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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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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

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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

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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…

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Base – 181 respondents