Paying Taxes The global picture
World Bank Group PricewaterhouseCoopers LLP
Simeon Djankov Bob Morris，Caralee McLiesh Susan Symons，Rita Ramalho John Whiting
The World Banks Doing Business Project and PricewaterhouseCoopers LLP are delighted to share with you the results of a survey which has been conducted as part of the World Bank Doing Business report (www.doingbusiness.org/taxes) to look at and compare tax regimes around the world. The results focus on the need for governments to ensure the effectiveness of the tax systems they implement, and for companies to appreciate the benefits of making tax reporting more transparent.
The effectiveness of a tax system relies on well-informed policy decision-making and the ability of businesses to comply with legislation. This publication considers improvements from the perspective of both government and business.
The conclusions are based on the findings of a survey on paying taxes which looked at the position of a standard modest-sized company in each of 175 countries. The work was carried out by the World Bank during the months of April to July 2006, with the support of PricewaterhouseCoopers LLP in terms of tax technical data and the methodology to be applied for the calculation of total tax rate. The survey represents a significant step forward in facilitating a comparison of the worlds tax regimes. We aim to build on the foundation laid, and to further improve this information in the future.
This publication sets out the results of the survey. It provides commentary by the World Bank and by PricewaterhouseCoopers LLP on the findings and presents some thoughts on the way forward for greater transparency in tax reporting.
We hope you will find this interesting and would welcome your feedback.
World Bank and PricewaterhouseCoopers LLP.
Simeon Djankov，Manager, Monitoring and Analysis，World Bank Group，
Susan Symons，Tax Partner， PricewaterhouseCoopers LLP
Taxes are essential to finance public services but there are good and bad ways to collect them.
The design of the tax system can have significant economic impacts and can influence multinationals in deciding where to invest. Tax regimes with relatively high marginal rates and which include a number of exemptions and allowances tend to be less economically efficient in relation to encouraging employment, saving and investment. Such regimes generally also impose higher tax compliance and administration costs. Evidence suggests that simpler tax systems promote economic growth and can help achieve a win:win for governments and industry.
Burdensome tax systems can be a deterrent and can lead to tax evasion. Companies in 90% of surveyed countries rank tax administration among the top five obstacles to doing business. The main factors contributing to this are:
. the large number of business taxes to pay;
. lengthy and complex tax administration;
. complex tax legislation; and
. high tax rates.
To help with paying taxes and implementing reform, governments and tax authorities need to consider all aspects of a tax system. All taxes borne and collected by businesses should be recognised along with the related tax compliance costs - the Total Tax Contribution.
Currently there is too much focus on corporate income taxes alone when considering reform. The Doing Business survey data shows that on average corporate income taxes only account for 36% of the Total Tax Rate, 11% of the number of tax payments made and 25% of the compliance time. The reason for this is that there is insufficient information available in the public domain on the Total Tax Contribution. Corporate reporting standards are geared towards corporate income taxes and there is little or no information available on the other business taxes which impact on companies.
The risk is that in discussions on reform these other business taxes are neglected or at worst overlooked. The increasing global trend to replace direct with indirect taxes underlines this issue.
This survey seeks to better inform the debate on reform. Better information around the Total Tax Contribution will encourage a clearer understanding from governments and help facilitate the appropriate steps that need to be taken.
Transparency is key. Governments need to be accountable for how taxes are spent. Businesses will potentially be more willing to pay taxes if they can see the benefits of improved public services and infrastructure. Businesses need to understand and communicate their Total Tax Contribution, so that they are more able to manage and control it and demonstrate the full extent of the contribution made to public finances.
Better information can be achieved through the systematic collection and reporting of data on the Total Tax Contribution, combined with regular consultation and dialogue between businesses, government and the tax authorities.
The Paying Taxes survey is carried out as part of the World Banks Doing Business report, which compares business regulations in 175 countries. It was originally launched in the 2006 report (published in September 2005). The results of the second survey (2007) were published in September 2006. PricewaterhouseCoopers LLP provides the tax technical data for the survey.
The concept of the Total Tax Rate has been a key element of both of the surveys. In the 2007 report the methodology applied to calculate the Total Tax Rate for each country has been updated so that it is aligned with the broad principles from the PricewaterhouseCoopers LLP Total Tax Contribution framework (see Appendix 1 for further details). Two additional indicators of tax contribution are measured by the Doing Business Project, which are related to administration and compliance.
The study involved gathering information on all business taxes borne by companies in 175 countries, by reviewing the financial statements and a list of transactions of a standard modest-sized business called TaxpayerCo. (See Appendix 2 C Data notes, for a further explanation of the methodology).
In outline, the business started with the same financial position in every country. Respondents were asked for details of the total tax that the business must pay and the process for doing so. All taxes - from corporate income tax and mandatory social security contributions paid by the employer to advertising or environmental tax - and all applicable deductions and exemptions are taken into account in determining the total tax contribution. Sales and consumption taxes are not included as part of the analysis to calculate the Total Tax Rate, as they are not considered to be borne by the business.
The recognition of Total Tax Rate as a key component of the ease of doing business, is a significant enhancement to the Doing Business report. It enables companies and governments alike to appreciate the full extent of businesses tax contributions globally. This in turn enables both governments and businesses to make better informed policy and risk management decisions.
Section 1: Paying taxes around the world
Who makes paying taxes easy and who does not?
By Caralee McLiesh and Rita Ramalho, Doing Business Project, World Bank
Tax collection has long been a despised activity. But taxes are essential. Without them there would be no money to build schools, hospitals, courts, roads, airports or other public infrastructure that helps businesses and society to be more productive and better off.
Still, there are good ways and bad ways to collect taxes. Imagine a modest-sized business C TaxpayerCo C that produces and sells consumer goods. In Hong Kong the business pays one income tax, one labour tax, one property tax and one fuel tax totalling 29% of profits. It takes 80 hours to comply with tax requirements. Meanwhile, in Belarus TaxpayerCo is subject to 12 taxes, including an income tax, sales tax, value added tax (VAT), transport duty, three labour contributions, land tax, property tax, ecological tax, fuel tax and a turnover tax where taxes are paid on inputs and again on outputs. Despite many deductions and exemptions, required payments add up to 186% of profits - which in an extreme case could lead to business failure or tax evasion. The business would make 125 tax payments to three agencies, all by paper, and spend 1,188 hours doing so. Tax refunds would take two years to process. This complexity and delay make Belarus tax system among the worlds most burdensome. Most companies cant afford to declare all their output, and 42% of business activity therefore goes unrecorded.
The results of the Doing Business survey on Paying Taxes show the full breakdown of taxes that an average business pays. For example, in Tunisia social security contributions paid by the employer amount to 16% of gross salaries, which is equivalent to 18.6% of commercial profits (Table 1.1). On top of that, the company pays jointly with social security contributions, and an accident insurance of 3.8% of gross salaries, that is 4.4% of profits. There are two additional labour taxes paid by employers of 1% gross salaries each - the FOPROLOS (social housing tax) and the TFP (professional labour tax). Both taxes amount to 2.4% of profits. After taking into account deductions and exemptions, the corporate income tax is 35% of taxable income - equivalent to 11.1% of profits. The company also pays FODEC (industrial development competitiveness tax), which is 1% of turnover and therefore 18.2% of profits. Additionally the business pays TCL (local municipality tax), and small taxes such as vehicle tax and stamp duty, which amount to 4.3% profit. Thus tax payments total 59% of profits, leaving TaxpayerCo with only 41% to invest in new products and distribute to shareholders.
Table 1.1: Paying taxes in Tunisia
a) - Data not collected， b) - VAT is not included in the Total Tax Rate because it is a tax levied on consumers，c) - Very small amount， d) - Paid jointly with another tax， Source: Doing Business 2007，
Arguments for business tax reform usually emphasise corporate income tax rates. But corporate income taxes are only a small share of the total business tax contribution C close to a third on average. For example, Argentinas profit tax is 9% of total taxes, while social security contributions paid by employers account for 26% and turnover and financial transaction taxes account for almost 62%. Moreover, the corporate income tax is just one of 34 required payments. Simplifying the other 33 payments spread over 11 separate taxes would go a long way towards reducing the tax burden on businesses. Latvia is another example: social security and other labour contributions account for 66% of the tax burden, whereas profit taxes account for 21%.
Around the world, corporate income taxes account for an average of 36% of the tax burden on businesses. They also account for only four of 35 business tax payments (Figure 1.1). In several Eastern European countries simplification has not had the desired impact on perceived business obstacles, in part because it focused on income tax only1.
Figure 1.1: Corporate income tax accounts for only part of the tax burden
Administrative requirements are also a burden in many countries. Firms in 90% of surveyed countries rank tax administration among the top five obstacles to doing business. In several C including Bangladesh, Cambodia, the Kyrgyz Republic, Russia and Uzbekistan C working with the tax bureaucracy is considered a bigger problem than tax rates2.
To measure these administrative burdens Doing Business and PricewaterhouseCoopers LLP recorded the number of payments TaxpayerCo would have to make to tax authorities, as well as the time required to prepare and file tax payments. Norway collects 46% of companies gross profit using three taxes filed electronically. In contrast, it takes 16 taxes and 59 interactions with the tax authorities to collect 53% of gross profit in the Philippines. In Ukraine it takes 98 payments and 2,185 hours a year, compared with only 11 payments and 104 hours in Estonia.
To comply with tax regulation, businesses in the 175 economies covered in this study submit, on average, 35 pages of tax returns a year C equivalent to 100,000 trees a year, even after accounting for the few countries where business taxes can be filed electronically3. In Cameroon the average annual tax return for businesses is 172 pages, in Ukraine, 92 and in the United States, 64.
Such complicated tax systems can lead to high evasion, even when rates are low. For example, although taxes in Peru are low by Latin American standards, evasion is a problem because it takes 74 days and 53 payments to fulfil tax requirements. In Brazil, the average business spends 455 days a year to comply with taxes C because there are, on average, 55 changes to tax rules a day4. Keeping up to date on tax law isnt easy.
Table 1.2 on page 09 ranks countries on the ease of paying taxes and is based on the average of the country rankings on total taxes, number of payments and time required to comply. Some countries at the top of the list are of no surprise C tax havens like the Maldives and St Lucia, and Middle Eastern countries like Oman, United Arab Emirates and Saudi Arabia, where the government relies on oil revenue to fund spending. However others, such as Ireland, Singapore, Switzerland and New Zealand, are less expected. Several Nordic countries perform better once all business taxes are taken into account and administrative burdens are considered C Iceland ranks 13th, Denmark ranks 15th and Norway ranks 16th. Perhaps this reflects the efforts already made by Nordic countries to push an overall government-tobusiness simplification agenda to reduce regulation, using a Standard Cost Model (SCM). The UK has embarked on a similar exercise.
1, Engelschalk (2004).
2, World Bank Investment Climate Survey database, available at http://rru.worldbank.org，
3, A grown tree produces, on average, 80,500 sheets of paper. There are about 250 million formal businesses in the world.
4,Folha de S.o Paulo, Pas edita 55 normas tributarias por dia, May 7, 2006.
On average, Middle Eastern and East Asian countries make paying taxes the easiest. Latin American countries impose the heaviest burdens, mainly because of high compliance costs. Africa follows, largely because of high taxes. The Organisation for Economic Co-operation and Development (OECD) countries impose the smallest administrative burdens and charge moderate tax bills.
Richer countries tend to have lower business taxes and less complex tax administration processes. Simple, moderate taxes and fast, cheap administration mean less hassle for business C as well as higher revenues.
In contrast, poorer countries tend to use business as a collection point, charging higher business taxes.
Table 1.2: Where is it easy to pay taxes -and where not?
Corporate income taxes versus the total tax contribution
By Susan Symons, PricewaterhouseCoopers LLP
As mentioned in the previous chapter, arguments for business tax reform usually emphasise corporate income tax rates. However, corpoorate income taxes are only asmall share of the total business tax contribution.
Figure 1.2 below illustrates that the differential between the total tax rate and the corporate income tax rate exists for most countries covered by the survey, while Figure 1.3 identifies the 20 countries where this differential is greatest.
It is interesting to note that while some of the largest differentials can be found in Africa (in countries like Sierra Leone and the Congo Democratic Republic), the biggest examples also extend to other continents in countries like Argentina, India, China and notably in France and Belgium.
Figure 1.3: Countries with the largest differential Total Tax Rate (TTR) versus corporate income tax
Figure 1.2: Corporate income tax as a percentage of profit before business taxes compared to other business taxes as a percentage of profit before business taxes
Source: Doing Business 2007
Figure 1.4 below analyses the data from a regional perspective, and further demonstrates that this is not just a feature for developing countries but applies similarly to other regions both geographically and economically. The full details by country for this comparison are shown in Figure 1.2 (See also data tables in Appendix 2).
Figure 1.4: TTR versus corporate income tax C the regional perspective
Source: Doing Business 2007
According to the survey data overall, corporate income taxes in fact account on average for only 36% of the total tax rate, 11% of the number of payments made, and 25% of the compliance time.
In this connection it is also interesting to take note of the number of business taxes that there are. For example, according to the survey, companies in Switzerland have 11 business taxes, and Belarus 9, and these numbers are of course limited by the assumptions made for the company used in the model.
Recent independent empirical work conducted by PricewaterhouseCoopers in the UK shows that there are up to 21 UK business taxes that companies may have to bear in addition to corporate income tax, with labour taxes, property taxes and irrecoverable value added tax being the most significant of these as illustrated in Figure
1.5. The other taxes include various sector-specific levies and an increasing number of environmental taxes aimed at behavioural change, including the congestion charge levied in London. The work has shown that on average the largest UK companies each bear 9 business taxes.
Figure 1.5: UK business taxes
Source: PwC survey for the Hundred Group
In Australia PricewaterhouseCoopers studies undertaken show that companies may have to deal with many more business taxes, in some cases more than 50, because of the various taxes each State levies in addition to those operating at Federal level and those applied locally for example the Fire Brigade levy.
In addition countries that appear to be tax havens because of the lack of corporate income tax C ranging from Estonia to the Marshall Islands C usually ensure that businesses contribute significantly to government coffers in other ways, typically high employment taxes (employer contributions) or operating licence fees. The World Bank survey shows a Total Tax Rate of 50.2% for Estonia and 66.6% for the Marshall Islands.
So far, this section has drawn attention to the other business taxes which companies have to bear C the taxes which directly affect their profitability and which therefore contribute to the calculation of the Total Tax Rate. But the taxes which companies collect on behalf of governments should not be forgotten. These are taxes which companies are obliged to collect but which are not ultimately borne by companies but which are instead borne by the consumer. For companies their impact is in relation to administrative and compliance cost, and is also commercial to the extent that they impact on the companys prices. The UK work referred to above found that in the UK there are potentially 13 taxes collected by the largest companies and the experience is that on average 5 have to be complied with.
Among the most prominent examples of such other business taxes are employment taxes (levied on the employee), and indirect (or consumption) taxes such as value added tax (VAT)/goods and services tax (GST), and environmental taxes. These taxes are increasingly being used by governments to collect the revenues that they need to fund public services and the trends indicate specifically that governments are looking towards VAT/ GST5 as the major source of tax revenue for the future. If this trend continues and indirect taxes become the most prominent form of taxation in the next 10 to 20 years, then there is clearly a need for governments to consider these taxes as part of the reform agenda. As a key role for businesses is to collect these taxes on behalf of governments, so the costs of administration and compliance need to be factored into the decision over whether reform is necessary. Consultation with business is essential.
So the evidence clearly suggests that it would be short sighted for the tax reform agenda for government to focus only on corporate income taxes. To do so ignores the fact that there are many other business taxes which together (and often even in isolation) represent significant components of the total tax contribution. Focusing solely on corporate income tax can lose sight of the value that the country gets from the multiplier effect of the wider tax contribution.
Currently, corporate income taxes are the primary focus of government decisions over reform. This is largely due to the fact that todays corporate reporting standards generally home in on corporate income taxes and, typically, the disclosures in the company accounts are around corporate income taxes paid or provided on business profits. There may also be some disclosure around employers social security costs. However, until recently there has been little data in the public domain about other business taxes borne or collected by companies. There has certainly been nothing that brings them all together. The risk is therefore that these other business taxes are neglected in the reform debate or at worst, overlooked.
The onus is therefore on businesses to increase transparency around their total tax contribution, including all the taxes they pay and collect, as well as the time taken and cost of administration and compliance. In this way, governments (and other stakeholders) will be able to take on board the full picture when considering reform.
5, This concept includes VAT and GST but does not cover sales taxes, customs duties or excise type taxes，
Section 2: Is there a need for reform?
Why reform tax systems?
By Caralee McLiesh and Rita Ramalho, Doing Business Project, World Bank
Governments impose taxes to finance public services. But taxes must first be collected and high tax rates do not always lead to high tax revenues. Between 1982 and 1999 the average corporate income tax rate worldwide fell from 46% to 33%, while corporate income tax collection rose from 2.1% to 2.4% of national income6. This outcome was achieved because more businesses entered the formal economy and because tax exemptions and other tax incentives were reduced or eliminated.
Poorer countries try to levy the highest amount of tax on businesses. Some claim that these high taxes are needed to fund public services and correct fiscal deficits. The evidence suggests otherwise. Higher rates typically do not lead to higher revenues in poor countries (Figure 2.1). Instead they push businesses into the informal economy. As a result the tax base shrinks and less revenue is collected7.
Figure 2.1: Taxes and revenue C unrelated in poor countries
Source: Doing Business database, IMF (2005), WDI (2005)
A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate. Russias large tax cuts in 2001 did exactly that. Corporate tax rates fell from 35% to 24%, and a simplified tax scheme lowered rates for small business. Yet tax revenue increased - by an annual average of 14% over the next three years. One study showed that the new revenue was due to increased compliance8.
Reducing tax rates has been a trend in other Eastern European and Central Asian countries. Most reformers -Armenia, Bulgaria, Estonia, Kazakhstan, Slovakia - have seen tax revenues rise. The larger the share of informal business activity before reform, the higher the revenue growth after.
More recent reformers have shown similar results. Ghana exceeded its mid-year revenue targets despite significant cuts in corporate tax rates in the last two years. Albanias corporate tax revenue rose 21% after the rate was cut, while in Moldova it jumped 28% and in Latvia, 37%. In Romania, budget revenues grew 8% in real terms in the first quarter of 2005 relative to the same period in 2004, despite the new flat tax. Economic growth in these countries is a factor in the increased revenues. But compliance is also up.
Lower rates work best when their administration is simple. They are undermined by exemptions that shrink the tax base. Tax revenue has fallen in Uzbekistan, where the enthusiasm for income tax cuts was not matched by efforts to improve tax administration and expand the tax base.
Businesses are more willing to pay taxes if they see that the money is used to improve public services. Yet many developing countries with high tax rates fail to improve business infrastructure or education and training C two things that employers care about (Figure 2.2). Across countries, higher taxes payable are not associated with better social outcomes, even allowing for country income levels. They do not increase government spending on health and education, raise literacy or life expectancy or lower child mortality, nor are they associated with better infrastructure and other public services9.
6, Hines (2005)
7, A similar result holds between fiscal regulation and economic growth. See Loayza, Oviedo and Serven (2004)
8, Ivanova, Keen and Klemm (2005)
9, Based on analysis of Doing Business indicators with health, education and infrastructure indicators in the World Banks World Development Indicators (2005) and Global Competitiveness Report 2004C05 (WEF 2004). The results hold controlling for income per capita
Figure 2.2: Burdensome taxes, and still poor public services
Source: Doing Business database, WEF
Note: Relationships are significant at the 1% level and remain significant when controlling for income per capita
Figure 2.3: Burdensome taxes are associated with more services informality
Source: Doing Business database, Schneider (2005)
Note: Relationship is significant at the 1% level and remains significant when controlling for income per capita
Burdensome taxes do however generate other undesirable outcomes. They are associated with more informality, as entrepreneurs often choose to avoid the formal system altogether and operate underground (Figure 2.3). They also breed corruption. Businesses ranking in the bottom 30 countries on ease of paying taxes are twice as likely as those in the top 30 to report that informal payments are a problem. Every point of contact between a bureaucrat and an entrepreneur could present a danger of bribery and confusion on voluminous, often contradictory rules which may create room for discretion.
Simplifying the tax regime by reducing tax rates and eliminating exemptions is the main way to reduce corruption in tax administration. Georgia C which introduced major reductions in tax rates and simplifications to the tax system in 2004 C has seen a drastic fall in perceived corruption of tax officials. In 2005 only 11% of surveyed businesses reported that bribery was frequent, down from 44% in 2002. That was the sharpest drop in perceived corruption among the 27 transition economies10. Romania, another major reformer in 2004, and Slovakia, which introduced large tax reforms in 2003, also saw falls in perceived corruption: from 14% to 8% of surveyed businesses and from 11% to 5%, respectively. Growing evidence shows that tax reform creates more vibrant businesses. A smaller tax burden encourages firms to invest (Figure 2.4). One recent study found that a 10% cut in indirect taxes, such as VAT, may imply a rise in investment of up to 7%11. Businesses are happy with the change and responding by investing more, says Kenneth, an accountant, about corporate tax reform in Ghana. Moreover, such investment yields higher returns when taxes are streamlined. A study in India estimates that tax reform can increase productivity by up to 60%12.
10, World Bank (2006)
11, Desai, Foley and Hines (2004)
12, World Bank (2004)
Figure 2.4: Burdensome taxes are associated with less investment
It is not just businesses that gain from reform. Streamlining taxes also brings savings for government. A complicated tax system costs a lot of money to run C funds that could be better spent on education, health care and infrastructure. In Denmark, one kroner spent on tax administration generates 113 kroner of tax revenue. In Hungary, one forint produces only 77. In Mexico one peso produces only 33. Overall growth is also higher with lower taxes and better collection13. And with tax incentives aligned to encourage work, more firms and more jobs are created. One study shows a cut of one percentage point in corporate tax rates is associated with up to a 3.7% increase in the number of firms and up to 1.1% higher employment14. Tax reforms inspire political debate and can be hotly contested. But both business and government benefit when taxes are simple and fair and set incentives for growth.
13, Engen and Skinner (1996), Lee and Gordon (2004) and Slemrod (1995)
14, Goolsbee (2002)
The increasing burden of tax administration and compliance
By Peter Cussons, PricewaterhouseCoopers LLP
Tax administration and compliance can be a significant countries ranked by gross domestic product (GDP). The obstacle to businesses and need to be considered as part relative tax administration burden in each country was of the decision on reform. measured by the number of pages of primary federal tax legislation, as shown in Table 2.1. A recent study by PricewaterhouseCoopers LLP looked at the burden of federal tax administration for the top 20
Table 2.1: Federal tax administration burden
Source: PwC study June C July 2006. GDP information is based on 2004 figures taken from World Bank data as at April 2006, for more information visit: http://www.worldbank.org
Note: The study does not measure state and local taxes. Countries levy taxes at different political levels, which will affect the relative ranking.
The smaller but significant and growing economies of Ireland and Luxembourg were also surveyed and revealed equally interesting results. Ireland (GDP ranking 30/ $181,523m) had 4,250 pages of primary tax legislation and therefore a ranking of seven if incorporated into the above table. Luxembourg (GDP ranking 67/$31,864m) had 2,200 pages of primary tax legislation and therefore a ranking of 10 if incorporated into Table 2.1 (on page 16).
A first important finding to note is that the volume of primary federal tax legislation is not directly proportional to economic size. For example, the US, ranked number one in GDP terms, being almost three times the size of the next nearest economy (Japan) has just 5,100 pages of primary federal tax legislation compared with Japans 7,200 pages. Or India, with a lower GDP ranking of 10 but which has the most pages of primary federal tax legislation at 9,000.
Secondly, the volume of primary federal tax legislation is on the increase i.e. more new legislation is being enacted than repealed. In the UK over the past 10 years, the number of pages has more than doubled from approximately 3,700 to 8,300.
There are a number of reasons for this. In the UK, for example, the Tax Law Rewrite committee has rewritten most of the UKs income tax provisions in more user-friendly language. The necessity for this is perhaps best illustrated by a quote from Section 704, Income and Corporation Taxes Act (ICTA) 1988, as yet unreconstructed: That in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in Paragraph C (1) such a consideration as is therein mentioned. (Paragraph D (1) of the arcane Section 704 prescribed circumstances provisions in relation to anti-avoidance regarding transactions in securities).
Nonetheless, it is arguable that this process is responsible for a 50% increase in the length of the legislation that is being rewritten, and it should be noted that the Tax Law Rewrite process has as yet probably rewritten under a half of all UK primary tax legislation.
The Government may consider tax advisers (and perhaps business) as responsible by virtue of tax avoidance for much recent legislation. However, with the extension of the UK Tax Avoidance Disclosure (TAD) rules to all income tax, corporation tax and capital gains tax transactions as well as VAT and stamp duty/stamp duty reserve tax/stamp duty land tax, it is arguable that tinkering with the tax system by introduction of layer upon layer of anti-avoidance is leading to a situation where one transaction (e.g. borrowing in the UK) may require consideration of up to half a dozen differing blocks of anti-avoidance legislation or case law15.
A particularly worrying consequence is that with the sheer volume of tax legislation no one individual can possibly read all of it; and so the days of a tax director being confident of spanning all the relevant parts of the tax code seem to have all but disappeared. Similarly, at least as regards advising large to medium-size corporates, the ability of a single tax adviser to span all the relevant tax legislation is circumscribed, hence the increasing relevance of specialists and sub-specialists. This leads to an at least two tier market C those who can afford the necessary advice, and those for whom such advice may be of only marginal benefit on a cost/benefit analysis.
It is also leading to a situation where the primary tax legislation is being read by fewer and fewer people, and on the HM Revenue & Customs (HMRC) side in the UK, where there are nominated specialists for not only particular areas but nowadays even for a particular section or schedule.
On a brighter note, other countries such as Germany and France with economies that are comparable to (France) or even larger (Germany) than the UKs, appear to manage with considerably fewer pages of primary federal tax legislation. The PricewaterhouseCoopers LLP survey shows Germany with 1,700 pages putting the country in tenth place and France with 1,300 pages and in 13th place.
To conclude, many countries need to reflect on the likely deterrent effect of the ever increasing complexity of their tax legislation and the resulting probable reduction in their international competitiveness. Ultimately, when tax legislation becomes too voluminous, compliance drops more through ignorance than deliberate evasion, as the Paying Taxes survey illustrates.
15 Section 209 ICTA 1988: whether interest dependant on the results of the business and therefore a distribution; Paragraph 13 Schedule 9A FA 1996: loans for unallowable purposes; Schedule 28AA ICTA 1988: thin capitalisation and transfer pricing; Sections 24 to 31 Finance (No. 2) A 2005 and Schedule 3: anti-arbitrage provisions; Section 349 ICTA 1988 and SI1970/488: treaty clearance from UK 20% withholding tax; Ramsay/Furniss, post BMBF and SPI.
The effect of the tax system on the econom
By John Hawksworth, PricewaterhouseCoopers LLP
There is extensive research on the relationship between economic growth and tax regimes, with a broad range of findings. At the macroeconomic level, there is no simple relationship between the overall level of taxation (as a % of GDP) and long-term economic growth, although some econometric studies find evidence of a negative influence from high levels of taxation after correcting for other factors. But it remains a controversial area and other studies find little or no evidence of such a relationship.
Some studies find that, while the overall level of taxation may not be significant, the composition of taxation does matter, with greater negative impacts on growth from high levels of direct taxation (e.g. income tax and corporate profits tax) than indirect taxation (e.g. VAT and excise duties). But this needs to be weighed against the fact that direct taxation tends to be more progressive than indirect taxation.
It is also important to note what the extra taxes are used to fund: if, for example, they are used for transfer payments, then the net impact on long-term economic growth may be negative. However, the net impact could be positive if they are used to fund improvements in, say, education, transport and energy infrastructure and research and development (although these net impacts may be difficult to quantify if these benefits take a long time to come through). These relationships may also vary with the level of economic development of the countries concerned and, related to this, the quality of governance in these countries.
There is probably a greater consensus in the view that the design of the tax system can have significant microeconomic impacts. In particular, tax regimes with relatively high marginal rates and large numbers of exemptions and allowances tend to be less economically efficient in relation to encouraging work, saving and investment, as well as imposing higher compliance and tax administration costs. Tax regimes may also have particularly significant effects where they relate to internationally mobile physical, human or financial capital.
Attempts to impose internationally uncompetitive tax rates on these forms of mobile capital may be particularly damaging to an economy in the long term.
Employment taxes C scope or scourge?
By John Whiting, PricewaterhouseCoopers LLP
Companies know that they pay many taxes over and above the tax on their profits. In almost every country in the world, those taxes include some form of levy related to their payroll bill C sometimes directly, sometimes linked to the employees. Its questionable whether the extent of these charges is fully appreciated C or fully controlled by either the company that pays them or the government that levies them.
If tax reform is in the air, taxes on employment are usually a part of that mooted reform. Is this an area where there is scope for countries to extract more C or is it an area that damages employment prospects?
What are human resource taxes?
The employers tax costs related to the human resource (HR) function are usually threefold:
(1) Taxes borne C the employers social security contributions, contribution to pension benefits (for example employer pension contributions in Australia) or payroll taxes.
(2) Taxes collected C deductions made by the employer from employees pay in respect of social security and income tax.
(3) Tax administration C the cost of running all of this effectively on behalf of governments. There may also be involvement by employers in what are essentially benefits laid down by governments. Some may be funded by governments, imposing only an administrative burden on employers. Some are actual costs and become part of taxes borne. Examples will include areas such as sick and maternity/paternity pay and levies to support particular industries or training schemes. It is arguable how much these represent in taxes in the purest sense of the word C it will come down to whether these are payments to tax authorities which are then used as general revenues. But, however they are regarded, they need to be borne in mind when the burden of employment taxes is considered.
Pros and cons
There is a lot to be said for taxing employees via the employer C at least from a governments point of view. Employers may be more likely to pay; there is potentially one employer as against many employees; adding to payroll costs emphasises the employers wider responsibilities and may ensure that the employer puts additional monies into some form of social welfare. Incentives can be given for particular actions C for example, reduced social security contributions for new employees in Finland. Checking compliance can be via employer visits rather than many individual reviews of employees.
The contra argument has to be one of cost. Imposing extra costs onto employers in respect of their employees will undoubtedly increase the cost of employment. The administrative burden shouldered by employers must not be forgotten either: particularly where returns require copious data, as is normally the case.
Is this a significant burden?
It is noticeable that some countries with modest (or in the case of Estonia, no) corporate income taxes evidently make up the lost revenues via employment taxes, in particular employer social security charges. But it is not just countries with low rates of corporate income taxes: countries such as France and Belgium impose high employer social security charges. This has led to some employment perceptibly moving to the south east of the UK where services can easily be rendered to France/Belgium while staying out of their social security net. Whether it also contributes to unemployment is an issue for the economists but evidence from businesses makes it clear that these high costs are factors in business planning.
Within a country, sectors can differ. This can result from additional (or reduced) levies for particular industries, depending on the countrys attitude to the sectors in question. Even with the same rates on tax, differing employment patterns (and rates of pay) can mean very different impacts on the companies concerned. For example, in the UK Financial Services sector, employers national insurance contributions (NICs) are one-third of corporate income tax bills, whereas in Industrial Products, the position is reversed C employers NICs are three times the corporate income tax bills16.
All this emphasises the need to factor employment taxes into any tax strategy C both at government and company level.
Cost or benefit?
Many countries will argue that the employer actually benefits from the cash that they deduct and retain from employees pay. This cash can be managed positively for the period that it is in the companys hands before it is passed on, and can offset, to a greater or lesser extent, the tax administration costs. This may work for larger employers; however the smaller employer will often struggle.
16, Source: PwC Total Tax Contribution survey for The Hundred Group 2005
The question then arises as to whether employers are properly focused on managing these significant tax costs. Bear in mind that risks in the tax arena generally come in many guises, and employment tax risks are no different. For example:
. Operational risk C the possibility of processing errors, which because of the volumes involved could lead to significant additional costs;
. Compliance risks C the possibility of late submission, with consequent penalties; and
. Reputational risk C making errors in the employment tax arena is unlikely to lead to adverse external publicity but it could impact on staff relations. Some might argue that these risks have always been present. However, it is apparent that tax authorities see the employment tax compliance arena as a fruitful area for their efforts.
A bigger HR bang?
This section does not argue for or against employment taxes, but simply suggests that companies and governments alike need to consider them and make sure that they factor them properly into planning.
Many countries in the developing world may see employment taxes as an attractive route to obtaining additional revenues, particularly for the perceived ease of collection. That can be a very valid argument; the downside can be pricing staff out of the market. A particular factor within this will be whether local staff are to be taxed in the same way as expatriates. After all, expatriates may not draw on social costs in the same way, if that is part of the rationale for employment taxes. But allowing them a discount C which may come via a tax treaty C may cost the country more than it had envisaged.
There is a long way to go before taxes, particularly employment taxes, are harmonised. In the meantime the implication is that it is becoming ever more important to ensure there is transparency around employment taxes and that they are properly managed and reported.
Section 3: How to reform
The options for reform?
By Caralee McLiesh and Rita Ramalho, Doing Business Project World Bank
In 2004-06, reducing profit tax rates was by far the most popular change to tax systems (Table 3.1). Corporate income tax cuts swept through Eastern European countries, sealing the regions rank as the top tax reformer. Western European countries also joined the trend, partly in response to competition from new European Union members. Such reductions are possible when reforms target increasing compliance and the tax base.
Here are three ways to start:
. Simplify tax law.
. Ease filing requirements.
. Consolidate taxes.
Simplify tax law
The boldest reform is to simplify tax law so that every business faces the same tax burden C with no exemptions, tax holidays or special treatment for large or foreign businesses. Many tax laws start that way. But when hard times come and governments need revenue, tax rates are often raised. This is unpopular, and large or well-connected businesses usually obtain special treatment. Soon the tax law becomes riddled with exceptions, generally at the expense of small businesses, which have the least ability to lobby. Often they are pushed into the informal sector.
Few reformers dare eliminate exemptions. Egypt is an exception: since 2005 all businesses have paid a 20% corporate income tax C rather than 32% or 40%, depending on the sector.
Figure 3.1: How Egypt created a flat profit tax
Table 3.1: Reducing profit tax rates: the most popular reform in 2004-06
Special exemptions erode the tax base. Businesses left in the system end up paying more. The system becomes less transparent and more costly to run. It distorts resource allocation. And incentive schemes create possibilities for rent seeking and arbitrage as businesses seek to minimise their tax with legal ways of manipulating income17.
Estonias 1994 reform replaced its concession-laden system with a single flat tax of 26% offering no exemptions. We could not afford to maintain a more complex system, said a representative of the Ministry of Finance. The countrys tax base broadened, and revenues have not suffered. Its success sparked a rush by other Eastern European countries to do the same. In 2003, Slovakia streamlined its convoluted incentive schemes into a single flat tax, with similar results18. In 2004, Romania and Georgia became the latest. Romania introduced a 16% flat tax and cut payroll taxes - though at 33.25%, they are still high. Georgias new tax code levies a 20% corporate income tax on businesses and a 12% flat tax (down from 20%) on personal income. In addition, social taxes were cut from 31% to 20% and the number of taxes from 21 to nine, and invoices and receipts were simplified.
If radical changes are not feasible, reforms can be phased in. In 2005, Ghana, Israel, Mexico and Paraguay introduced gradual reforms. For example, Ghana cut its corporate income tax rate by 4.5 percentage points in 2005 and by another three points in 2006. This way the Government can defuse lobbying. But this was learned the hard way: Ghana tried to introduce a VAT in 1995, only to withdraw it two months later after public demonstrations scared reformers. It took four more years for its eventual introduction. Without major overhauls, Colombia, El Salvador, Indonesia, Jamaica and Mexico have eliminated some distortions by cutting ineffective incentive schemes and increased revenues in the process19.
Ease filing requirements
Good reforms also go beyond reducing tax rates. Making electronic filing and payment available to businesses is a start. Businesses can enter financial information online and file it with one click C and no calculations. Errors can be identified instantly, and returns processed quickly. Singapore led the way. In the early 1990s its tax department was plagued by a mounting backlog of unprocessed tax returns and the lowest public satisfaction rating of all public services. In response, a new department C the Internal Revenue Authority of Singapore C was created. In 1998 the department launched an e-filing system. Filing taxes is now entirely paperless (except for a verification receipt) and takes just a day C and 90% of corporate taxpayers express satisfaction with tax administration20.
Another 45 countries have made e-filing possible, and the list is growing. In Madagascar tax declarations were computerised in October 2005. If there is no change in the information submitted previously, a business can file the same declaration again with the click of a mouse. This innovation is especially important for compliance with labour taxes, where the information submitted by small businesses changes less often. As a result the time needed to comply with taxes fell by 17 days.
In 2004, Armenia and Lithuania introduced online filing. Lebanon began automating its payroll tax. Businesses in Slovakia can now email tax returns, with no signature or paper evidence. And South Africa is implementing an e-filing system. Such reforms pay off. In countries with online filing it takes less time to comply with tax regulations: 44 days compared with 58.
Simplifying paper filing is another way to make things easier. Doing so works everywhere but is especially important in poor countries, which may not have the demand or capacity to support e-filing. In many countries return and payment forms are cluttered with information requirements that are never processed. In the 1990s, the monthly Polish VAT form required 105 entries - including 37 just for identification - and 38 calculations21. At one point entrepreneurs had to get a stamped VAT certificate for every business lunch. Things have improved, but it still takes two pages for each monthly filing and three days a year to complete VAT filing requirements. In Switzerland it takes one page per quarter and one day a year to deal with VAT paperwork. Brazil still has a long way to go: six forms are needed just to pay income tax. To complete just one of those forms, taxpayers must first read 300 pages of instructions. For the VAT at least three forms are needed.
Eliminating excessive paperwork cuts the time that businesses spend complying with tax laws. To increase compliance, the UK shortened its VAT return to one page. In 2004, Pakistan did the same for its income tax return, significantly shortening the time required to file. Croatia simplified its tax forms in 2005, cutting eight pages of tax returns and shortening the time required to comply with tax regulations by five days.
17, See, for example, Tanzi and Zee (2000)
18, Moore (2005)
19, World Bank (1991)
20, Bird and Oldman (2000) and Tan, Pan and Lim (2005)
21, Bird (2003)
23 Section 3: How to reform
Consolidating taxes is also a worthwhile reform. For example, most countries have more than one labour tax, yet such taxes are typically based on gross salaries. Why not unify them? Tax offices can then distribute the revenues among government agencies. Slovakia did just that: its single social contribution tax funds health insurance, sickness insurance, old age pensions, disability insurance, unemployment benefits, injury insurance, guarantee insurance and reserve fund contributions. In many countries social security agencies would be reluctant to part with their powers C especially if there is a chance that tax offices wont give them their share of revenues. To gain their trust, an automatic separation of revenues can be introduced so that there is no room for discretion.
Our system is characterised by a flood of taxes that overload business with administration. The primary taxes are income tax, VAT, import duty, export tax, excise duty and special excise, provincial turnover tax and property tax. There are taxes at different levels of government. There is also the social responsibility levy, debits tax, share transaction levy, economic service charge, financial transactions tax and various stamp duties. And there is a whole host of industry specific taxes. It is way too complicated. So says Anil, an accountant in Sri Lanka.
Having more types of taxes requires more interaction between businesses and tax agencies. Businesses complain that a higher number of taxes is cumbersome (Figure 3.2). The problem is greatest in poor countries, which rely more on other taxes rather than income tax and VAT. In Tanzania, for example, local authorities impose 50 business taxes and fees22. But the number of taxes is a burden in some rich countries too. In New York City income taxes are levied at the municipal, state and federal levels23. Each is calculated on a different tax base, so businesses must keep three sets of books. Such an approach costs governments more in collection costs as well.
22, Fjeldstad and Rakner (2003)
23, Not all cities in the United States have a municipal business tax. In addition, in several states the tax base is the same for federal and state income taxes
24, Georgia Business Council interview
Figure 3.2: More taxes and payments C more hassle
Source: Doing Business database, GCR (2005)
Note: Relationship is significant at the 1% level and remains significant when controlling for income per capita.
Reformers can look to Georgia, which in 2004 cut the number of taxes from 21 to nine. Businesses have praised the new, simpler system24. In 2001 Russia consolidated several business taxes, cutting the number of taxes from 20 to 1525. And Iran recently merged three taxes into one to ease payment. Improvements were also made in Senegal. Small businesses can now pay one tax that has a lower rate and consolidates four previous taxes. In addition, several exemptions were abolished to widen the tax base. And the company income tax rate fell from 33% to 25%.
Some taxes can be droppeed altogether. Reforms shouldtarget minor excises and stamp duties - which cost money to administer but do not raise much revenue C or particularly distorting taxes. An example is a turnover tax, which is levied on a firms inputs and again on its outputs, so tax is paid on tax. The main alternative to a turnover tax C a VAT C levies tax only on the difference between inputs and outputs (the value added), avoiding double taxation. Another alternative, a sales tax, does the same by taxing onnly outputs, as in the UnitedStates. Mozambique abolished its turnover tax in 1999, replacing it with a VAT. Georgia eliminated its turnover tax, which was levied on top of a VAT, as a part of its 2004 reform. In 2005, Yemen eliminated its production tax, reducing the total tax that businesses would pay from 170% to 48% of profits. Before the reforms, businesses paid a 10% turnover tax on their sales. The reforms replaced the production tax with a 5% sales tax, levied on final consumers. But another 44 countries maintain a turnover tax, including Argentina, Belarus and Tunisia. Almost all have a VAT or sales tax as well. In 2005, Uzbekistan introduced a 1% tax on turnover, which outweighed reductions in corporate and labour taxes.
Small businesses have a particularly hard time dealing with multiple tax payments. Why not help them by making their interactions with the tax agency simpler? This is what Brazil did. In 2001 it introduced the Simples system, which allows for one monthly tax payment for businesses with annual revenues below $1.1 million. The payment covers eight taxes, including four federal and state consumption taxes, two profit taxes, one labour tax and one municipal tax. Opinion surveys have found that nearly 90% of businesses think highly of this reform
C emboldening the government to plan more ambitious reforms to collect taxes electronically. These are needed C it takes larger businesses 455 days to comply with taxes, the longest in the world.
VAT/GST: The win:win taxation systems of the future?
By Ine Lejeune, PricewaterhouseCoopers LLP
Actual trends in taxation show that there is a general and increasing shift from direct taxation to indirect taxation. More specifically governments are looking towards VAT/ GST26 as the major source of tax revenue for the future.
However, this shift from direct taxation to VAT/GST needs to be carefully planned to ensure that the system introduced delivers optimum levels of tax revenue with the least possible adverse impact on individuals and businesses.
With VAT/GST systems the consumers are the taxpayers whilst businesses are the unpaid tax collectors of the governments. Therefore, a joint approach between governments and businesses is an essential ingredient in order to achieve a win:win VAT/GST model.
VAT/GSTs contribution to national budgets is increasing
Consumption taxes are growing as a major source of tax revenues for governments across the globe. Tax authorities worldwide are gradually migrating from direct taxation to the less visible indirect taxation, and this reduced visibility reinforces the need for reporting on the total tax contribution.
VAT/GST models have been adopted by more than 130 countries. The United States is the only OECD member country that does not have a VAT/GST. However, 45 of the US states impose a retail sales tax. A variety of consumption tax proposals have been discussed in the United States, primarily as a replacement for income taxes, but a VAT/GST model is not expected in the near future27. Hong Kong has also opened a consultation period on a tax reform proposal that includes the introduction of GST28.
26，This concept includes Value Added Taxes and Goods and Services Taxes but does not cover sales taxes, customs duties or excise type taxes.
27，On August 22 2006, the U.S. Congressional Research Service released a report examining the merits of value-added taxation as a new revenue source for the United States. The document can be found at http://www.opencrs.com/document/RL33619
28，Broadening the Tax Base; Ensuring our Future Prosperity; Tax Reform and Households Consultation document can be found at www. taxreform.gov.hk/eng/document.htm
29，OECD, Consumption Tax Trends, VAT/GST and excise rates, trends and administration issues, 2005 edition, Paris, 2006, p.10.
In 2004, consumption taxes (VAT, GST, Customs duties and excise) on average constituted approximately 30 per cent of total tax revenues29 in the OECD countries, whilst in some individual countries these taxes constitute over 50 per cent of the total tax revenues collected by governments.
It would appear that this relatively recent growth of consumption taxes is not at an end. It is expected that governments will continue shifting the burden of tax from income tax (including labour tax) to indirect tax.
Figure 3.3: Taxes on general consumption as a percentage of total taxation Impact of taxation on GDP
The reasons for this continued increase in consumption taxes as opposed to direct taxes can be found in the need for governments to be seen to have a tax structure which is conducive to growth and employment and which can also maintain tax revenues. Tax competition between countries to help attract business and investment has usually involved the lowering of direct taxes on income by reducing corporate income tax and other measures such as exempting capital gains, tax deductions for dividends or interest obtained amongst others. As a consequence this reduction in corporate income tax necessitates an increase in other sources of tax revenue for government budgets to be maintained. This has manifested itself in an increase in consumption taxes, so reinforcing the trend followed by governments in recent years.
Tax policy can have important economic effects through its impact on incentives to work, save and invest. In particular, high levels of labour taxes and social contributions create disincentives to employment by increasing the costs of employing staff and generate the so-called tax wedge. According to the OECDs figures, in 2005, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge of 51.8% of the cost of their labour to their employers in Germany and 50.5% in Hungary, compared with 17.3% in Korea, 18.2% in Mexico and 20.5% in New Zealand. The average tax wedge for OECD countries was 37.3%30.
In light of this, some policy makers consider that a drop in income tax of 1% of GDP together with an increase in consumption taxes of 1% of GDP, would generate extra growth of 1% of GDP31.
Regressive nature of the tax
The main criticism levelled at consumption taxes is that they are regressive in nature (which is inherently contrary to the commonly accepted principle of higher taxation for higher income earners). They also have an effect on inflation where there is an increase in consumption taxes.
There are certain measures which can help to eliminate or mitigate the regressive nature of consumption taxes.
These measures include allocating revenues obtained from consumption taxes to policies which ensure a certain level of welfare for lower income earners32 and applying reduced rates to goods and services such as food and other basic necessities (like medical supplies and services) that represent the major types of expenditure of lower income earners.
In addition, in order to maintain an individuals purchasing capacity, an increase in VAT or consumption taxes will at least need to be accompanied by some reduction in personal income taxes, although the two types of taxes will not necessarily offset as many lower paid workers do not pay income taxes.
On the other hand, the impact on inflation of VAT or consumption tax increases will generally be as a one-off increase. Such an increase would not necessarily give rise to a permanent increase in future inflation rates where compensating policies are applied, provided it does not feed through into second round effects on wages. This could, however, be a risk for a large increase in VAT that is widely passed on to customers. A credible monetary policy regime would, however, reduce the risk of second round effects since trade unions and employees will be aware that trying to push for higher wages could, in addition to direct negative effects on employment, also cause the central bank to push up interest rates in response.
Managing the compliance burden
This shift from labour and income taxes to VAT/GST may trigger new compliance costs for businesses which should not be underrated. These compliance costs include not only human and IT costs for producing VAT documentation (e.g. billing, archiving, proof of exemption when not charging VAT/GST to customers), but also the costs associated with preparing VAT accounts/VAT reports, and preparing and filing VAT returns.
Also errors regarding the application of the rules can trigger penalties, joint and several liability, interest and other costs for businesses and their directors. The latter risks and related costs vary considerably between different countries.
For businesses a pure VAT/GST should not generate any impact in their profit/loss accounts and should not result in any double taxation. The VAT/GST should not generate disproportionate compliance costs or risks which require the input of costly management time when collecting the taxes on behalf of governments33, 34.
In reality compliance costs and profit/loss account impacts have been growing jointly with the expansion of VAT/GST, as countries use VAT/GST as a tax raising measure on businesses, e.g. non-deductible VAT on expenditure such as travelling expenses.
An in-depth analysis of VAT compliance costs in companies would challenge this view of VAT as being a neutral tax for businesses. These compliance costs 30Taxing Wages, special feature, OECD 2006, document can be obtained in www.oecdbookshop.org.
31，A European Pentathlon, A Community growth strategy for the European economy, Brussels 17 February 2005, as referred to in I. Lejeune, QuoVATis, Where are we going with VAT/GST globally, PricewaterhouseCoopers, 2005
32，See in this respect e.g. Chapter 6, consultation paper from Hong-Kong tax Authorities, where the measures suggested include also VAT/GST household credits for certain lower-income earners
33，Some recent studies have been done by the University of Manchester business School C Prof F. Chittenden on this subject where the compliance cost burden varies considerably between large and small business. Excerpts of his studies can be found at www.mbs.ac.uk.
34，At the EU Commissions request, PricewaterhouseCoopers performed a study making specific recommendations on the means of simplifying and modernising VAT obligations (VAT registration, submission of declarations, payments and refunds, and submission of recapitulative statements). An executive summary of the final report can be found on ec.europa.eu/taxation_customs/resources/documents/final_report.pdf and the risks for economic operators acting in good faith are mainly due to the lack of global common VAT/GST principles on the treatment of the globalisation of the trade in goods and services. In addition the growing complexity of VAT/GST often laid down in unclear or outdated legislation, as well as the lack of guidance from the tax authorities, leads to uncertainty, thereby increasing compliance costs and risks.
Global common VAT/GST principles
To create legal certainty, reduce compliance costs and facilitate proper risk management certain measures should be put into place such as the adoption of global common VAT/GST principles, simplifying measures, better use of technology and also clear guidance and open communication between authorities and businesses.
The more advanced VAT and GST systems around the world have, for some time, been looking at ways in which to simplify compliance. The need to simplify VAT for cross-border business in particular is also high on the EU
Commissions agenda. The EU Commission is therefore currently proposing to introduce a raft of new measures including the proposal for an optional centralised EU VAT compliance jurisdiction for taxpayers (the so-called one-stop-shop)35 and a reform of the VAT rules regarding the place of taxation of services36.
The OECD has also pointed out the need for internationally accepted principles on the consumption tax treatment of cross-border services and intangibles to avoid double taxation or unintentional non-taxation37.
Use of technology
Another way in which tax authorities are attempting to simplify compliance for business is through the better use of technology. Tax authorities across the world are simplifying compliance through the electronic filing of returns. An increasing number of taxpayers are availing themselves of such facilities, a trend which will ensure swift repayment on the investment made by tax authorities through improved administration efficiencies.
Electronic invoicing and archiving offers businesses the opportunity to reduce the cost of doing business at a tangible unit cost level.
Notwithstanding the OECD guidance38 and a European VAT Directive39, the barriers to widespread adoption of administrative simplifications in the area of invoicing have not been removed entirely. To fully reap the benefits offered by digitisation and to achieve adequate returns on investment in back-end IT systems, more effort is required to increase the confidence of the tax authorities in IT systems and to facilitate the maximum use by economic operators40.
Indeed, the digitisation of the VAT compliance of business will enhance the use of electronic auditing techniques by the tax authorities as laid down in OECD guidance41, thus reducing the cost of collecting VAT/GST.
Communication and dialogue
Last but not least, it is in the interest of tax authorities to communicate their vision clearly to business, and to have a simple and efficient communication system for taxpayers. Some are better at doing this than others. The majority of countries have an internet site which offers guidance to taxpayers on topical issues but the quality of the content and the regularity of updates on these sites varies from country to country. On the other hand some countries struggle on this front.
As an example of good practice in this area, the Australian Tax Office has set up an internet portal for tax agents in order to communicate more efficiently with the authorities on taxpayers affairs. This portal allows the agent access to client activity statements and account information whilst also providing an effective tool for communicating on topical tax questions. Clearly such tools can only contribute to the efficiency of any tax system, direct or indirect42.
There is of course a responsibility here on industry and advisers to constructively express the needs of business. If the views and needs of businesses are not communicated, there is less chance of finding the win:win route to efficient and effective tax policy.
Consumption taxes are going global. At just over 50 years old, VAT/GST is an adolescent tax; just as big as the more mature taxes, but with a great deal still to learn.
VAT/GST specialists from industry and practice need to take the lead collectively through dialogue with governmental tax policymakers to ensure the implementation of win:win VAT/GST taxation models as the tax matures.
Indirect tax specialists also need to be at the forefront within companies tax and finance departments. They should ensure that businesses understand that consumption taxes are no longer minor taxes but are important, complex and sometimes cumbersome. The amounts at stake, and hence the risks, are high, and proactive management is essential.
A VAT/GST model should meet some generally accepted criteria in order to achieve the key results expected (see Table 3.2).
In the end, there is an opportunity for the perfect VAT/GST to become a win:win taxation model for businesses, governments and citizens, with the ability for governments to achieve its dual goal of obtaining tax revenues and facilitating economic and employment growth and welfare without challenging the ability of companies to make profits and the imposition of unnecessary additional compliance costs. This model can be achieved by clear legislation, common global VAT/GST principles, the better use of technology and an open and continued dialogue between authorities and businesses.
Table 3.2: VAT/GST model criteria
Figure 3.4: VAT/GST systems as Win:win Taxation Models
35，Proposal of the EU Commission of 29 October 2004, COM(2004)728final (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2004:0728:FIN:EN:PDF); I. Lejeune, Simplifying Value-Added Tax Obligations in the EU, in X., Revenue Matters, A Guide to Achieving High Performance under Taxing Circumstances, Volume 1; I. Lejeune, B. MESDOM, New EU Proposal Aims to Simplify VAT Obligations in Tax Planning International Indirect Taxes, Volume 2, number 12, December 2004.
36，Proposal of the EU Commission of 20 July 2005, COM(2005)334 amending Directive 77/388/EEC as regards the place of supply of services (http://eur-lex.europa.eu/LexUriServ/site/en/com/2005/ com2005_0334en01.pdf).
37，The application of Consumption Taxes to the Trade in International Services and Intangibles, OECD 14 July, 2004 and OECD, Consumption Tax Trends, VAT/GST and excise rates, trends and administration issues, 2006 edition, Paris, 2006.
38，OECD Tax Guidance Series: Record Keeping, 5 May 2004 and OECD Tax Guidance Series: Transaction information, 5 May 2004.
39，EU Council Directive 2001/115/EC amending Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for invoicing in respect of Value-Added Tax (required for implementation in Member States national law since 1 January 2004 and 1 May 2004 for the at that time joining Member States: Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Czech Republic, Slovakia and Slovenia. As of 1 January 2007 the Directive also needs to be implemented in the new joining Member States Romania and Bulgaria. ).
40，M.Joostens, I. Lejeune, P. Breyne, D. Evrard . Global (E-)Invoicing & (E-) Archiving, Increasing Efficiency en Reducing Costs Including VAT/ GST rules in 41 countries worldwide. PricewaterhouseCoopers, 2006.
41，OECD Guidance for the Standard Audit File-Tax, May 2005 and OECD Guidance on Tax Compliance for Business and Accounting Software, May 2005. Documents can be found at www. oecd.org/dataoecd/51/33/34422641.pdf and www.oecd.org/ dataoecd/13/45/34910263.pdf respectively;
42，I. Lejeune, QuoVatis, Where are we going with VAT/GST globally, PricewaterhouseCoopers, 2005. Australian Tax Portal is on https://tap. ato.gov.au/
Section 4: The way forward
Understanding the total tax contribution
Key actions for governments and tax authorities:
. Consider the need for tax reform through a thorough assessment of the total tax contribution, which takes into account all taxes borne and collected by businesses as well as the cost of tax compliance.
. Increase their accountability and communicate clearly with businesses and taxpayers as to how taxes are spent.
. Consider clear tax education campaigns to explain the taxes, how to pay them, and the benefits to all stakeholders.
. Consider how simplification of tax legislation, the easing of the compliance burden, and the consolidation of taxes might generate benefits for both governments and businesses.
. Most importantly, consult with businesses when developing ideas for tax changes.
Key actions for businesses:
. Gather information on the total tax contribution including all taxes borne and collected, as well as the cost of tax compliance. PricewaterhouseCoopers LLP has developed a methodology and framework which can help with this (see Appendix 1).
. Ensure that information around the total tax contribution is made accessible to governments and tax authorities to help inform their decisions over reform.
. Communicate the total tax contribution to the wider stakeholder group (including employees, investors, the media and society at large) to demonstrate the extent to which they are supporting public finances through taxes.
. Engage in regular dialogue with governments and tax authorities over the need for reform and specific areas of concern.
Informing the debate and evolving the model
Appreciation of the Total Tax concept is gaining momentum and it is becoming more widely accepted as a robust measure of taxes contributed by companies to national treasuries. Work undertaken by PricewaterhouseCoopers LLP in the UK with the Hundred Group (membership comprises the FTSE 100 companies) has been positively received by all external stakeholders, and it can be expected that projects with similar groups of companies will be undertaken in other countries around the world.
The World Bank Doing Business in 2007 survey and the amendments made to align the Total Tax Rate calculation with the PricewaterhouseCoopers LLP Total Tax Contribution framework methodology represents a good way forward. It generates some useful tax indicators, which enable countries to see how their tax regimes, for a standard modest-sized company, compare in 175 countries around the world. However, the development of a model to make such comparisons is a dynamic process with a constant need for improvement. It is expected that further adjustment will be necessary as the analysis continues. There is also potential to extend the assumptions made in the model to include more taxes. For example, with the ongoing debate on climate change, environmental taxes are ripe for inclusion in some way.
The measures undertaken to estimate the time to comply with administrative requirements of tax systems are recognised as being somewhat subjective. It is intended that measures of administration and compliance will be further developed to be more representative of the effort that is required to comply with the tax legislation in force. Additional questions on tax administration and the process of tax collection will be included in future rounds of the survey.
Additional issues may also be worthy of consideration around the wider implications for society of taxes paid by business. Corporate responsibility has been around as an issue for some time in relation to the environment and other ethical issues, but tax is increasingly important in this arena and the reporting of total tax will be an important step forward.
The issues discussed will be further addressed as survey data is updated and evolves in subsequent years. In the meantime, the data now available is useful in informing the debate around business taxation globally. Knowledge of the Total Tax Contribution, the Total Tax Rate and the costs of administration and compliance are key components in facilitating constructive dialogue with governments and other stakeholders and to ensure that there is better information available for tax management internally, and for governments to take decisions on the basis of the full tax picture of taxes in their countries.
For further information, or to discuss any of the findings in this report please contact: World Bank Group PricewaterhouseCoopers LLP
Simeon Djankov Bob Morris， +1 202 473 4748 +1 202 414 1714 firstname.lastname@example.org email@example.com
Caralee McLiesh Susan Symons， +1 202 473 2728 +44 20 7804 6744 firstname.lastname@example.org email@example.com
Rita Ramalho John Whiting ，+1 202 458 4139 +44 20 7804 4422，firstname.lastname@example.org email@example.com