2 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 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, providing explanations to tax authorities, trips to tax offices 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
3 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.
4 Examples of TCCS South Africa Yemen Ukraine Peru India (Bihar) What data did we get and how did we use it???
5 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 South Africa Tax Compliance Burden
6 6 Regressive Compliance Cost Firms registered for VAT Firms not registered for VAT Source: FIAS Tax Compliance Cost Survey South Africa, 2007
7 7 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
8 8 Informality comes with significant costs for many firms Percentage of informal Yemeni businesses facing costs to avoid tax payments/ remain informal Source: FIAS Tax Compliance Cost Survey in Yemen, 2008
9 Yemen TCCS – capacity for tax compliance
10 Reported incidence of bribes to tax officials by businesses in Yemen (2008)
11 Estimated profit reported for tax purposes in Yemen
12 Tax morale (agreement with statement, scale 1 – 5) in Yemen, 2008 It is justifiable if a business underreports income in order to pay less tax The govern- ment taxes all busines- ses fairly If I saw less corruption I would be willing to pay more tax When business people believe a tax is fair, they are always willing to pay it I trust the Tax Authority to calculate my taxes accurately If the tax system was more trans- parent, business people would pay more tax Mean Groups by turnover and size Micro 184.108.40.2064.402.253.93 Small 3.622.164.274.592.264.11 Medium 3.592.284.694.571.844.06 Large 2.782.464.214.632.293.72 Total 3.332.123.994.462.243.98
13 Ukraine TCCS – incidence of inspections
14 South Africa: Incidence of inspections VAT related inspections seem to be more frequent than inspections related to other taxes Income taxVATEmployees’ tax
15 Advantages and disadvantages of simplified regimes – Peru: reasons offered … ….Not to file under RER … to File under RG N=1302n=1289
16 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
17 Most businesses believe that ”Achieving tax collection target” is the main reason officials give a high assessment, and “correction” to be the second reason However, almost 25% of the intermediaries believe the “main reason” for this move is aimed at making personal gains… 17 Base – 181 respondents