Hawks: Tax evasion at heart of illicit tobacco trade
3 May 2018
Cape Town – The Hawks is investigating 394 cases of illicit tobacco trade for the 2017/18 year, Parliament heard this week.
The Standing Committee on Finance (Scof) held hearings on illicit tobacco trade on Wednesday. Among those who made representations was major-general Alfred Khana, head of serious commercial crime at the directorate priority crime investigation.
Khana said tax evasion was at the heart of illicit tobacco trade. “I must state up front, I have a slight problem with the reference to illicit tobacco trade. In my view this is not about tobacco trade, it has more to do with tax evasion.”
Khana said there is non-reporting of income through the vehicle of illicit tobacco trade. He explained that legitimate businesses were operating as a front to trade illicit tobacco from “specific” countries.
Khana added that allegations of cigarettes manufactured in Lesotho and Zimbabwe illegitimately being brought into South Africa have not been reported to the Hawks. "The information has never been brought to us to act on."
Earlier at the hearing the chair of the Tobacco Institute of South Africa (TISA), Francois van der Merwe, estimated that between 2010 and 2016 the loss to the fiscus was over R27bn.
SARS’ group executive of customs compliance risk and case selection William Mpye told Parliament that between 2014/15 and 2017/18 the tax authority managed to conduct 1 368 seizure operations in which 270 million cigarette sticks to the value of R217m were recovered.
Limited capacity
Khana said the South African Police Service (SAPS) does not have the capacity or manpower to check cigarette prices in stores. There are stores selling cigarettes as cheap as R10, when the tax on these boxes is over R17. However, Khana assured that the Hawks has the capacity to deal with criminal syndicates.
He suggested that industry bodies TISA and the Fair-Trade Independent Tobacco Association (FTIA) get manufacturers audited to determine how many cigarettes are sold and how much revenue is generated. This would determine the tax liability.
“When we start there it gives us a better outlook as to how many cigarettes are brought through the system.”
Khana said the Hawks would willingly investigate tax evasion reported to them, but found problems with the interpretation of section 4 of the SARS Act, which deals with protection of information.
The Hawks found it cannot carry out investigations because SARS officials cannot share information on taxpayers. Khana said he wrote to the Law Reform Commission to provide guidance on the interpretation of the section.
Advocate Malini Govender from the specialised commercial crimes unit at the National Prosecuting Authority also made representations and shared views that the drive behind illicit trade was financial gain.
The NPA has been dealing with illicit traders since its inception. The oldest case on the matter dates back to 2000. “This problem is an old problem.”
The NPA established a specialised tax unit in conjunction with SARS in 2003, which deals with criminal matters affecting revenue of the country.
Govender clarified that the role of the NPA is to provide guidance for investigations and not necessarily to conduct investigations. The NPA relies on investigations by SARS and SAPS before dealing with the prosecution of cases.
In 2017, 124 cases were referred to the NPA, 43 have been finalised with guilty outcomes. Other cases are still being litigated on, she explained. The matters are "highly litigated" on and are complex given cross border involvement, involvement of foreigners as runners and cost analysis in terms of the cost to the economy.
Govender also called on more collaboration between government departments, such as SARS, SAPS, the NPA and even Home Affairs as there is a foreign element to illicit trade.
Departments should also set joint targets, because each is seeking different outcomes, she explained. The NPA, for example, has an objective to achieve convictions, while SARS has an objective to recover revenue.
She added that there is a benefit of having joint operations to address organised crime and corruption relating to the tax system.
Similarly, National Treasury's director of personal income taxes and saving, Chris Axelson, said there should be better cooperation between SARS, SAPS and the NPA to tackle illicit trade.
