VAT Refunds: Balancing fraud against cash flow Jacqui Wierzbowski, - - PowerPoint PPT Presentation

VAT Refunds: Balancing fraud against cash flow Jacqui Wierzbowski, Deloitte South Africa

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

Agenda

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
• utput 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 verified in person at a SARS branch

• eDNA system at SARS branches - a simplified process

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 21 business afforded to taxpayer to submit information

• Taxpayers should inform SARS that outstanding

documents will be submitted The SARS system automatically allocates refunds to debts

• n other periods notwithstanding suspension of payment
• Could the SARS system be modified to take request/

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?

VAT Withholding

• Used by a number of countries in Africa
• Revenue Authority appoints withholding agent

(recipient of goods or services)

• Withholding agent withholds the VAT when making

payment to the supplier of goods and services

• Withholding agent pays the VAT over to the Revenue

Authority and issues a certificate to the supplier

• Supplier files the certificate as proof that VAT is

already remitted to the Revenue Authority on their supplies Challenges

• Costs associated with changes to a taxpayer’s ERP system

to automate

• Cash flow disadvantage - delayed issuing of certificates in

some instances - taxpayer may end up paying the VAT while awaiting certificates Incentives

• Visibility – All VAT payments are recorded and the Revenue

Authority can use the information to perform desk audits

• Cash flow benefit – Revenue Authority receives funds early

Are there risk detection measures employed in the rest of Africa that SA can implement?

Electronic Fiscal Devices

Challenges

• Costs associated with purchasing and setting up the

devices

• Costs associated to interface device content with

Revenue Authority Incentives

• Enhances authenticity of tax invoices - reduces cases
• f fraud in terms of issuance of invalid invoices
• Enhances compliance i.e. declarations are complete

and accurate

• Used by a number of countries in Africa – first introduced

in Europe in 1980

• EFD refers to a wide variety of technological devices that

Revenue Authorities use to monitor business transactions to combat non-compliance for example; Electronic Cash Registers, Electronic Tax Registers, Electronic Fiscal Printers, Electronic Signature Devices, Sales Control Devices (Modules)

• Used to record each sale and sends information to the

Revenue Authorities

• 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

• Also used by a number of countries in Europe
• Transactions above a certain threshold required to be

submitted to the Revenue Authorities within a certain time period e.g. 24 hours in Hungary UK introduces “Making Tax Digital for VAT” April 2019

• VAT registered businesses with taxable turnover

above the VAT registration threshold to keep records in digital form and file their VAT returns using specific software

• Software collates and prepares VAT return using

digital records - VAT Return is shown to taxpayer to confirm correctness

Real time reporting Split payment mechanism

• Used in a number of countries in Europe to counter

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

• Taxpayer submits VAT return using the software and

receives confirmation of submission through the software application

• Business records and accounts are commonly kept in

a digital format – using software to prepare and file return reduces administrative burden for taxpayer while mitigating risk of fraud

Incentives

• In certain countries e.g. Spain –

taxpayers get refunds quicker if real time reporting is done

• Taxpayers are “certified” compliant/

trust worthy

• The Revenue Authority has more

information to verify completeness and / accuracy of declarations submitted by taxpayers

• Missing trader risk is mitigated

Challenges

• Administrative burden for taxpayers

e.g. reconciliations etc.

• Limited capability by Revenue

Authority to analyse the data received

Recommendations: minimizing refund delays without compromising risk detection

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 Fraudulent changes to vendors’ bank details

• Lodging security with SARS to

release VAT refunds

• Automation of ‘stopper’ lifting

after finalization of an audit

• Taxpayers – detailed and

complete responses to requests for information

• SARS – specific requests on

verification letters

• Introduction of split payment

mechanism?

• eDNA system at SARS branches - a simplified process to

verify banking details

• Could SARS work with the banks to verify bank details?
• Introduction of Electronic Fiscal Devices
• Information sharing between Revenue Authorities –

Exchange of Information conventions / agreements

Speaker bio

Jacqui Wierzbowski is a Director with Deloitte South Africa’s Tax & Legal practice. She is a member of SAIT with over 20 years of experience in VAT. Jacqui provides advisory, compliance, tax dispute resolution services, due diligence reviews as well as advises on client expansions into Africa and the rest of the globe. These services are provided to clients across a multitude

• f

industries including financial services, automotive, telecommunications, public sector etc. Jacqui spent 8 months in the Australian practice assisting clients with the implementation

• f GST. She drafted certain chapters and managed the writing of the Australian GST

handbook with the Australian Tax Practice (Butterworths equivalent). Jacqui has also provided research and views for Government departments in other countries on the financial services industry and provided input into the South African Committee (Davis Committee) reviewing the impact and recommendations pertaining to the South African tax legislation. Phone:+27 11 8065310 Email: jwierzbowski@deloitte.co.za