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Tax compliance cost surveys Jacqueline Coolidge ITD Conference, Manila March 2 - 5, 2010. What are tax compliance costs?. Enterprises’ tax compliance and statistical reporting costs – these are NOT amounts of taxes paid, but costs : - PowerPoint PPT Presentation
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Tax compliance cost surveys
Jacqueline Coolidge
ITD Conference, ManilaMarch 2 - 5, 2010
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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
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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.
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Examples of TCCS
• South Africa
• Yemen
• Ukraine
• Peru
• India (Bihar)
• What data did we get and how did we use it???
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• 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
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Regressive Compliance Cost
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 tur
nove
r
Firms registered for VAT
Firms not registered for VAT
Source: FIAS Tax Compliance Cost Survey South Africa, 2007
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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
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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
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Yemen TCCS – capacity for tax compliance
41
59
68
6
23
77
79
16
18
83
65
46
0
100
65
84
0 20 40 60 80 100
Not keeping physicalreceipts
Keeping physicalreceipts
Manual bookkeeping
Computer bookkeeping
Micro Small Medium Large
10
37 39
68
4138
0
10
20
30
40
50
60
70
Micro Small Medium Large Total
Reported incidence of bribes to tax officials by businesses in Yemen (2008)
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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%
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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 Mean Mean Mean Mean MeanGroups by turnover and size
Micro3.21 2.10 3.85 4.40 2.25 3.93
Small 3.62 2.16 4.27 4.59 2.26 4.11 Medium 3.59 2.28 4.69 4.57 1.84 4.06 Large 2.78 2.46 4.21 4.63 2.29 3.72 Total 3.33 2.12 3.99 4.46 2.24 3.98
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Ukraine TCCS – incidence of inspections
35% 37%
50%
73%76%
42%
32% 30%36%
48%
60%
35%29% 31%
40%45%
48%
32%
less than UAH300 000
UAH 300 000 -UAH 1 million
UAH 1 million -UAH 5 million
UAH 5 million -UAH 35 million
over UAH 35million
Ukraine(average)
Anuual turnover, UAH
% o
f in
spec
ted
co
mp
anie
s
tax authority Pension fund social insurance funds
14
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South Africa: Incidence of inspections
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
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Advantages and disadvantages of simplified regimes – Peru: reasons offered …
0% 10% 20% 30% 40% 50%
does not allow for client'seconomic activiy
net income >S/.500,000
fixed assets >S/.126,000
client's expectations to growabove S/.500,000
requirements are too difficultto comply
do not know about thisregime
other reasons
0% 10% 20% 30% 40% 50%
did not advise
easiest regimeto understand
only regime forwhich client is
eligible
the only regimethat allows
client to grow
lowest taxcompliance
cost
allows to emitall invoices
other reasons
….Not to file under RER … to File under RG
N=1302 n=1289
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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
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
84
55
54
22
0 20 40 60 80 100
To achieve the target of taxcollection assigned to VAT officials
Correctness of assessment andtendancy of businesses to under
rate their tax liability
To make personal gains
Vindictive act by VAT officials
However, almost 25% of the intermediaries believe the “main reason” for this move is
aimed at making personal gains…
17
Base – 181 respondents