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


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


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


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???

Education

Tax compliance cost surveys