Tax compliance cost surveys
Jacqueline Coolidge
ITD Conference, Manila
March 2 - 5, 2010
1
What are tax compliance costs?
Enterprises’ tax compliance and statistical reporting
costs – these are NOT amounts of taxes paid, but costs:
•
Enterprises’ tax compliance and statistical reporting costs – these are
NOT amounts of taxes paid, but costs:
•
spent by
by accountants
accountantsand
andother
otherstaff
staffon
oncalculation
calculation
of working time spent
taxes,
providing
taxes, preparing
preparingall
allreports
reports,(including
providingstatistical),
explanations
to tax authorities,
explanations
to tax and statistic authorities, trips to these bodies
trips to tax offices
••
for
purchasing, installation
for purchasing,
installation and
and maintenance
maintenanceofofcorresponding
corresponding
equipment (cash registers) and programs (on workflow automation)
equipment (cash registers) and programs (on workflow automation)
•
for purchasing all necessary forms of reporting, etc.
•
for outside consultants
•
•
for purchasing all necessary forms of reporting, etc.
for outside consultants
2
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 penalties) can deter business
formation and formalization of informal firms.
3
Examples of TCCS
•
South Africa
•
Yemen
•
Ukraine
•
Peru
•
India (Bihar)
•
What data did we get and how did we use it???
4
South Africa Tax Compliance Burden
• Time and cost estimates for four main taxes:
– Income Tax (IT)
– Provisional Tax (PT)
– Value Added Tax (VAT)
– Employees’ Tax (ET)
• Significant processes:
– Registration
– Preparation, completion and submission of returns
– Objections & Alternative Dispute Resolutions (ADR’s)
– Audits, inspections & written queries from SARS
5
Regressive Compliance Cost
% of turnover
Compliance Burden for preparation of tax returns as
a percent of turnover (firms registered/not registered
for VAT; mandatory at R300,000)
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Firms registered for VAT
Firms not registered for VAT
0.15
0.3
0.65
3.5
10
Turnover (in R million)
6
Source: FIAS Tax Compliance Cost Survey South Africa, 2007
6
South Africa: Formal vs. Informal
• About 12% of SMEs reported having operated
for some period before registering for tax, of
which:
– Majority operated informally for less than five years
– About one quarter operated informally for less than one
year
• Most informal firms have been operating for
several years:
– About 2/3 for 5 years or less
– About ¼ for 6 – 10 years
– Just over 11% for more than 10 years
7
7
Informality comes with significant costs
for many firms
•
Percentage of informal Yemeni businesses facing costs to avoid
tax payments/ remain informal
8
Source: FIAS Tax Compliance Cost Survey in Yemen, 2008
8
Yemen TCCS – capacity for tax compliance
84
46
Computer bookkeeping
16
6
65
65
Manual bookkeeping
79
68
100
Keeping physical
receipts
83
77
59
0
Not keeping physical
receipts
18
23
41
0
Micro
20
Small
40
60
Medium
80
100
Large
9
Reported incidence of bribes to tax officials by
businesses in Yemen (2008)
68
70
60
50
40
37
41
39
38
30
20
10
0
Micro
Small
Medium
Large
Total
10
Estimated profit reported for tax purposes
in Yemen
46
Groups by turnover and size
Micro
53
Small
46
53
Large
20%
25% or less
30%
40%
26% - 50%
50%
60%
51% - 75%
16
8
70%
12
26
13
29
16
4
2
17
48
Total
10%
10
30
26
Medium
0%
27
80%
15
90%
100%
76% - 100%
11
Tax morale (agreement with statement,
scale 1 – 5) in Yemen, 2008
When
business
It is
If I saw
people
justifiable if a
The
less
believe a
business
govern- corruption I tax is fair,
underreports ment taxes would be they are
income in
all
willing to
always
order to pay busines- pay more willing to
less tax
ses fairly
tax
pay it
Mean
Mean
Mean
Mean
Groups by Micro
turnover
and size
Small
Medium
Large
Total
I trust the
Tax
Authority
to
calculate
my taxes
accurately
Mean
If the tax
system
was more
transparent,
business
people
would pay
more tax
Mean
3.21
2.10
3.85
4.40
2.25
3.93
3.62
3.59
2.78
3.33
2.16
2.28
2.46
2.12
4.27
4.69
4.21
3.99
4.59
4.57
4.63
4.46
2.26
1.84
2.29
2.24
4.11
4.06
3.72
3.98
12
Ukraine TCCS – incidence of inspections
tax authority
Pension fund
social insurance funds
% of inspected companies
73%
76%
60%
50%
35%
32%
29%
37%
48%
45%
48%
42%
40%
36%
35%
32%
31%
30%
less than UAH UAH 300 000 - UAH 1 million - UAH 5 million 300 000
UAH 1 million
UAH 5 million UAH 35 million
over UAH 35
million
Ukraine
(average)
Anuual turnover, UAH
13
South Africa: Incidence of inspections
Income tax
0.5
Northern Cape
1.5
2.5
3.0
Western Cape
Limpopo
2.5
3.5
4.5
5.5
0.5
1.5
2.5
3.5
4.5
5.5
1.7
4.3
4.4
1.7
5.7
1.5
0.5
3.3
1.8
2.0
3.2
1.4
1.3
1.5
2.1
1.5
1.6
Mean by respondents
1.7
Mean by provinces
1.7
6.5
6.2
1.9
Gauteng
Eastern Cape
1.5
Employees’ tax
2.2
North West
Kwazulu Natal
3.5 0.5
0.9
Freestate
Mpumalanga
VAT
2.4
2.7
1.1
1.6
3.1
3.0
2.2
2.3
VAT related inspections seem to be more frequent than inspections related to
other taxes
14
14
Advantages and disadvantages of simplified
regimes – Peru: reasons offered …
….Not to file under RER
… to File under RG
other reasons
other reasons
do not know about this
regime
allows to emit
all invoices
requirements are too difficult
to comply
lowest tax
compliance
cost
client's expectations to grow
above S/.500,000
the only regime
that allows
client to grow
fixed assets >S/.126,000
only regime for
which client is
eligible
net income >S/.500,000
easiest regime
to understand
does not allow for client's
economic activiy
did not advise
0% 10% 20% 30% 40% 50%
N=1302
0%
10%
20%
30%
40%
50%
n=1289
15
Bihar: On an average, over assessment of VAT
liability
is observed in 1 out of every 5 cases…
% of cases of over assessment ; Base - 181
Almost half of the intermediaries believe
that high assessment is given to 10-25% of
the businesses…
Level of over assessment ; Base - 181
More than 2/3rd of the tax intermediaries
estimate that the extent of over assessment
upto 25% of the VAT amount
16
16
Most businesses believe that ”Achieving tax collection
target” is the main reason officials give a high assessment,
and “correction” to be the second reason
22
Vindictive act by VAT officials
To make personal gains
54
Correctness of assessment and
tendancy of businesses to under
rate their tax liability
55
To achieve the target of tax
collection assigned to VAT officials
Base – 181 respondents
84
0
20
40
60
80 100
However, almost 25% of the intermediaries
believe the “main reason” for this move is
aimed at making personal gains…
17
17
17