On 28 August 2017 the Tax Ombud, Judge Bernard Ngoepe, released his report on the alleged delayed payment of refunds by SARS. After an extensive examination, the diagnosis is not good and the prognosis not much better.
To truly comprehend the significance of this document, one needs to look at the mandate of the Tax Ombud, as prescribed in section 16 of the Tax Administration Act (TAA). Initially, his mandate was restricted to reviewing and addressing complaints by taxpayers regarding service, procedural or administrative matters arising from the application of the provisions of tax Act by SARS. However, the provision was amended with effect from 19 January 2017 to extend his mandate to review, at the request of the Finance Minister or at the initiative of the Tax Ombud with the approval of the Minister, any systemic and emerging issue related to a service matter or the application of the provisions of this Act or procedural or administrative provisions of a tax Act.
Since the office of the Tax Ombud first opened its doors in October 2013, one of the issues that most consistently formed the subject of taxpayer complaints was the delay in the payment of refunds. Despite the Ombud raising the issue in his periodic reports to SARS and annual reports to Parliament, the complaints continued escalating. For the period November 2016 to March 2017 the office received 500 complaints relating to delayed refund payments.
Given the seriousness and extent of the problem, the Ombud approached the Minister and on 14 March 2017, less than a month after the empowering provision came into effect, the Deputy Minister of Finance granted the Ombud approval to review the delay in the payments of refunds as a “systemic and emerging issue”.
The Ombud obtained data, conducted meetings with SARS and consulted various stakeholders, like SAICA and LSSA, before releasing a Provisional Report. SARS’ response to this report is included verbatim in the Final Report.
At the onset, SARS was quick to point out that the number of complaints represents less than 1% of the refunds processed by SARS over the same period. As a statistic, this number is not reliable. It should be borne in mind that not all taxpayers who experience delayed refunds have the resources to lodge a complaint. Furthermore, SARS’ complaints mechanism requires taxpayers to first approach their Call Centre, Contact Centre or a branch office. If the issue is not resolved at this first port of call after 21 business days, the taxpayer needs to submit a complaint to the SARS Complaints Management Office (CMO) by way of eFiling. Only if the CMO fails to resolve the matter within another 21 business days, may the taxpayer approach the Tax Ombud. Taking all this into account, it is simply not accurate to suggest that only 1% of refunds were not paid on time.
The data considered by the Ombud shows that SARS’ credit book, reflecting all amounts owed to taxpayers, increased by almost R16 billion from R44.97 billion in April 2016 to R60.94 billion in April 2017. However, the average refunds paid out for the fiscal year ending March 2017, decreased from R15 billion for the corresponding period in 2016 to R14 billion.
The report finds that there has indeed been an undue delay in the payment of refunds, and identifies twelve “obstacles allegedly placed by SARS to delay the payment of refunds”.
1. Failure to link submitted documentation requested by SARS to the main file; e.g. scanned documents not being linked
In order to verify a refund, a SARS auditor would request additional information by post or telephone, but neglect to open a link in eFiling. This would necessitate the taxpayer visiting a SARS branch to have the documents scanned. In many cases, the auditor does not have access to these documents or sometimes even be aware of their existence.
SARS’ response to the Provisional Report was that “from our own investigation and engagement with our front office teams, this allegation is not true.
It is unfortunate that this obstacle was identified after a “general” complaint by SAICA. The fact the Ombud could not provide an illustrative case allowed SARS the opportunity to deny the existence of the problem.
2. The unwarranted placement of special stoppers
Stoppers are usually placed on a refund when a taxpayer is required to verify his bank details in person at a SARS branch. One of the problems identified by SAICA is that these requests appear to be issued on a random basis, i.e. irrespective of whether there has been any change in the taxpayer’s details.
The Ombud had already broached this subject in a letter to SARS dated 17 November 2016:
“That SARS should clarify why it is necessary for taxpayers to confirm their banking details when SARS’s procedures already require substantiating documents to be submitted by taxpayers when they change their banking details.”
The Ombud accepts SARS’ explanation that one of the reasons for stoppers is to limit fraud. However, the question remains why it would be necessary for a taxpayer to confirm banking details (that had already been verified on a previous occasion) again and “only after a refund claimed has been verified as legitimate”.
3. Using the filing of new returns as an excuse to block refunds
The system blocks refunds, even if they had already been verified, the moment a subsequent return is submitted. In the Provisional Report, the Ombud noted that if SARS kept to its time frames, one period’s refund should be paid out before the next return is submitted. Even if this may be a challenge where a taxpayer submits monthly VAT returns, the Ombud is adamant that the submission of subsequent returns, or the review, inspection or audit of another period, constitutes no reason to withhold the refund.
SARS’ response was that a remedy was introduced for VAT refunds in October 2016 and that the challenge experienced with regard to income tax refunds should be addressed with the implementation of GAAP.
The Ombud is not convinced and states that “whatever remedy SARS is referring to, does not work well”. This comment is justified, given that 500 complaints were received after implementation of the “remedy”.
4. Delay in lifting stoppers and lack of time frame to do so
The Ombud found that lifting a stopper can take more than 2 months, and this after the audit of the refund has been finalised and personal details updated.
SARS undertakes to put steps in place to ensure that “inappropriate” stoppers are removed within 21 days.
The Ombud is concerned that the term “inappropriate” is very vague and does not include stoppers that have been placed on a refund in error. He recommends removal of the stopper as soon as the issue that resulted in the placement of the stopper is resolved.
Once also cannot help wondering why SARS would need 21 days (presumably 21 business days) to remove a stopper if the refund has already been audited and bank details verified.
5. Refunds on one period being withheld while an audit/verification is in progress on another period
Section 190 of the TAA is clear and unambiguous. SARS is not obliged to pay a refund until such time as a verification, inspection or audit of the refund has been finalised.
Withholding a refund that has been verified while reviewing a refund on another tax period can be viewed as an attempt “to secure payment of a future possible, but uncertain and as yet to be established, tax debt”.
In one case brought to the office of the Tax Ombud, SARS persisted in refusing to pay a refund pending the audit of unrelated VAT periods, even after the matter had been referred to the Ombud. In another matter, SARS admitted that when selecting cases for audit, “they go into a pool and are not touched until a complaint is lodged”.
In its response to this allegation, SARS makes reference to “the high volume of refunds” and “a significant number of illicit refund claims”, while failing completely to address the issue of its ultra vires actions.
The Ombud recommends in no uncertain terms that this practice must stop.
6. SARS using historic returns
Outstanding returns appear on the system out of the blue, without previously being shown as being due. Unfortunately, the Ombud was not able to cite a case as illustration, providing SARS with grounds for not accepting the Ombud’s recommendation to discontinue the practice.
7. SARS raises assessments and passes journals to clear unallocated credits
Unallocated payments, for example overpayments by taxpayers, amounted to R3.47 billion held by SARS at the end of the 2016 tax period. By law, SARS may apply these amounts towards satisfying existing tax debts owed by the taxpayer. In the absence of such debts, the monies must be refunded to the taxpayer.
However, SARS practice is to request the taxpayer to provide reasons for the overpayment, as well as proof that the payment was actually made. If not satisfied, SARS raises an assessment for the precise amount of the unallocated payment to absorb the credit.
In one case, a VAT vendor accidentally paid the amount due in respect of his return twice. He requested SARS to refund the excess payment and provided proof of the double payment. Regardless, SARS issued an assessment for the amount of the overpayment.
SARS’ initial response to this allegation is shocking. Reference is made to statutory provisions that provide no authority whatsoever for the practice to raise assessments, simply for the purpose of absorbing unallocated credits. However, SARS does claim to have “discontinued the practice in cases where it is inappropriate”.
The Ombud is concerned with the fact that SARS does not indicate when exactly it ceased the practice. Perhaps of greater concern is whether it is ever appropriate for SARS to raise an assessment to absorb an overpayment by a taxpayer, instead of simply refunding the money.
8. Requests for further information during audit
Auditors send repeated requests for information to taxpayers, thereby postponing the date on which interest starts accruing by 21 days with each request. In the case cited by the Ombud, this practice resulted in a taxpayer receiving his refund for the December 2016 VAT period only in May 2017.
The Ombud accepts SARS’ response that it is unrealistic to expect an auditor to specify all the relevant information that may be required in an initial request, as the taxpayer’s answer to one query can raise other issues.
The recommendation is that interest should start to accumulate from the day when the taxpayer responded to the auditor’s first request. This suggestion would however require an amendment of the legislation and it is doubtful if Parliament would acquiesce.
9. Delay in revision of assessments following the reinstatement of the initial refund after successfully disputing assessments
There is no prescribed period for revising and paying a refund that is reinstated after an objection has been decided in favour of the taxpayer. In accordance with the “pay now, argue later” principle recognised by the Constitutional Court, a taxpayer’s objection to an assessment does not relieve him of the obligation to pay the tax due. Thus, if the taxpayer’s objection is allowed and the refund reinstated, the payment made in respect of the overturned assessment lies on the system as an amount refundable.
The sample case referred to by the Ombud reads like a horror story. The taxpayer objected to an assessment, but paid the tax due in full. SARS conceded the matter on appeal and reinstated the refund, but instead of refunding the taxpayer, issued an additional assessment for the same amount without providing any reasons for the assessment. The taxpayer lodged a complaint with the CMO, who simply informed him that he needs to object to the assessment! Bear in mind that his objection to the first assessment for the same amount had already been upheld. After submitting his complaint to the Tax Ombud, the refund was paid out without the taxpayer ever objecting.
The Ombud identifies several errors made by SARS in this case. Most significantly, SARS “expected the taxpayer to lodge an objection to an estimated assessment which was raised for the sole purpose of avoiding to pay a refund”.
In response, SARS gives an undertaking to “endeavour” to revise assessments within 45 days after a dispute has been resolved.
The Ombud recommends a shorter period. This seems justified, given that a taxpayer is only afforded 30 days to prepare and submit and objection, including all supporting documents. One cannot help wondering why SARS would need 45 days to revise an assessment in a case where the refund had effectively been verified when the objection was considered and allowed.
10. Diesel refund delays
Taxpayers eligible for the diesel rebate, declare their eligible use on their VAT returns. The system provides for the set-off of the diesel refund against any liability for VAT, leaving only the net amount refundable or payable. However, if the diesel refund is audited or verified, the amount is no longer treated as a credit, resulting in a liability for VAT with added penalties and interest.
The Ombud’s inability to cite a specific case and the proposed diesel reforms that include separate registration for diesel refunds, resulted in SARS essentially being absolved from having to respond to this allegation.
This is unfortunate, as the Discussion Paper on the Review of the Diesel Fuel Tax Refund System was only issued in February this year and the proposed dual registration system is still a long way from being implemented. In the meantime, there is no obstacle SARS continuing its practice of failing to set-off the diesel credit against the VAT liability, and thereby creating additional liabilities for penalties and interest.
11. Raising assessments prematurely
When SARS requests substantiating documents for purposes of verifying a refund, a taxpayer is usually allowed 21 days to respond. In the Ombud’s report it is alleged that assessments are sometimes raised before the deadline expires.
Failure to provide an illustrative case and an admission by the industry that taxpayers sometimes fail to upload all relevant information at the first instance, gave this round to SARS.
12. Refunds for periods that have been verified by SARS are automatically set off against debts on other periods notwithstanding a request for suspension or where there is suspension of payment
In terms of section 164(4) of the TAA, SARS may not institute collection steps once a taxpayer has submitted a request for suspension of payment. The SARS system, however, automatically sets off refunds against other debts, irrespective of whether a request for suspension has been received or considered.
SARS acknowledges this allegation and has apparently put an automated process in place for dealing with requests for suspension of payment. This should hopefully prevent the set-off of refunds against disputed tax debts.
Considering the report in its entirety, one must accept that many claims for refunds are not justified and that the fraudulent use of bank accounts is a reality. And then there are the sheer numbers. For the period under review SARS had to process and verify more than 5 million refunds. The task is herculean.
That being said, what is apparent from the Ombud’s report is that SARS does not play by the rules. The introductory remarks made by SARS in its response to the Ombud’s Provisional Report smack of pure defensive denial: “We want to record that there was no evidence and no finding was therefore made, that SARS intentionally delayed the payment of refunds as was alleged.”
The Ombud concedes that the delays may not always be intentional, but points out that “in cases such as when an assessment is raised which comes up with a debt identical to the cent to that otherwise due to be paid to the taxpayer, the inference of intentional delay is irresistible”.
Arguably the most concerning aspect of the Ombud’s report is the many instances of blatant disregard for the law. SARS is a creature of statute and may only operate within the ambit of the relevant enabling legislation. The report identifies policies and practices that fall foul of the requirements of administrative justice. The Ombud has found that “the system allows for SARS to unduly delay the payment of verified refunds to taxpayers in certain circumstances”. He has made recommendations on how to remove each of the twelve obstacles that are identified in the report. However, and this is very significant, the Ombud’s recommendations are not binding on SARS. Nevertheless, the SARS Commissioner may have to face some tough questions at the next sitting of Parliament’s Standing Committee on Finance.
Specialist Tax Consultant
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