Extracts from a media briefing held on Tuesday, 5 May 2020

Good afternoon and welcome to our media briefing.

So much has changed during the past 2.5 months to bring to a culmination a year that was already characterized with so many challenges ahead of COVID-19 and the investment downgrade. We are already 5 weeks into the new financial year, and the harsh reality is beginning to emerge as Government is trying to balance the health and mortality outcomes on the one hand, with the social and economic challenges on the other.

I would like to start with our current challenges presented by Covid-19, in particular how it has impacted on our work arrangements as well as our initial sense of the impact on tax revenue collections.

REVENUE MANAGEMENT & PERFORMANCE 

Tax & Customs Revenue performance was significantly affected during this period. This is an evolving picture and will be continually refined, but will chiefly be a function of:

1. The general state of the South African economy heading into the Covid-19 challenge, but aggravated by the investment downgrades by two ratings agencies

2. The specific impact of Covid-19 Tax Relief Measures

3. Decisions made by government during the various Lockdown Levels that will have a direct impact on economic capacity as well as economic activities

4. The general impact on the Compliance environment

1. General State of the South African Economy, Impact of Downgrade & Covid-19

Last week National Treasury pointed to a severe global economic crisis not seen since the Great Depression:

• Predicting a contraction of around -3% for the current year alone

• Advanced economies bear the brunt of this contraction at -6.1%, whilst

• Developing economies projecting a contraction of -1%

• Sub-Saharan economies projecting a contraction of -1.6%

For South Africa, three scenarios are modeled which predicts GDP outcomes ranging from between -5.4% to -16% for the current financial year.

Final outcomes will depend on the extent of the pandemic globally, and locally a function of lockdown decisions exercised as government tries to contain the spread of the virus and manage the health and mortality outcomes.

We concur that there are so many unknowns and indeterminate variables that are confronting all predictive models that are continually being updated.

We are certainly facing the worst economic performance in recent times, which are aggravated by the structural faults in our economy, which includes:

• The stubborn legacy of Spatial & Social inequality that has not been addressed since the start of our democracy

• Still unacceptably poor educational outcomes, which places constrains on future skills

• Unacceptably low levels of labour intensive growth, aggravating already high levels of unemployment

• Poorly performing state owned monopolies with huge negative impact on the state balance sheet and administered prices – driving unacceptable debt service costs and price inflation

• A highly concentrated private sector with limited competition and highly restrictive entry barriers for new and especially smaller players

2. IMPACT ON REVENUE PERFORMANCE

Whilst it is early days, our initial view is that revenue performance will be lower than the February Budget announcement by between 15%-20%. This means that revenue under-recovery could move up to R285 billion.

From the preliminary assessment of revenue performance of the first month we can report:

• The under-recovery of around R9 billion for April represents a year on year decline of 8.8%

• Main drivers for this under-recovery includes:

1. PAYE down on prior year by 5.2%

• 65 219 employers who made payments in April 2019, but no payments in April 2020 – tax value of R3.8b

• 87 137 employers who made payments in April 2019, made lower payments in April 2020 – tax value R6.1b

2. Domestic VAT down on prior year by 4.3%

• Number of vendors who filed and paid decreased by 13% from 160 136 in April 2019 to 139 313 in April 2020.

• 139 313 vendors that paid this year, only 104 996 (75%) are repeat payers (also paid in the PY). Collections from this 75% of vendors that paid in both years contracted by R200m (0.9%). This signifies a strain in the core tax base.

• Year-on-year monthly payments from those who filed decreased by 20% with a tax value of R1.1b

3. Import Tax overall down on prior year by 19.7%

• Import VAT down 25% on prior year – tax value R1.6b

• Customs Duties down 11.8% on prior year – tax value R100m

4. Specific Excise Duties down on prior year by 54.7% – tax value R1.3b (R1.7b lower on alcohol and cigarettes, offset by R0.4b upward correction on Fuel Levy)

• We have already received requests for payment deferrals from 3 taxpayers in respect of Alcohol, Cigarettes and Fuel

• We are currently investigating non-compliance in instances of alcohol and cigarettes

• We have anecdotal evidence that illicit sale of cigarettes and alcohol has continued during the lockdown period – whilst the revenue impact is relatively low as a percentage of total revenue, we raise the criminality thereof as our main  concern

5. Corporate Taxes down on prior year by 55.4%

• April is not a significant month for corporate taxes, but early indications point to a downward spiral in all areas with the exception of electricity, gas and water

• We expect that the number of companies who will apply for business rescue will grow over the next year

6. VAT Refunds 12.5% lower than estimated

• VAT refund payments for April is lower as the number of credit returns contracted compared to the prior year for the month of April – refund value of R15.5b compared to R17.7b in April 2019 

TAX RELIEF MEASURES

The cost of Covid-19 Tax Relief Measures alone is estimated at R70 billion arising from tax deferrals without penalties and interests, Employee Tax Incentive extensions as well as the temporary suspension of the Skills Development Levy.

This number:

• Includes R5 billion for case-by-case applications for deferrals, but we predict this number to be significantly higher, and

• Excludes a projection of a decline in general compliance simply due to business struggling with cash flow, and unable to repay the deferred payments during the current fiscal year, or simply defaulting and/or failing completely

We therefore project that the total impact of the Tax Relief Measures is likely to be much higher than the R70b initial assessment

IMPACT ON ECONOMIC CAPACITY DUE TO COVID-19 AND LOCKDOWN

A major concern that we have from a revenue perspective is not only a downward trend of economic activities, but a loss of economic capacity due to businesses closing and job losses. The full impact of this will manifest over the next few months, and also depend on how government manages the phasing in of economic activities.

Many businesses will simply not be able to operate profitably at reduced capacity and will fail completely. Those who have started businesses from scratch, will know how hard it is to start a business – it often takes 100 business ventures to start one successfully! The loss of economic capacity in our economy will have long-term tax revenue implications.

Our initial assessment is informed by the following data points. According to STATSSA report on Liquidations & Insolvencies

1. Liquidations increased by 12.3%, for February 2020 vs February 2019, with an increase in voluntary applications

2. Insolvencies increased by 13.9% for January  2020 vs January 2019

3. According to directives finalised, we can report an increase of 1 622 employees retrenched in April 2020 compared to April 2019 – an increase of almost 9% – Total retrenchment in April 2020 amounted to just over 20 000.

4. STATSSA also conducted a perception survey, targeting VAT registered businesses, with a reference period of 30 March – 13 April 2020, and reported:

   • 42% businesses feel they cannot operate through the Covid-19 pandemic

   • 54% businesses felt they could survive between 1-3 months

   • 46.4% of businesses have temporarily closed their doors

   • Only half of the respondents felt their workforce would not be affected

   • 36.8% businesses expect that they will definitely decrease their workforce

   • 20% of businesses have laid off staff in the short term

   • 28% businesses have decreased working hours

   • 85.4% businesses reported their turnover below their normal level for the period

   • 2/3 businesses feel that the impact will be worse than 2008/9 recession

   • Of the 707 businesses surveyed:

     1. Manufacturing – 180

     2. Trade – 71

     3. Logistics & Communications – 52

     4. Real Estate & Business Services – 44

     5. Construction – 39