armenia regulatory simplification-doing business reform project the costs of tax compliance in...

ARMENIA REGULATORY SIMPLIFICATION-DOING BUSINESS REFORM PROJECT

THE COSTS OF TAX COMPLIANCE IN ARMENIA

Yerevan,2011

Not for quotation or distribution

About the Project

World Bank Group has allocated funding to carry out the Armenia Regulatory Simplification-Doing Business Reform project. The goal of the project is to improve the business environment in Armenia through reduction of the administrative burden and regulatory barriers in the selected areas, including Paying Taxes.

Tax Compliance Cost Survey

The survey was conducted by IFC (World Bank Group) upon request from the Government of Armenia (Ministry of Economy, State Revenue Committee)

Survey objectives:

To assess costs of paying taxes

To identify most costly and complex procedures and taxes

To prepare recommendations to simplify taxation and procedures of paying taxes

2

Survey details

Target population: Private businesses active during reference period (excluding political parties, religious, professional associations, NGO’s, state non commercial organizations )

Reference period: 2009

Sample size: 750 companies and 250 sole proprietors

Methodology: face to face interviews

Coverage: All regions of Armenia

Respondents: CEO, finance directors and chief accountants

3

Comparison of indicators for paying taxes Doing business 2011

Indicators Armenia** Eastern Europe&Central Asia

OECD average

Payments *(number per year)

50 46.3 12.8

Time (hour per year)

581 336.3 194.1

Total tax rate(% profit)

40.7 43.4 44.5

* Social security payment-12 ** Manufacturing company in Yerevan• Corporate income tax – 13 Turnover -780mln AMD• Value added tax- 12 Number of employees - 60• Land tax – 4• Property tax on building- 4• Vehicle tax -4• Environmental pollution charge for vehicles-1

4

Criteria for sample design

Upon request from the IFC the list of 750 enterprises and 250 sole proprietors was provided by SRC according to the following criteria:

By turnover size /million AMD/ (0-5, 5-29.99,30-58.35, more than 58.35). Taxpayers registered in the large taxpayers unit, were considered as separate group.

By type of activity (production,trade, service and other activities, dominated by the construction companies)

By region (All regions)

According to the above mentioned criteria, the share of enterprises and sole proprietors in the sample, corresponds to real structure of 2009 active business in the Republic of Armenia.

5

Other details

Survey Company

Armenian Marketing Association

Structure of the questionnaire

- 7 sections (Accounting practice, submission of reports, payments, inspections, consultations,VAT refund, etc.)

- 92 questions

The questionnaire was prepared by the international and local experts of the IFC.

6

Survey represents opinions of 750 private enterprises* of Armenia

By company income (AMD): By sector:

The weighted sample reflects the structure of Armenian’s economy

By region:

21.0% Produc-

tion

20.6% Trade

44.6% Service

13.8% Other

* Based on official data of SRC 7

24.4%

36.5%13.1%

24.2%

1.7%UP to 5 million

5-29.99 million

30-58.35 million

More than 58.35 million

More than 58.35 million (Large taxpayers)

56.3%

14.6%

21.4%

6.0%1.7%Yerevan

North (Shirak, Lori, Tavush)

Central (Aragatzotn, Ararat, Armavir, Gegharkunik, Ko-tayk)

South (Syunik, Vayoth Dzor)

Large taxpayers

Survey represents opinions of 250 sole proprietors* of Armenia

By sole proprietors’

Income (AMD):

By sector:

The weighted sample reflects the structure of Armenian’s economy

By region:

9.6% - Production

60.0% - Trade

26.8% - Service

3.6% - Other

20.4%

44.2%

20.5%

14.9% Up to 1 million

1 - 2 million2 - 5 millionMore than 5 million

57.1%

13.4%

23.6%

5.9%

Yerevan

North (Shirak, Lori, Tavush)

Central (Aragatzotn, Ararat, Armavir, Gegharkunik, Kotayk)

South (Syunik, Vayoth Dzor)

* Based on official data of SRC 8

What do tax compliance costs embrace?

Tax compliance costs – are NOT the actual amounts of taxes paid, but costs comprised of:

Time spent by accountants (or sole proprietors) and other staff on tax accounting, preparing all tax reports, visits to tax and local authorities, time related to inspections

Procurement and update of software for tax accounting, cost of tax related workshops and trainings, as well as printed or electronic tax related media

Payments for purchasing all necessary tax reporting templates, etc.

Payments for outsourced tax consulting services

9

Time spent on complying with taxes per average enterprise depending on turnover

(hours per year)

10

UP to 5 mil-lion

5-29.99 mil-lion

30-58.35 mil-lion

More than 58.35 million

More than 58.35 million (Large tax-

payers)

Average for all enter-

prises

DB case turnover

2011 (780 mil-lion)

221291

444

669

1145

400

581

Annual turnover of enterprises, AMD

Ho

urs

per

yea

r

* There was LESS of a distinction between different sectors, but trade sector had highest time burden and services had lowest.

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)

400 person-hours (50 business days), which is

AMD 495 014* (~$1,363**)

11

* Calculations based on reported time and salary costs of survey respondents. ** Average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.

Annual cost of tax compliance per an average enterprise depending on annual turnover

12

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

296,151 290,309

613,653

844,420

1,848,832

495,014


AM

D p

er y

ear

Time spent on complying with taxes per average sole proprietor depending on annual turnover

13

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

82

108 100

218

118

Annual turnover of sole proprietors, AMD

Ho

urs

per

yea

r

Tax Compliance Costs incurred by an average Sole proprietor in 2009

In person-hours:

Total time spent on tax compliance of all staff

In money:

Time cost X labor costs (salary and wages) and/or average salary in the economy in 2009*

118 person-hours (15 business days), which is

AMD 77 477 (~$213**)

14

*average salary in the economy was used only to calculate the costs of working time of sole proprietors **average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.

Annual cost of tax compliance per average sole proprietor depending on annual turnover

15

up to 1,000, 000 1,000,001 – 2,000,000

2,000,001 – 5,000,000

more than 5,000,000


53,873

81,84874,233

101,232

77,477


AM

D p

er y

ear

Smallest enterprises carry the heaviest burden in complying with taxes

Relative costs (cost/turnover) of tax compliance per average enterprise depending on annual turnover

16



taxpayers)

17.5%

2.4%1.3%

0.4%

0.2%

Average total - 5.4%

Annual turnover of companies, AMD

Smallest sole proprietors carry the heaviest burden in complying with taxes

Relative costs (cost/turnover) of tax compliance per average sole proprietor depending on annual turnover

17

up to 1,000, 000 1,000,001 – 2,000,000

2,000,001 – 5,000,000

more than 5,000,000


8.6%

5.0%

2.2%1.1%

0.0%

Average total - 4.6%


Total tax compliance costs incurred by all active private businesses

Direct costs (labor costs and additional cost) incurred by all Enterprises and Sole Proprietors on complying with taxes in 2009 amounted to:

AMD 10.3 bln, (USD 28.4 mln)which is about

0.3% of Armenia’s GDP in 2009

Enterprises spent: AMD 9.0 bln

(USD 24.8mln)

Sole Proprietors spent: AMD 1.3 bln

(USD 3.6mln)

18

Structure of Tax Compliance Work (Enterprises)

* Time spent for filling these books among companies that filled these books is 256 hours (56% of all companies) ** Calculated among companies that were inspected (44%)*** Calculated among companies that submitted additional info (19%)**** There are not enough answers for VAT refund. This is not included in the table.

19

TIME (hours) COST (AMD)

Tax accounting and filling all forms of all taxes that company paid , researching and studying tax legislation 199 209,667

Filling book of registration of revenues and filing book of shipment of inventory holdings (among all enterprises) * 149 143,676

Submitting tax reports to tax authority and local authority and payment of taxes in 2009 48 52,232

All inspections including unofficial visits and filing appeals** 32 35,185

Prepare all additional information requested by the SRC request*** 5 4,800

Structure of Tax Compliance Work (Sole Proprietors)

* Time spent for filling these books among sole proprietors that filled these books is 103 hours( 36%)** Calculated among sole proprietors who were inspected in 2009 (34%)*** Calculated among sole proprietors who submitted additional information in 2009 (8 %)

20

TIME (hours) COST (AMD)

Tax accounting and filling all forms all taxes that IE paid including annual declaration on personal income tax and social payments , researching and studying tax legislation 41 26,643

Time spent on filling book of registration and shipment * 38 22,191

Submitting tax reports to tax authority and local authority and payment of taxes

36 21,152

All inspections including unofficial visits and filing appeals** (58.8%)

6 2,961

Prepare all additional information requested by the SRC request ***(8.2%)

3 915

Time spent on tax accounting and filling reporting forms of all taxes by enterprises

21

Local duties and fees

Payment for use of natural recourses and/or pollution of environment

Property and/or land taxes

Fixed tax

Social payment

Personal income tax

Profit tax

VAT

Total time on tax accounting and filling all forms for all taxes

1

4

5

11

19

25

51

55

117

Hours per year

Taxe

s

Time spent on accounting and filling reporting forms of all taxes by sole proprietors

22

State duties

Local duties and fees

Payment for use natural resources and pollution of environment

Property and/or land taxes

Social payment

Fixed tax

Personal income tax

VAT

Total time on tax accounting and filling forms for all taxes

0.2

0.3

2.3

2.6

7.1

7.5

10.0

14.6

23.5

Hours per year

Taxe

s

Time spent on filling book of registration of revenues and book of shipment of inventory holdings by enterprises*

23

UP to 5

milli

on

5-29

.99

milli

on

30-5

8.35

milli

on

More

than

58.

35 m

illion

More

than

58.

35 m

illion (L

arge

taxp

ayer

s)

Avera

ge fo

r all e

nterp

rises

151 154231

407

786

256


Ho

urs

pe

r y

ea

r

* Calculated among enterprises who fill these books (56%).

Time spent on filling books of registration of revenues and book of shipment of inventory holdings by

sole proprietors*

24

up to 1,000, 000 1,000,001 – 2,000,000

2,000,001 – 5,000,000

more than 5,000,000


78

94

59

185

103


Ho

urs

per

yea

r

* Calculated among sole proprietors, who fill these books (36 %)

Visits to supervisory bodies – submission of reports and for other reasons

25

Submission of reports Tax Authority Local Authority

Percent of enterprises who made visits (%)94.2 51.9

Number of visits among those who made any visits 10 5

Total time on visiting in 2009 (hours) 15 5

Enterprises

Other Reasons Tax Authority Local Authority

Percent of enterprises who made visits (%) 99.7 12.6



Face to face visits are also opportunities for conclusion between taxpayers and tax officials

Visits to supervisory bodies – submission of reports and for other reasons

26

Submission of reports Tax Authority Local Authority

Percent of sole proprietors who made visits (%)92 30



Sole Proprietors

Other Reasons Tax Authority Local Authority

Percent of sole proprietors who made visits (%) 44 8



Inspections of enterprises

27

44% of enterprises had any inspections in 2009

37%

15%

6%

10%

Percent of enterprises had inspections

Inspections of sole proprietors

28

34% of sole proprietors had any inspections in 2009

30%

5%2%

10%

Percent of sole proprietors had inspections

Cost of Outsourcing vs. Internal tax compliance work (enterprises)

2.1% of enterprises outsourced tax compliance related work partly, 4.9% of enterprises outsourced all tax compliance related work

29



67,738

209,072

334,200

668,022

362,691296,151 290,309

613,653

844,420

495,014

Outsource for Tax Compliance work

Internal Tax Compliance work


AM

D p

er y

ear

Accounting software is not commonly used at small and medium enterprises

30



taxpayers)


55% 52%

34%

18%8%

41%

26% 24%

34%

20%13%

25%19%

24% 32%

62%

79%

34%

Manually PC using non specialized software PC using specialized software


Most of sole proprietors did not use accounting software

31

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

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%

Manually PC using non specialized software PC using specialized software

Annual turnover of enterprises

Using computers and Internet for business purposes

46.7%

16.8%13.5%

23.0%

Enterprises

73.2% of enterprises who used computers had internet connection

7.9% 8.5%1.6%

82.6%Sole proprietors

70.8% of sole proprietors who used computers had internet connection

32

Ways of submitting tax reports

33

The most popular answer among those who submitted tax reports on paper in person is – “it was the most reliable way”

52%

27%

20%0%

Personally

Both personallyand via post

Via post

Electronically74%

19%

7% 0%Personally

Both personallyand via post

Via post

Electronically

Enterprises Sole proprietors

Call-center of the Tax authority

34

29%

85%

71%

15%

Enterprises

YesNo

53.2%

94.3%

46.8%

5.7%

Sole proprietors

YesNo

Center of Accounting Services

35

Share of enterprises who was aware about

the Center of Ac-counting Services

Share of enterprises who used Cente of

Accounting service?

41.5%

87.4%

58.5%

12.6%

Enterprises

Yes

No

62.7%

94.4%

37.3%

5.6%

Sole proprietors

YesNo

General data regarding respondents’ answers on question regarding underreported turnover and unofficial salaries.

36

Turnover Salary

Percent of respondents who indicated figures from “1” to “100” 30 30

Percent of respondents who indicated “0” (zero) 31 31

Percent of respondents who refused to answer 6 6

Percent of respondents who did not know 33 33

Enterprises

Turnover Salary

Percent of respondents who indicated figures from “1” to “100” 30 30

Percent of respondents who indicated “0” (zero) 37 37

Percent of respondents who refused to answer 4 4

Percent of respondents who did not know 29 29

Sole Proprietors

Tax evasion

* The share of underreported turnover/salary was calculated as a mean among companies/individual entrepreneurs who indicated the share of underreported turnover/salary including “zero” answers (indicated figures from “0” to 100”).

37

EnterprisesTurnover (%) Salary (%)

Officially reported84 84

Underreported 16 16

Sole Proprietors Turnover (%) Salary (%)

Officially reported85 88

Underreported 15 12

Share of officially reported and underreported turnover /salary*

Tax evasion

The main popular ways of tax evasion for enterprises and sole proprietors*

No way

Fraudulent abuse of tax privileges

Overstate of costs

Use fiction firm

Payment of unofficial salary

Declare only part of the revenue

2.5%

4.8%

9.5%

15.0%

16.5%

51.7%

Sole proprietors

No way

Fraudulent abuse of tax privileges

Use fiction firm

Overstate of costs

Payment of unofficial salary

Declare only part of the revenue

1.5%

5.1%

7.4%

7.6%

26.0%

52.4%

Enterprises

* The share of respondents who reported at least one way of tax evasion

38

Tax evasion

Allows evading of taxes*

* The share of respondents who reported at least one reason

39

Nothing

Small amount of penalties

Incompetence of control au-thorities

Bad control system

Possibility of conclusion unof-ficial agreement with control

authorities

Fallibility of legislation

.6%

2.6%

7.7%

8.1%

25.7%

55.2%

Enterprises

Nothing

Incompetence of control au-thorities

Small amount of penalties

Bad control system

Possibility of conclusion unofficial agreement with

control authorities

Fallibility of legislation

2.3%

3.6%

6.3%

10.3%

20.9%

56.6%

Sole proprietors

Recent Reforms

During 2010 and 2011, the Government of Armenia implemented a number of reforms aimed at simplifying and improving tax administration and taxpayer services. Some of the reforms were implemented based on IFC recommendations that had resulted from initial survey findings. These reforms include:

The Profit Tax advance payments will be made on a quarterly basis instead of the monthly as previously, thus the number of tax payments will be reduced by 8, i.e. from 13 to 5;

Employers will submit a quarterly report on Social Security payments instead of the monthly as previously, thus the number of reports will be reduced by 8, i.e. 4 instead of 12;

Taxpayers will file Excise Tax calculations quarterly (before it was monthly), i.e. 4 instead of 12;

40

Recent Reforms

VAT payers have a right to issue electronic tax invoices. In addition, it is defined that those VAT payers who issue only electronic tax invoices are exempted from filling in the Book of Shipment;

Adoption of the new Law on Patent fee, according to which IEs also may choose the Patent fee taxation regime, and the Patent fee taxation regime threshold was increased from AMD 2,5 million (USD 6750) to AMD 6,0 million. (USD 16210);

Approval of the procedure of calculation, set off and/or payment of fines by the GoA for delays in paying back of overpayments or amounts other than overpayments;

Approval of criteria for considering tax payer as a risky taxpayer in relation to offsetting or refunding VAT and Excise Tax without study or inspection;

41

Recent Reforms

Approval of the procedure on providing commenatry related to implementation of the tax legislation;

Publication of the Guidelines on Tax Inspections in several areas (construction, transportation, health, education, tourism, fixed payments, maintaining books of shipment of inventory holding and registration of revenues, real estate transactions, and use of cash registers);

Establishment of the Interdepartmental Board of Appeal and the procedure of discussing decisions of appeal (both tax and customs) committees of the SRC.

42

Recent Reforms

Regulatory and administrative measures to improve taxpayer service (e.g. to exclude cases when taxpayers are required to submit documents or data not envisaged in the tax legislation and procedures, to promote the submission of tax reports (calculations, statements, data) by taxpayers via postal services and especially electronically (by encouraging them through trainings and explanatory activities), to exclude unnecessary contacts with taxpayers visiting the tax officials, to invite taxpayers to the tax authority exclusively within the scope of jurisdictions provided by the Law on Inspections and tax legislation);

Launch of three special taxpayer service centers (two in Yerevan and one in Vanadzor), which are designed to minimize taxpayers’ contacts with tax officers. It is anticipated that in 2011, three additional service centers will be established;

Introduction of 27 types of tax reports out of around 40 that can be submitted electronically starting Jan. 1, 2011.

43

Top 5 of short term recommendations

1. Simplification of tax accounting, including special simplified accounting schemes for SME’s;

2. Elimination of requirements for maintaining special tax books (registration of revenues and of shipments);

3. Improvement of services for taxpayers;

4. Eliminate practice of requesting additional information/data/advance payments to submit reports;

5. Introduction of advance ruling practice.

44

[A1]change

Top 5 of midterm recommendations

1. Appeal system further improvement: creating a tax Ombudsman’s office;

2. RBA needs to be implemented;

3. Streamlining VAT invoices system;

4. Improvement of e-filing system and promotion of online banking;

5. Improvement of VAT refund system.

45

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