARS has been intensifying its scrutiny of South African taxpayers by collaborating with the Hawks to investigate defaulting taxpayers and hand down harsher punishments. 

Many taxpayers have previously expected minor repercussions such as fines and interest charges, but recently, SARS has introduced a revised prosecution strategy. 

With the assistance of the Hawks and SAPS, it promises harsher punishments for taxpayers who default and tighter compliance with regulations. 

Danielle Luwes, tax director at Hobbs Sinclair Advisory, said the tax authorities are cracking down on hidden income, which is evident in SARS’ record-breaking tax collection.

For the fiscal year ending March, SARS collected a whopping R2.16 trillion in gross tax revenue, surpassing the Treasury’s estimate by R10 billion.

The 2023/24 tax haul saw a remarkable R52 billion increase compared to the previous year. This can be attributed to a surge in VAT – over 8% growth, reaching R448 billion – and personal income tax, which exceeded R651 billion.

These figures suggest a substantial rise in taxpayer compliance, particularly when it comes to disclosing personal income accurately.

Below is an overview of some of SARS’ focus areas going forward.

High-net-worth individuals

Tax experts Jashwin Baijoo and Michelle Phillips from Tax Consulting SA explained that SARS is deploying advanced tech like AI to streamline audits and gather more information through third-party data on high-net-worth individuals (HNWIs).

The experts explained how, in the world of tax, HWIs are known for accruing their wealth by navigating complex, multi-layered investment structures, both locally and offshore.

“This results in these affluent individuals having to regularly traverse intricate regulations and calculations to ensure compliance,” they said. 

“However, recent developments indicate that the collection focus on HWIs is intensifying, with SARS employing advanced technology to streamline audits and bolster efficiency.”

The challenge for HNWIs lies in managing complex investment structures, both local and international, which often involve intricate regulations and calculations. 

Traditionally, provisional tax filings were not part of a typical audit. However, SARS’ HNWI Unit is now requesting relevant materials from these filings, along with detailed calculations from submitted returns. 

The tax authority is even asking for income and deduction forecasts for the next six months.

The experts explained that while this might seem like expecting taxpayers to predict the future, SARS is simply exercising its legal powers under the Tax Administration Act and the Income Tax Act.

Multinational enterprises

Similar to HNWIs, Baijoo said multinational enterprises (MNEs) are among the “big ticket” taxpayers SARS is targeting.

He said that while MNEs are familiar with international transactions, it is astonishing how many fail to adhere to international tax law, specifically pertaining to base erosion and profit shifting, also known as ‘transfer pricing’.

He said many MNEs find themselves facing transfer pricing audits regularly.

“Practically, this stems predominantly from failing to establish the correct tax and legal foundation to support the commerciality and profitability of ‘affected transactions’ between companies under common control,” he explained.

Baijoo said SARS has strengthened its tax treatment on all international transactions through various AI data-driven processes and the outsourcing of specific functions.

This allowed the revenue service to collect R36.6 billion from 31 Transfer Pricing Audits, 5 International Audits and 8 Integrated Audits. 

“In practice, and to ensure group compliance, it is essential for MNEs to enlist the appropriate tax advisory and legal muscle, ensuring all Transfer Pricing documents, including Local and Master Files, are legally sound and will meet the muster of any revenue authority,” he said.

General focus areas

In the service’s presentation of revenue collections for the 2023 financial year, SARS outlined the sectors it will focus on in 2024, including the illicit economy, multinational corporations, cryptocurrency, and eCommerce transactions. 

Despite its higher-than-expected revenue collection last year, the revenue service is not resting on its laurels and laid out the following focus areas for its 2024/25 financial year. –

• Illicit economy, including a focus on illicit tobacco, illicit fuel, illicit financial flows
• International taxes with a focus on base erosion and profit shifting 
• Trade mispricing and undervaluation fraud
• Debt cash collections
• Syndicated VAT fraud and tax crimes
• Tax base broadening through the use of 3rd party data
• eCommerce transactions, including duties on imported goods
• High Wealth Individuals (service and compliance) 
• Cryptocurrency

SARS will be particularly focused on the illicit economy and the illicit cigarette trade, as it has lost billions in tax revenue from this sector.

A study by the University of Cape Town revealed that the government lost R119 billion in excise and VAT revenue between 2002 and 2022 because of the illicit cigarette market.