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Transcript of Tax compliance cost surveys
1
Tax compliance cost surveys:
Findings from developing
and transition countries
Jacqueline Coolidge
Washington DC
February 1, 2012
2
INTRODUCTION
3
What are tax compliance costs?
• Enterprises’ tax compliance and statistical reporting costs – these are
NOT amounts of taxes paid, but costs:
• of working time spent by accountants and other staff on calculation
taxes, preparing all reports (including statistical), providing
explanations to tax and statistic authorities, trips to these bodies
• for purchasing, installation and maintenance of corresponding
equipment (cash registers) and programs (on workflow automation)
• for purchasing all necessary forms of reporting, etc.
• for outside consultants
Enterprises’ tax compliance and associated reporting
costs – these are NOT amounts of taxes paid and NOT
costs of general bookkeeping or accounting, but costs:
• of working time spent by accountants and other staff on calculation
taxes, preparing all reports, providing explanations to tax authorities,
trips to tax offices, etc.
• for purchasing all necessary forms of declaring/filing, updates on
changes in tax legislation or regs, etc.
• for outsourcing to tax preparers on retainer or fee-for-service basis
• for purchasing, installation and maintenance of required equipment
(e.g., cash registers) and/or software (amortized as appropriate)
4
Why should we care about tax
compliance costs?
• Tax compliance costs add significantly to the
cost of doing business
• Tax compliance costs can be extremely
regressive: a relatively minor burden for large
firms but extremely onerous for small firms
• The costs and risks of tax compliance (e.g., the
risk of incurring severe penalties) can deter
business formation and formalization of informal
firms.
5
Examples of TCCS
• South Africa, Kenya, Burundi (Uganda upcoming)
• Yemen
• Ukraine, Uzbekistan, Armenia, Georgia
• Peru
• India (Bihar), Lao, Nepal (Bangladesh upcoming)
• What data did we get and how did we use it???
6
BASIC TAX COMPLIANCE COSTS
7
• Time and cost estimates for main business taxes:
– Income Tax (IT), including provisional tax
– Value Added Tax (VAT)
– Employees’ Tax (ET)
• Significant processes:
– Preparation, completion of returns
– Tax filing and payment
– Objections, Appeals & Alternative Dispute Resolution
– Audits, inspections & written queries from SARS
South Africa Tax Compliance Burden -coverage
8
Armenia: Tax Compliance Costs incurred by an average Enterprise in 2009
• In person-hours:
Total time spent on tax compliance of all staff
• In money:
Time cost X labor costs (salary and wages)*
* Beware: imputed salaries for business owners/managers can be very
problematic and can lead to very wide variation in valuations.
400 person-hours (50 business days),
which is
AMD 428 892 (~$1,181*)
8
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N * average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.
9
Ukraine: Most costly taxes for enterprises
Tax Average time, hours per year
VAT (including preparation of VAT
invoices)
650
Enterprise Profit Tax 280
Personal Income Tax 142
Social contributions 146
Unified Tax 65
Fixed Agriculture Tax 90
Time spent on tax accounting (analysis of tax legislation, tax
accounting, preparation of reports, paying taxes) of different
taxes in 2007 per average enterprise
10
Other expenses related to
compliance with tax in Ukraine
ExpensesAverage costs per
enterprise*, UAH
Average costs per
sole proprietor*, UAH
Accounting software1500 498
Consulting and legal database,
tax literature, consultations and
seminars etc.
1000 279
Tax templates, books and other
tax reporting forms
350 83
Registers for settlement
transactions
700 842
Total average: 3600 394
Average costs calculated among enterprises and sole proprietors who incurred
these costs
11
Nepal: 84 percent of eligible taxpayers don’t file for VAT Refund
Dont know1%
Eligible7%
Not Eligible
92%
1. Eligible for VAT Refund (N=517)
Applied16%
Not Applied
84%
2. Applied for VAT Refund (N=50)
50.3
31.2
50.7
9.0
4.2
Complicated formalities for rebate
Not worth because the rebate amount was too small
We would not get the rebate anyway
Might induce a tax audit in our enterprise
Other (please, specify)
Reasons for Not Demanding VAT Refund in Cash
Approved
64%
Disapproved
24%
Still in process
12%
3. Status of application (N=19)
Received fully33%
Received partially
67%
4. Received VAT refund(N=13)
12
TCCS TEND TO BE VERY REGRESSIVE, AND A MAJOR BURDEN FOR SMALL BUSINESSES
13
Developed country TCC/turnover
0.1 0.06 0.090.090.0060.02
-1
4
9
14
19
24
15 44 103
215
430
549
1,31
8
1,90
3
81,8
98
189,
874
316,
456
Turnover in 000 USD
Tax C
om
plian
ce C
ost
as a
perc
en
tag
e o
f tu
rno
ver
(scale
fo
r
New
Zeala
nd
)
Canada United Kingdom Netherlands New Zealand
14
14
Regressive Compliance Costs –South Africa (Pre reform)
Compliance Burden for preparation of tax returns as
a percent of turnover (firms registered/not registered
for VAT; mandatory at R300,000)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.15 0.3 0.65 3.5 10
Turnover (in R million)
% o
f tu
rno
ve
r
Firms registered for VAT
Firms not registered for VAT
Source: FIAS Tax Compliance Cost Survey South Africa, 2007
15
Country-specific examples of TCC/turnover
0
2
4
6
8
10
12
14
16
18
20
Tax C
om
pli
an
ce C
os
t as a
pe
rcen
tag
e o
f tu
rno
ver
Turnover in 000 USD
South Africa Armenia India (Bihar) Georgia
16
Nepal – threshold may be too low
3.43%
0.87%
0.48%
0.32%
0.55%0.43%
0.19% 0.09% 0.05% 0.10%0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
30,001 -100,000
100,001 -500,000
500,001 -1,000,000
1,000,001 -2,000,000
2,000,001 -5,000,000
5,000,001 -10,000,000
10,000,001 -50,000,000
50,000,001 -100,000,000
100,000,001 -
250,000,000
Above 250,000,000
Tax Compliance Cost vs Revenue of Business
VAT
Thresh-
hold
17
WHAT CAN REDUCE TAX COMPLIANCE COSTS FOR SMALL BUSINESSES?
SIMPLIFIED TAX REGIMES?
18
Peru – Tax Regimes / Turnover
39.6%
86.3%
68.8%
25.5%
16.8%
8.6%
23.2%
16.0%
43.6%
5.1% 8.0%
58.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All Regimes RUS RER RG
Regime of client
More than S/. 360,000
S/.150,001 - S/.360,000
Less than S/. 150,000
1949 175 388 1386
19
Advantages and disadvantages of simplified regimes – Peru: reasons offered …
0% 10% 20% 30% 40% 50%
does not allow for client's
economic activiy
net income >S/.500,000
fixed assets >S/.126,000
client's expectations to grow
above S/.500,000
requirements are too difficult
to comply
do not know about this
regime
other reasons
0% 10% 20% 30% 40% 50%
did not advise
easiest regime
to understand
only regime for
which client is
eligible
the only regime
that allows
client to grow
lowest tax
compliance
cost
allows to emit
all invoices
other reasons
….Not to file under RER … to File
under RG
N=1302 n=1289
20
The simplified regime in Ukraine appeared to broaden the Tax Net…
Table 5: Ukraine’s Presumptive Tax System
Year Unified/Single tax Number of
special trade
patents
purchased
(units)
Number of
fixed tax payers
(‘000)
Legal entities (‘000) Natural
persons (‘000)
1999 28.6 66.1 16,873 318
2000 66.6 182 7,411 327.4
2001 91.7 345.1 6,986 339.3
Source: Barbone and Sanchez (2003)
21
… but it was still no panacea
Table 6: Registered Enterprises in the Presumptive Tax System
Enterprise size Number of employees
Estimated number of enterprises
Estimated employ-
ment
Estimated percentage
of regis-tration
0 (Sole entrep-reneur)
2,651,433 2,651,435 24.6
Small 1 to 5 148,976 516,947 37.6
6 to 10 104,608 850,460 94.1
11 to 50 123,757 3,189,226 99.5
Medium 51 to 250 33,169 4,206,444 99.5
Large more than 250
10,851 9,822,542 99.4
Total 3,073,244 21,237,054 -
Source: Thiessen (2001)
22
Why offer a simplified regime? Compliance capacity is often low: e.g., in Yemen
23
WHAT ELSE CAN REDUCE TAX COMPLIANCE COSTS?
TAX SOFTWARE, E-FILING AND OTHER TAX I.T.
24
Use of computers and Internet for
business purposes in Armenia
24
46.7%
16.8%13.5%
23.0%
Using business owned
computer only
Using personally
owned computer only
Using business as
well as personally
owned computers
No, do not using
computer
73.2% of enterprises who used computers had internet
connection
Enterprises
7.9% 8.5%1.6%
82.6%
Using business owned
computer only
Using personally
owned computer only
Using business as
well as personally
owned computers
No, do not using
computer
70.8% of sole proprietors who used computers had internet connection
Sole proprietors
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N
25
25
Accounting Software is not used at the majority
of micro and small enterprises in Armenia …
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N
55%52%
34%
18%
8%
41%
26% 24%
34%
20%
13%
25%
19%
24% 32%
62%
79%
34%
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 million
More than 58.35 million (Large
taxpayers)
Average for all enterprises
Annual turnover of enterprises, AMD
Manually PC using non specialized software PC using specialized software
26
26
…and is even less common among sole
proprietors in Armenia
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N
99.2%95.6%
85.8%
76.6%
91.4%
.0% 1.7%
10.6%15.1%
5.2%.8%
2.7%
3.6%8.3% 3.4%
up to 1,000, 000 1,000,001 – 2,000,000 2,000,001 – 5,000,000 More than 5,000,000 Average among all SPs
Annual turnover of enterprises
Manually PC using non specialized software PC using specialized software
27
Ways of submitting tax reports in Armenia
27
21.6%
78.4%
On paper via post
On paper in person
The most recent way of submission,share of sole proprietors
Sole proprietors
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
NThe most popular answer among those who submitted tax reports on
paper in person is – “it was the most reliable way”
2.2%
36.6%
61.3%
Electronically via internet
On paper via post
On paper in person
The most recent way of submission, share of enterprises
Enterprises
28
OUTSOURCING VERSUS IN-HOUSE TAX COMPLIANCE
29
20
13
9
6
9
11
44
56
48
49
42
46
35
31
43
45
49
43
45
41
33
30
26
34
Less than R300K
R300K to R1000K
R1000K to R6000K
R6000K to R14000K
Over R14 million
Total
Completely outsourcing Partially outsourcing Not outsourcing at all Outsourcing index
Outsourcing patterns in South Africa
Small and large businesses are more likely to outsource than medium sized
businesses
30
Why outsourcing is and is not used in South Africa
9
Reasons for the decision …
It costs too
much to
outsource
10%
Have
sufficient in-
house tax
expertise
80%
It is not
difficult to
complete
tax forms
for my
business
10%
It is difficult to
keep up-to-
date with
changes in
Tax laws
7%
Other
1%
No time to do
it internally
10%
Tax is a
specialist field
73%
Tax expertise
of my current
Tax
Practitioner
9%
to outsource or not to outsource
31
Cost of tax compliance for those who fully outsource versus those who do everything in-house in South Africa
0 10000 20000 30000 40000 50000 60000
Less than R300K
R300K to R1000K
R1000K to R6000K
R6000K to R14000K
Over R14 million
Total
Full outsourcing Full in house
32
Cost of partial outsourcing versus no partial outsourcing in South Africa
0 10 20 30 40 50 60 70 80 90
Less than R300K
R300K to R1000K
R1000K to R6000K
R6000K to R14000K
Over R14 million
All turnover groups
Turn
over
gro
ups
Cost of tax compliance - thousands of Rands
No partial outsourcing Some partial outsourcing Total
Cost of partial outsourcing is significantly higher than either doing
everything in house or fully outsourcing everything.
33
TAX INSPECTIONS AND OTHER VISITS
34
Ukraine - High incidence of inspections
35% 37%
50%
73%76%
42%
32% 30%
36%
48%
60%
35%
29% 31%
40%45%
48%
32%
less than UAH
300 000
UAH 300 000 -
UAH 1 million
UAH 1 million -
UAH 5 million
UAH 5 million -
UAH 35 million
over UAH 35
million
Ukraine
(average)
Anuual turnover, UAH
% o
f in
sp
ecte
d c
om
pan
ies
tax authority Pension fund social insurance funds
35
Length of KRA inspections – registered
businesses in Kenya
5%
10%
1%
20%
65%
0% 20% 40% 60% 80%
More than 10
6 to 10 hours
4 to 5 hours
2 to 3 hours
1 Hour or Less
36
36
South Africa: Incidence of inspections by region
VAT related inspections seem to be more frequent than inspections related to other taxes
0.9
3.0
1.9
1.5
1.8
1.4
1.3
1.5
1.6
1.7
1.7
0.5 1.5 2.5 3.5
Northern Cape
Freestate
North West
Mpumalanga
Gauteng
Kwazulu Natal
Eastern Cape
Western Cape
Limpopo
Mean by respondents
Mean by provinces
2.2
1.7
4.4
5.7
3.3
3.2
2.1
2.7
1.6
3.1
3.0
0.5 1.5 2.5 3.5 4.5 5.5
6.2
4.3
1.7
0.5
2.0
1.5
2.4
1.1
2.2
2.3
0.5 1.5 2.5 3.5 4.5 5.5 6.5
Income tax VAT Employees’ tax
37
Georgia: Control of Proper Usage of Cash Registers is the most Frequent Type of Tax Inspection
37
0.1
0.1
0.3
0.0
0.8
0.5
0.1
2.5
0 1 2 3
Desk tax audit
Planned field tax audit
Unplanned/control field tax audit
Chronometrage
Controlling purchases
Visual Inspection
Stock-taking/inventory
Control of cash register usage
Frequencies of Different Types of Tax Inspections per Inspected Firm
38
Georgia: Penalties & Fines are the Most Common Negative Events Associated with Tax Inspections
47%
30%
10%
0%
1%
45%
21%
12%
2%
0%
66%
33%
30%
3%
1%
50%
28%
14%
1%
1%
0% 10% 20% 30% 40% 50% 60% 70%
Penalties and/or fines
Wasted time of employees
Closure or delay in operations
Necessity of unofficial costs
Confiscation of goods
Negative Events Associated With Tax Inspections Experienced by Inspected Respondents in 2009
Micro Small Medium Overall
38
39
INFORMAL BUSINESSES AND THEIR PERCEPTIONS ABOUT TAX COMPLIANCE
40
Lack of information can be a substantial problem :
e.g., Kenya, where they know they need a license…
40
94%
6%
Yes
No
Non-registered businesses in Kenya: Are
you required to have licenses? (Correct
answer – YES)
41
… but don’t seem to understand they are required
to get registered for tax!
41
24%
77%
Yes
No
Non-registered business in Kenya: Are you
required to pay taxes? (Correct answer: YES)
4242
Reasons for not registering with Kenya
Revenue Authority
0% 20% 40% 60% 80%
My businesses profit margin is too low to pay for …
Registration would impose excessive tax financial …
I simply do not see any benefit
Tax compliance is too difficult
Registration would result in tax administration …
Lack of information about "what and how to do it"
Most businesses don't, why should I?
The products are already taxed
Weak enforcement/ no punishment
No local government office
Top reasons not to pay or file for taxes
43
Disadvantages of not registering with KRA
0% 10% 20% 30% 40% 50% 60%
Need to pay bribes to avoid "formal" procedures
Fear of government retribution
Limited access to finance (loans)
Inability to sell to/buy from formal enterprises
No access to and insecurity of premises/land/legal rights
No tax reclaims
No access to Government programs
No access to broader market
Limited access to raw materials
Large labor turnover/limited skills development
No inspections
Theft by employees/suppliers/buyers
No disadvantages whatsoever
Others
44
44
Informality comes with significant costs for many firms – evidence from Yemen
• Percentage of informal Yemeni businesses facing costs to avoid
tax payments/ remain informal
Source: FIAS Tax Compliance Cost Survey in Yemen, 2008
45
Reported incidence of bribes to tax officials by formal businesses in Yemen (%)
37 39
68
4138
0
10
20
30
40
50
60
70
Micro Small Medium Large Total
46
WHO AMONG INFORMAL BUSINESSES MIGHT BE WILLING TO FORMALIZE?
A CASE STUDY FROM SOUTH AFRICA
47
S. Africa - Likelihood of registering for tax (by sector) among informal businesses
34
22
34
38
66
78
66
62
0 20 40 60 80 100
Total
Agriculture,
construction,
manufacturing
Trade
Services
Sec
tor
Percentage of informal businesses likely or not likely to register for tax in the next 2
years
Not likely/Neutral Likely
48
Record keeping and likelihood of registering
66
75
63
50 55 60 65 70 75 80
Total
Keeping complete
financial on paper or
computer
Not keeping complte
financials
Rec
ord
keep
ing
prac
tices
Percentage of informal businesses likely to register
49
Renters are more likely to formalize
66
62
65
74
59
50 55 60 65 70 75 80
Total
Same premises
w here you live
Separate premises -
ow ned
Separate premises -
rented
Place of business
changes
Pla
ce o
f bus
ines
s op
erat
ion
Percentage of informal businesses likely to register
50
Location vis-à-vis SARS office and likelihood of registration
66
75
67
57
50 55 60 65 70 75 80
Total
30 minutes or less
More than 30 minutes
Doesn't know w here
SARS off ice is
Dis
tanc
e to
SAR
S of
fice
Percentage of informal businesses likely to register
51
View of government services and likelihood of registration
64
57
80
50 55 60 65 70 75 80 85
Total
Disagree
Agree
Atti
tude
: Gov
ernm
ent g
ives
a g
ood
retu
rn o
n ta
xes
paid
Percentage of informal businesses likely to register
52
Perceived ease of bookkeeping and likelihood of registration
3.2
2.8
2.4
3.8
3.4
2.6
2 2.5 3 3.5 4
Keep the accounting
records and books for
the business
Fill out and submit tax
forms
To be able to hire and pay
for a
bookkeeper/accountant
to prepare tax returns
Boo
kkee
ping
and
tax
acco
untin
g re
late
d ta
sks
Average score on 1 - 7 scale, 1 being "very diff icult", 7 being "very easy"
Not likely/Neutral to register Likely to register
53
Perceived ease of tax compliance and likelihood of registration
3.2
3.2
3.9
3.9
2 2.5 3 3.5 4
The required skills and
expertise
The cost to your
business
Bus
ines
s ca
pabi
lity
for
tax
com
plia
nce
in te
rms
of...
Average score on 1 - 7 scale, 1 being "Not at all capable", 7 being "completely
capable"
Not likely/Neutral to register Likely to register
54
TAX MORALE AND TAX EVASION
55
Tax morale (agreement with statement, scale 1 – 5) in Yemen, 2008
56
Percent of taxes businesses say they “get back” through government services in Yemen
57
Estimated profit reported for tax purposes in Yemen
48 29 8 15
53 17 13 16
26 46 2 26
53 30 4 12
46 27 10 16
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Micro
Small
Medium
Large
Total
Gro
ups b
y t
urn
over
and s
ize
25% or less 26% - 50% 51% - 75% 76% - 100%
58
Armenia: Tax evasion
The main popular ways of tax evasion for
enterprises and sole proprietors*
1.5%
5.1%
7.4%
8%
26.0%
52.4%
No way
Fraudulent abuse of tax privileges
Use fiction firm
Overstate of costs
Payment of unofficial salary
Declare only part of the revenue
Enterprises
Among the share of respondents who reported at least one way of tax evasion
58
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N
59
Armenia: Tax evasion
What allows evading of taxes?*
* The share of respondents who reported at least one reason
59
D
R
A
F
T
F
O
R
D
I
S
C
U
S
S
I
O
N
.6%
2.6%
7.7%
8.1%
25.7%
55.2%
Nothing
Small amount of penalties
Incompetence of control authorities
Bad control system
Possibility of conclusion unofficial agreement with control authorities
Fallibility of legislation
Enterprises
60
Businesses with Bank Accounts
Percent of businesses with a bank account in Nepal
0
20
40
60
80
100
120
Less than Rs. 2 Million Rs. 2 to 10 Million Rs. 10 to 250 Million
Turnover
Perc
en
t o
f B
usin
esses
Yes
No
61
For businesses with bank account, percent of transactions using cash - Nepal
62
PERCEPTIONS ABOUT TAX OFFICIALS
63
Kenya: KRA perceived as relatively uncorrupt
Corruption presence by office
37%
21%
17%
9%
9%
7%
6%
3%
2%
2%
2%
1%
1%
1%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Local government Offices
None
License Offices
Inspection officers
Police
Government Offices
Everywhere
KRA
Others
Health
Busy Town Centers
Ministry of Immigration
Ministry of Land offices
Judiciary
64
Kenya - Perception of KRA - competence
64
65
Perception of KRA - helpfulness
65
66
Perception of KRA - fairness
66
67
RESEARCH AGENDA FOR TCCS
68
Hypotheses to be tested:
• Simplified tax regimes can reduce TCC for small
businesses
• Accounting software and e-filing can reduce TCC
• E-filing and e-payment can reduce opportunities
for corruption
• Risk-Based Audit can reduce TCC and
opportunities for corruption
• What else???