VAT Refunds: Balancing fraud against cash flow Jacqui Wierzbowski, Deloitte South Africa
Agenda VAT fraud and refunds in South Africa • Main VAT risk areas • SARS risk detection • Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue Risk detection vs taxpayer service: rest of Africa • VAT Withholding • Electronic Fiscal Devices Risk detection vs taxpayer service: Europe • Standard Audit File for Tax • Real time reporting • Split payment mechanism Recommendations: minimizing refund delays without compromising risk detection
VAT fraud and refunds in South Africa
R2 billion VAT fraud investigated
Main VAT risk areas • Fraudulent changes to vendors’ bank details • Cash and carry industry – no VAT declared to SARS on cash payments received • Understatement or non-declaration of goods imported into South Africa AND fictitious imports • Charging and collecting VAT while not registered as a VAT vendor or not registered as a VAT vendor in spite of meeting the threshold for compulsory VAT registration
SARS risk detection • In the VAT refund space - during the 2016/2017 financial year, 89% of VAT refunds were released without an audit. • A refund in excess of an approved refund limit is investigated. • A computer program analyses VAT returns and selects “high risk” refunds. Taxpayers selected will get a request for documentation (usually within 48 hours of submitting the VAT return) which needs to be submitted within 21 business days. • The refund should be paid within 21 business days. • SARS may withhold a refund until : Details of the vendor’s bank account have been provided; A vendor has filed all outstanding returns in respect of VAT and/or any other taxes; SARS is satisfied that a refund claimed will be refunded by the vendor to another party where that vendor’s output tax is borne by that other party; or A verification, inspection or audit of the refund has been finalised, unless acceptable security has been provided.
Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue Issues Recommendations SARS system blocks refunds where bank details are not eDNA system at SARS branches - a simplified process • verified in person at a SARS branch to verify banking details. Is this working? Could SARS work with the banks to verify bank • details? Delay in lifting of “special stoppers” Could SARS automate release of refunds as soon as a • verification/ audit is finalised? SARS auditors fail to ask for all documentation at once SARS should pay interest on the delayed refund • SARS auditors raise assessments prior to the lapse of the Taxpayers should inform SARS that outstanding • 21 business afforded to taxpayer to submit information documents will be submitted The SARS system automatically allocates refunds to debts Could the SARS system be modified to take request/ • on other periods notwithstanding suspension of payment granted suspension of payment into account?
SARS measures to balance risk detection and taxpayer service Current 27 June 2017 - Taxpayer Verification and eDNA system are implemented at all SARS branches (entity maintenance and • registration etc.). In terms of the TAA – SARS must release refunds where acceptable security has been provided (example bank • guarantees are common, however pledges and bonds can be costly and take time to put in place). In progress SARS working on enhancing verification letters to be more specific. • Taxpayers advised to be detailed in their response as to reason for the refund and substantiate. • SARS working on improving communication between the Audit division and the Account Maintenance division to ensure • that refunds are released as soon as the Audit is complete. Could this be automated?
Risk detection vs taxpayer service: rest of Africa
Are there risk detection measures employed in the rest of Africa that SA can implement? Challenges VAT Withholding • Costs associated with changes to a taxpayer’s ERP system • Used by a number of countries in Africa to automate • Revenue Authority appoints withholding agent • Cash flow disadvantage - delayed issuing of certificates in (recipient of goods or services) some instances - taxpayer may end up paying the VAT while awaiting certificates • Withholding agent withholds the VAT when making payment to the supplier of goods and services • Withholding agent pays the VAT over to the Revenue Incentives Authority and issues a certificate to the supplier • Visibility – All VAT payments are recorded and the Revenue • Supplier files the certificate as proof that VAT is Authority can use the information to perform desk audits already remitted to the Revenue Authority on their • Cash flow benefit – Revenue Authority receives funds early supplies
Are there risk detection measures employed in the rest of Africa that SA can implement? Challenges Electronic Fiscal Devices • Costs associated with purchasing and setting up the • Used by a number of countries in Africa – first introduced devices in Europe in 1980 • Costs associated to interface device content with • EFD refers to a wide variety of technological devices that Revenue Authority Revenue Authorities use to monitor business transactions to combat non-compliance for example; Electronic Cash Registers, Electronic Tax Registers, Electronic Fiscal Incentives Printers, Electronic Signature Devices, Sales Control • Enhances authenticity of tax invoices - reduces cases Devices (Modules) of fraud in terms of issuance of invalid invoices • Used to record each sale and sends information to the • Enhances compliance i.e. declarations are complete Revenue Authorities and accurate • Estimated at USD 1,000 for the device 2018 Budget Speech: SARS will release a discussion paper on the potential use of electronic fiscal devices, to assist revenue administration by monitoring business transactions
Are there risk detection measures employed in the rest of Africa that SA can implement? Electronic Fiscal Devices (continued…)
Risk detection vs taxpayer service: Europe
Standard Audit File for Tax (“SAF-T”) • Originally created by the OECD and in use in a number of countries in Europe • Likened to the IT14SD in SA • Electronic format (.xml) for efficient transfer of accounting data from companies to Revenue Authorities or external auditors • Revenue Authorities are: Collecting more detailed customer data e.g. GL, ledgers, list of suppliers, list of customers etc. Understanding the wider business Focusing on a risk-based approach Employing sophisticated interrogation techniques e.g. discrepancies must be explained where a claim does not reconcile with supplier declaration
Real time reporting • Also used by a number of countries in Europe • Taxpayer submits VAT return using the software and receives confirmation of submission through the • Transactions above a certain threshold required to be software application submitted to the Revenue Authorities within a certain time period e.g. 24 hours in Hungary • Business records and accounts are commonly kept in a digital format – using software to prepare and file UK introduces “Making Tax Digital for VAT” April return reduces administrative burden for taxpayer 2019 while mitigating risk of fraud • VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT returns using specific Split payment mechanism software • Software collates and prepares VAT return using digital records - VAT Return is shown to taxpayer to • Used in a number of countries in Europe to counter confirm correctness VAT evasion • Customers make a single payment per invoice to the supplier and the supplier’s bank splits the taxable base and the VAT amount • The VAT amount then flows into a special account for remission to the Revenue Authorities
Incentives Challenges In certain countries e.g. Spain – Administrative burden for taxpayers • • taxpayers get refunds quicker if real e.g. reconciliations etc. time reporting is done Limited capability by Revenue • Taxpayers are “certified” compliant/ Authority to analyse the data • trust worthy received The Revenue Authority has more • information to verify completeness and / accuracy of declarations submitted by taxpayers Missing trader risk is mitigated •
Recommendations: minimizing refund delays without compromising risk detection
Fraudulent • eDNA system at SARS branches - a simplified process to changes to verify banking details vendors’ • Could SARS work with the banks to verify bank details? bank details • Lodging security with SARS to release VAT refunds Cash and • Automation of ‘stopper’ lifting carry industry after finalization of an audit – no VAT • Taxpayers – detailed and declared to • Introduction of Electronic Fiscal Devices complete responses to requests SARS on cash for information payments • SARS – specific requests on received verification letters • Introduction of split payment mechanism? Understatement or non-declaration of • Information sharing between Revenue Authorities – goods imported Exchange of Information conventions / agreements into South Africa AND fictitious imports
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