Paying Taxes 2008

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Paying Taxes 2008The global picture


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World Bank Group

Simeon Djankov+1 202 473 [email protected]

Rita Ramalho+1 202 458 [email protected]

PricewaterhouseCoopers*

Bob Morris+1 202 414 [email protected]

Susan Symons+44 20 7804 [email protected]

John Whiting+44 20 7804 [email protected]

Contacts

For urther inormation or to discuss any o the ndings in this report please contact:

*In this publication, the terms PricewaterhouseCoopers and PwC reer to the network o member rms oPricewaterhouseCoopers International Limited, each o which is a separate and independent legal entity.


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Paying Taxes 2008 3

This is the second Paying Taxes publication andocuses on the results o the taxes study in the WorldBank Doing Business project. The study seeks tocompare the ease o paying taxes in 178 countriesaround the world. It provides data which helpsgovernments and industry to ocus on the need to

ensure that the tax systems implemented are eectivetools or tax collection and that they are also ecientor business.

Last years publication generated many gooddiscussions with government and other interestedparties. Media headlines around the world pointed to:

the numerous taxes that companies paybeyond corporate income tax;

the heavy compliance burden in somecountries; and

the high tax cost in others.

Issues discussed with governments includedunderstanding the methodology used in thestudy, assessing the useulness o the results, andquestioning whether the comparisons made werevalid; but also recognising in some cases that changewas needed.

In response to this interest, the World Bank andPricewaterhouseCoopers have devoted signicanteort to ensuring that the results o this studycontinue to be robust and consistent. In addition, inresponse to eedback in the discussions, we have inthis years publication provided more detail on themethodology and the results. The inormation providedis also more extensive so that readers can make theirown analysis and draw their own conclusions.

We hope that you again nd the results o the survey

interesting and useul and we welcome eedbackand comments.

Simeon DjankovManger, Monitoring and AnalysisWorld Bank Group

Susan SymonsTax partnerPricewaterhouseCoopers LLP, UK

Foreword


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Paying Taxes 2008 5

Foreword 3

Executive summary 6

Section one

Survey methodology 8

Introduction 9

The case study company 9

Total Tax Contribution 10

Ease o paying taxes ranking 11

Number o tax payments 11

Time to comply 12

Tax cost 12

Taxes borne and taxes collected 13

Section two

Learning rom reorm a World Bank perspective 16

Section three

Understanding Total Tax Contribution and the Paying Taxes data 26 a PricewaterhouseCoopers perspective

Section our

The way orward 42

Appendix 1

The data tables 46

Appendix 2

Fundamental denitions and related issues 60

Appendix 3

The PricewaterhouseCoopers Total Tax Contribution ramework and developments in 2007 64

Caveats and disclaimers 68

Contents


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Executive summary


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Paying Taxes 2008 7

Executive summary

Last years Paying Taxes publication generated manygood discussions on the impact o the tax system,with businesses, governments and other interestedparties. This year, in response to eedback, we areproviding even more detail on the methodology usedand the results generated by the study.

The World Bank study now extends to 178countries and oers a valuable opportunity to beable to look at and compare tax regimes aroundthe world.

We now include rankings o the three indicatorswhich make up the overall ease o paying taxesranking. Full inormation on the results is on the

website (www.doingbusiness.org).

The results o the survey are very rich, and these areully disclosed in the appendices to this publication.Only a selection, however, can be covered inthe commentary.

The results o this years study show again thatcorporate income tax is only part o the story.Governments thereore need to look across all o thetaxes that companies pay when considering theirreorm agenda.

The World Bank study is unique in that it looks beyond corporate income tax to all o the taxespaid by a case study company.

There continues to be many more business taxesto consider in addition to corporate income taxes.The study this year shows that corporate incometaxes only account or 37% o the Total Tax Rate(TTR), 26% o the number o hours spent ontax compliance and 12% o the number o taxpayments made.

Some types o sales tax add considerably to theTotal Tax Rate (cascade and turnover taxes).

Labour taxes and contributions add signicantlyto the tax cost in some countries and also to thecompliance obligations.

Our results include indicators on the tax complianceburden in addition to the tax cost. These help toshow that a win:win or government is achievable bysimpliying the tax system and easing the complianceburden on business, as well as by reducing tax rates.

To consider the ull impact o the various businesstaxes, both their tax cost and their complianceburden need to be considered.

Indirect taxes and consumption taxes can addsubstantially to compliance costs.

Government revenues can be enhanced bysimpliying tax systems and compliance obligations.This may involve reducing the number o taxes.Companies benet at the same time with reducedtax compliance obligations to ull.

The ability to le and pay taxes electronically canhelp reduce the compliance burden.

The results show that tax reorm is widespread. Thisyear 31 countries improved their tax system and 65have done so over the past three years.

Reducing corporate income tax was the mostpopular reorm.

However, many countries have made changes toreduce the compliance burden by simpliying oreliminating other business taxes.

Total tax rates have been in a downward trendduring the period in which Paying Taxes data has

been collected.

For their part, businesses need to be more transparentin communicating their total tax contribution (see page10). A better understanding o the impact o all taxes inany country will aid business decisions.

More transparency around the taxes paid and thecompliance systems is key to understanding howtax systems impact businesses.

Businesses need to be more transparent incommunicating their total tax contribution toacilitate how tax ts with corporate responsibilitystrategies, and to help assess the economicootprint o business.

Empirical work by PricewaterhouseCoopers isshowing the importance o companies in generatingtax revenues.


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Section one

Survey methodology


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Paying Taxes 2008 9

Introduction

The Paying Taxes study is carried out as part o theWorld Banks overall Doing Business report which, thisyear, was published on 26 September 2007. This is thethird year in which tax data has been collected as parto the Doing Business project.

The Paying Taxes study involves gatheringinormation on the tax aairs o a standard casestudy company in 178 countries, by reviewing thenancial statements and a list o transactions o astandard modest-sized rm. This inormation is usedto generate three indicators related to the number

o tax payments, the time taken to comply withits tax aairs, and the tax cost. These are equallyweighted to produce an overall ranking or eachcountry or the ease o paying taxes. Rankings oeach o the individual components are also available.All the rankings are included in Appendix 1, andurther details or each country are available atwww.doingbusiness.org

This year, the World Bank study has also collectedsupplementary data which, whilst not used todetermine a countrys ranking, assists with the

understanding o the tax system in each country.Some o this supplementary data is reerred to inthis publication.

The case study company

In order to gather the necessary inormation togenerate the tax indicators mentioned or thestandardised business in each country, a casestudy company has been developed. This company

has a set o nancial statements, and variousassumptions have been made about its activities andits transactions throughout a typical year. These actsand assumptions allow the World Bank to generate taxindicators or each country based on the applicationo their tax rules to the case study company. Theseacts and assumptions are vital to ensure that the datacollected is comparable across countries and that thetax indicators or each jurisdiction are calculated usingthe same criteria.

Tax advisers, mostly rom PricewaterhouseCoopers,provided the tax technical data. The data providedis based on the standardised case study acts andassumptions and on the tax rules applying or theyear rom 1 January to 31 December 2006. While thebasic elements o the case study do not change yearon year, the period or which the rules are deemed toapply is updated.

The case study company used or the study is afowerpot manuacturer and retailer. Its turnover isthe same multiple o the income per capita or eachcountry. In absolute terms, thereore, the numbersinvolved can be dierent. For example, in the UK, the

turnover o the business is assumed to be 21.5mwhereas in Argentina turnover is 13,941,603 pesoswhich at 31 December 2006 (the end o the scal yearo the survey) equates to 2.3m. In both countries,however, the calculation is the same and basedon income per capita. This allows the case studynancials to be fexed to refect the relative wealth othe economy in which it operates. While the turnover isfexed, the gross margin o the company is xed to thesame percentage regardless o the country in whichthe company operates.

The case study company does not attempt to bethe most typical business in every country, but theassumptions have been set in order to acilitatecomparability between countries o the tax burden ora company with a particular set o characteristics. Thiscomparability is assisted by the detailed assumptionsmade with regard to the companys operations, sta,transactions, size, etc., as well as the process bywhich the inormation is gathered and reviewed.

The ollowing detailed assumptions are made aboutthe case study company:

The company and its operations

The company is a limited liability, taxable company.I there is more than one type o limited liabilitycompany in a country, the limited liability ormmost popular among domestic rms is chosen.Incorporation lawyers or the statistical oce reportthe most popular orm.

Section oneSurvey methodology


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10


The company is in the second year o operation. Itcommenced activities, purchased all the assets inthe balance sheet, and hired all its workers on a setdate (1 January 2005). It operates in the countrysmost populous city.

The company is 100% domestically-owned andhas ve owners, all o whom are resident or taxpurposes in the country.

The company perorms general industrial andcommercial activities. Specically, it producesceramic fowerpots and sells them at retail. Thecompany does not handle products subject to aspecial tax regime, or example, alcohol or tobacco.

The company owns two plots o land, one building,machinery, oce equipment, computers and onetruck. Another truck is leased. One plot o land wassold in the year or a prot.

Employees

The company has 60 employees comprising ourmanagers, eight assistants and 48 workers. All othese workers are nationals o the country and oneo the managers is also an owner. The assumptionsor employees in terms o their salaries arestandardised in order to collect inormation on

labour taxes and contributions.

No employees have let or joined the companysince it was established.

Financial data

The company has a turnover o 1,050 times incomeper capita and makes a loss in the rst year ooperation. The same gross margin (pre-tax) isapplied to all countries.

The company distributes 50% o its protsas dividends to the owners at the end o thesecond year.

Tax-specifc assumptions

Several tax-specic assumptions have beenmade including the level o bad debts, pensioncontributions and details o operational expensesincluding entertaining, advertising, legal ees andleasing costs.

Patent royalties are paid by the company or apatented industrial process the company uses inits operations.

As explained beore, the turnover and prots o thecompany are calculated based on the income percapita o each country and the gross margin is xedat the same percentage. These assumptions allow thecalculation o what is called the commercial prot othe company. Commercial prot is the prot beore alltaxes, i.e. not just beore all corporate income or prottaxes. This gure is important in the survey as it isused to calculate one o the key ranking components,the Total Tax Rate. This rate is explained later inthis section.

Total Tax Contribution

The PricewaterhouseCoopers Total Tax Contributionramework was developed with a view to establishinga methodology which enables companies tocollect and communicate total tax inormation in aconsistent manner, meeting the needs o their variousstakeholders and helping to improve transparency.

The ramework encompasses all the taxes that arepaid by companies and includes, or example, propertytaxes, labour taxes and contributions, sales taxes and

other taxes, as well as corporate income tax. It makesa undamental distinction between two types o taxespaid by companies; these are known as taxes borneand taxes collected. This distinction is explainedurther below. In essence, taxes borne are thosewhich are a cost to the company, such as propertytaxes, employer social security and corporate incometax. Taxes collected are those where the company iscollecting the tax on behal o the authority, includingtaxes deducted rom employees salaries, sales taxesand excise duties1.

The Total Tax Rate indicator (explained later in this

section) which is included in the World Bank PayingTaxes study, has been calculated using the principleso the Total Tax Contribution ramework. It is importantto note that or the purpose o calculating the TTR, it isonly taxes borne which are included.

1 Total Tax Contribution ramework What is your companys overall tax

contribution? A PricewaterhouseCoopers discussion paper, published

April 2005.

http://www.pwc.com/Extweb/insights.ns/docid/75D58AF8B3774A3C80

256F8800586AC6


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Paying Taxes 2008 11


Details o taxes collected are also gathered by thestudy and these have an impact, along with taxesborne, on the indicators dealing with hours to complyand the number o tax payments. The Total TaxContribution ramework also includes the cost otax compliance.

It must be understood that the Total Tax Contributionramework is a data gathering and reportingmechanism, designed to increase transparencyaround a companys tax impacts. It is acknowledgedthat there are economic arguments over whethercompanies, consumers, or employees ultimately bearthe economic incidence o taxes. This is not addressed

in this study.

Ease o paying taxes ranking

The World Bank Paying Taxes database or the DoingBusiness report records not only the taxes that astandard modest-sized company must pay or withholdin a given year, but also the mandatory contributionsthat are made. Issues around the denition o tax,and the reasons or including other mandatory

contributions in the World Bank study are exploredurther in Appendix 2. The database also recordsmeasures o the administrative burden or paying taxesand other mandatory contributions.

The taxes and contributions measured include prot orcorporate income tax, social contributions and labourtaxes paid by the employer, property taxes, propertytranser taxes, dividend tax, capital gains tax, nancialtransactions taxes, waste collection taxes and vehicleand road taxes.

The data collected by the study is subject to a systemo ranking based on three indicators:

Steps: the number o tax payments

Time: the number o hours to comply with thecompanys tax obligations

Cost: the Total Tax Rate (TTR)

This three step approach is linked to a broadermethodology used by the World Bank in the

Doing Business project which requires these threecomponents o Steps, Time and Cost.

The World Bank report, Doing Business 2008,aggregates these three indicators to generate anoverall ranking. The aggregation o the indicators giveseach indicator an equal weighting.

The data tables at the back o this report in Appendix 1show this overall ranking, and additionally the rankingor each individual indicator i.e. the TTR, the time tocomply and the tax payments. The appendix alsogives a breakdown o the results or each indicatoracross the main types o taxes.

Number o tax payments

The tax payments indicator refects the total number otaxes and contributions paid, the method o payment,the requency o payment and the number o agenciesinvolved or this standardised case during the secondyear o operation. It includes payments made bythe company on consumption taxes, such as salestax or value added tax. These taxes are traditionally

withheld on behal o the consumer. Although theydo not aect the income statements o the company,they add to the administrative burden o complyingwith the tax system and so are included in the taxpayments measure.

The number o payments takes into account electronicling. Where ull electronic ling is allowed and it isused by the majority o medium-sized businesses, thetax is counted as paid once a year even i the paymentis more requent.

For taxes paid through third parties, such as tax oninterest paid by a nancial institution or uel tax paidby the uel distributor, only one payment is includedeven i payments are more requent. These aretaxes withheld at source where no ling is made bythe company.

Where two or more taxes or contributions are paidjointly using the same orm, these joint payments areonly counted once. For example, i mandatory healthinsurance contributions and mandatory pension


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contributions are led and paid together, only one othese contributions would be included in the numbero payments.

Time to comply

Time is recorded in hours per year. The indicatormeasures the time to prepare, le and pay (or withhold)three major types o taxes and contributions:

corporate income tax,

value added or sales tax, and

labour taxes including payroll taxes and socialcontributions.

Preparation time includes the time to collect allinormation necessary to compute the tax payable.I separate accounting books must be kept or taxpurposes or separate calculations made the timeassociated with these processes is included. This extratime is included only i the regular accounting work isnot enough to ull the tax accounting requirements.The time estimated also does not include the timespent developing the entries on tax or inclusion in the

statutory accounts.

Filing time includes the time taken to complete allnecessary tax orms and to make all necessarycalculations and submissions.

Payment time is the hours needed to make thepayment online, or at the tax oce. Where taxesand contributions are paid in person, the timeincludes delays while waiting. This payment timecan also include analysis o orecast data andassociated calculations i advance payments

are required.

It is important to note that the hours to complymeasure does not include any time spent on taxaudits or inspections or dealing with tax authorityqueries. The case study does not include any actsor assumptions which would enable such time tobe estimated.

Table 1.1

What does Paying Taxes measure?

Tax payments or a manuacturingcompany in 2006

Total number o taxes and contributions paid,including consumption taxes (value added tax)

Method and requency o payment

Time required to comply with the threemajor taxes

Collecting inormation to compute tax payable

Completing tax orms, ling with properagencies

Arranging payment or withholding

Preparing separate tax accounting books

Total Tax Rate

Prot or corporate income tax

Social contributions and labour taxes paid by

the employerProperty and property transer taxes

Dividend, capital gains and nancialtransactions taxes

Waste collection, vehicle, road and other taxes

Source: Doing Business database.

Tax cost

Total Tax Rate (TTR)

The TTR indicator measures the amount o all taxesand mandatory contributions borne by the businessin the second year o operation, expressed as apercentage o commercial prots. This is a morecomprehensive measure, which looks at the cost oall such contributions borne by business rather thanocussing only on corporate income or prot taxes. Assuch, it is more inormative and more useul.


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The Paying Taxes section o Doing Business 2008reports the TTR or the year 1 January to 31 December2006. The total amount o taxes is the sum o allthe dierent taxes and contributions payable ateraccounting or deductions and exemptions. Thetaxes withheld (such as sales or value added tax orpersonal income tax) but not borne by the companyare excluded rom the TTR (while noting that thesestill contribute to the compliance indicators, hoursand payments).

The taxes and contributions included can be dividedinto ve categories:

prot or corporate income tax,social contributions and labour taxes paid by theemployer (or which all mandatory contributions areincluded, even i paid to a private entity such as arequited pension und),

property taxes,

turnover taxes and cascading sales taxes includingirrecoverable VAT, and

other small taxes (such as municipal ees andvehicle and uel taxes).

It is important to note that the prot gure used inthe TTR calculation (the commercial prot) is not thetraditional gure ound in the nancial statements o acompany, the prot beore tax gure (PBT). As manyo the taxes borne are deductible in calculating PBT,they must be added back to generate a prot beoreall business taxes. Commercial prots are dened assales minus cost o goods sold, minus gross salaries,minus administrative expenses, minus other expenses,minus provisions, plus capital gains (rom the propertysale) minus interest expense, plus interest incomeand minus commercial depreciation. To compute the

commercial depreciation, a straight-line depreciationmethod is applied with the ollowing rates: 0% orthe land, 5% or the building, 10% or the machinery,33% or the computers, 20% or the oce equipment,20% or the truck and 10% or business developmentexpenses. I any o the taxes and contributions areincluded in other expenses, then these are addedback to the commercial prots gure.

It is o note that the assumption on the interestexpense was changed this year, reducing the value o

this expense. Commercial prots thereore changedrom 57.8 times income per capita to 59.4 times.

The principles used or the tax cost indicator arebroadly consistent with the PricewaterhouseCoopersTotal Tax Contribution ramework methodology.However the gures used by PwC in its empirical workto calculate TTR only include taxes. Other mandatorycontributions are usually disclosed in other elementso the Total Tax Contribution ramework.

Below are the gures or the UK which illustrate howthe various tax ratios compare with TTR.

Total Tax Rate: UK as an example

000 000

Prot beore total taxes borne 1,215(PBTTB) or commercial prot

Other taxes borne:

Social security 137

Business rates 15

Vehicle tax 1

Insurance premium tax 1

Fuel duty 21(175)

Prot beore tax (PBT) 1,040

Corporation tax (CT)(ater necessary tax adjustments) (259)

Prot ater tax 781

CT/PBT (259/1040) 25%

CT/PBTTB (259/1215) 21%

TTR (434/1215) 36%


Taxes borne and taxes collected

As mentioned above, the PricewaterhouseCoopersTotal Tax Contribution ramework makes a undamentaldistinction between taxes borne and taxes collected,and this principle is ollowed by the Paying Taxesstudy. The split is important or the purpose o


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understanding the impact o taxes on the companyand or the analysis o the results. For the PayingTaxes study, taxes borne contribute to the TTR, buttaxes collected do not. Taxes collected are importanthowever, as they do contribute to the number o hoursthat the company takes to comply with the tax system,and they also impact on the number o tax payments.They thereore contribute signicantly to the cost othe tax system and to the eort and resource required.A common denition o the terms is as ollows:

Taxes borne are those which are paid by thecompany and are a cost to the company.

Taxes collected are those or which the company

acts as tax collector/administrator or the authority.

To expand on these denitions a little urther:

Taxes borne could also be termed taxes suered,in that these are the levies that really do impact thecompany concerned. It does not matter whether thecharge to the prot and loss account is direct (orexample the corporate prots tax charge) or indirect(such as the transer tax paid on the purchase o abuilding, which is capitalised as part o the buildingscost and then amortised over a period). Both the

corporate income tax and the transer tax would countas taxes borne. For the transer tax, the amount bornewould be the ull amount paid in the period rather thanthe amount amortised. Taxes borne are a cost to thecompany and, as or other costs, will ultimately bepassed on, or example in higher prices to customers,lower wages to employees or lower dividends toshareholders. This ultimate incidence does not aectthe treatment as a tax borne.

Taxes collected are those where the companyacts, in eect, as (unpaid) tax collector on behal othe authority. The classic examples are sales andexcise taxes, together with taxes and contributionsdeducted rom employees pay. The only impact taxescollected have on the companys prots will be viaadministrative costs.

Sales taxes

Sales taxes probably present the best examples othe issues that have to be considered in making thetaxes borne/collected distinction. Below are ourtypes o sales taxes that have dierent treatmentsor the study, and thereore impact the rankings indierent ways:

1. Sales taxes that are charged only at the nal pointo sale to the consumer are not normally taxesborne by a company as they are suered only bythe nal consumer. This type o sales tax is treatedas a tax collected.

2. Value added tax is also normally a tax collected. Itis a tax which is separately identied in the pricecharged to the purchaser; the input tax paid by theseller can be set o against the output tax chargedon the sale; it is the net that is accounted or to thetax authorities. Each o these attributes point to VATbeing a tax collected. The exception to this is whereVAT incurred is irrecoverable, in which case thatcomponent will constitute a tax borne.

3. Cascade-style sales taxes, seen or example

in some Arican countries, add additional coststo each consumer, so that an element o themis borne by each company in a chain o supply.These taxes are a charge to the prot and lossstatement aecting the protability o a company,while VAT and sales tax on nal products do not.For the purposes o the study, these taxes are taxesborne to the extent that they are taxes incurred onpurchases by the company.

4. Turnover taxes are a tax borne as they are generallycalculated as a percentage o a companysturnover and paid to the tax authorities. Theybecome part o a companys costs and aect acompanys protability.


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Total Tax Contribution surveys

The Total Tax Rate is a core component to acilitate the measurement o tax cost in the PayingTaxes study. It is interesting to compare the results generated by the study with the empirical workcarried out by PricewaterhouseCoopers. A survey o large UK listed companies carried out in2006 ound an average TTR or the UK or these companies o 40.6% compared to 35.7% in thePaying Taxes study. Tax rates by reerence to turnover have been used as an interesting alternativeand have oten shown some useul correlations across industry sectors and additional insights byreerence to the value added by a company and who benets. It is oten the case that the rates o

tax shown to turnover are quite high, particularly or businesses that are involved in charging andcollecting excise duties. For example, the companies participating in the 2006 survey in the UKpaid an amount equivalent on average to 18.3% o their turnover in taxes borne and collected.


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Section two

Learning rom reorm

a World Bankperspective


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Who makes paying taxes easy and who

does not?

Tax systems are known to have existed since AncientEgypt (around 3000 BC). Tax systems have evolvedsince then in dierent ways across the globe.Nowadays, tax rules aced by companies can be verydiverse. In Hong Kong there are only our businesstaxes, all at low rates (or instance, corporate incometax is only 17.5% o taxable prots). Meanwhile,Belarus has 11 business taxes, 10 o which are paidmonthly and one paid quarterly, leading to a TTR oalmost one and a hal times commercial prots.

Dierences are visible not only in tax rates but also inthe administrative burden.

In Sweden we pay taxes online. The corporateincome tax, value added tax, labour contributionsand property tax are led on a single orm. Doesnteveryone do it that way? asks Astrid, a Swedishbusiness owner.

Not yet. In Papua New Guinea, Syria and Zimbabwetax orms are brought in person to the tax oce anddiscussed with a tax ocer to make sure calculations

are correct1. To comply with regulations on taxes andcontributions2 in the Republic o Congo, a companymust make 89 payments a year, spend 106 days andpay 65.4% o its prots. Meanwhile, the companyhas to ll out 50 pages o orms or corporate incometaxes, 50 or labour taxes and contributions and 36 orconsumption taxes. Only Belarus and Ukraine have amore burdensome tax system (Table 2.1).

1 The World Bank survey has this year also collected supplementary data

which whilst not used to determine a countrys ranking, does assist

with the understanding o the tax system in each country. Some o this

supplementary data is reerred to in this publication.

2 Doing Business measures taxes and contributions paid by a

standardised business. The indicator includes taxes as dened by

the system o national accounts (compulsory unrequited payments to

general government) as well as government-mandated contributions

such as compulsory payments to the employee social security where the

statutory incidence is on the employer. See Section one or details.

Table 2.1

Where is it easy to pay taxes and where not?

Rank

1

2

3

4

5

6

7

8

9

10

Easiest

Maldives

Singapore

Hong Kong, China

United Arab Emirates

Oman

Ireland

Saudi Arabia

Kuwait

New Zealand

Kiribati

Rank

169

170

171

172

173

174

175

176

177

178

Most difcult

Panama

Jamaica

Mauritania

Bolivia

Gambia

Venezuela

Central AricanRepublic

Congo, Rep.

Ukraine

Belarus

Note: Rankings are the average o the country rankings on the number o

payments, time and Total Tax Rate.


The Maldives levies only one small tax on domesticbusiness in the manuacturing sector (the propertytranser tax) and only hotels and banks are taxedon their prots. Oil producing countries tend toimpose low tax burdens or domestic rms in themanuacturing sector because governments generaterevenue elsewhere. Outside o oil rich countries andthe Maldives, the top perormers whose businesstax systems may be successully emulated by othercountries are Singapore, Hong Kong, Ireland andNew Zealand.

Four o the bottom 10 countries have a TTR above100% o commercial prots. That means that acompany with sales o 120% o cost o goods soldcannot make enough prot to pay all the businesstaxes. Seven o the bottom 10 countries have to paytaxes at least once a week and spend at least 65 daysper year in the process.

Section twoLearning rom reorm a World Bank perspective


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Figure 2.1More burdensome taxes and contributions, ewer ormal

businesses.

Fewest

2nd

3rd

4th

Most

Higher

Lower

Countries ranked by number o payments, quintiles

Business density

Easiest

2nd

3rd

4th

Mostdifcult

Higher

rate

Lower

rate

Countries ranked by ease o paying taxes, quintiles

Entry rate

Source: Doing Business database

Note: Relationships are signicant at the 1% level and remain signicant

when controlling or income per capita. Business density is the number o

ormally registered rms per capita. Business entry is the number o rmscreated in a year as a percentage o all registered rms.

Ease o paying taxes

The ease o paying taxes can range rom ling a singleonline orm in Sweden to making 124 payments a yearin Belarus. Investors make their choices accordingly.Countries with more payments have ewer ormalbusinesses per capita and lower rates o businessentry (Figure 2.1).3 In Brazil, or example, the Simplesprogramme, which aims to ease tax requirements orsmall businesses, increased business registrationsin the retail sector by 13% compared with the yearbeore the programme started.4

Countries that make it easier to pay taxes and

contributions also have higher rates o workorceparticipation, and lower rates o unemployment,among women.5 The reason appears simple: aburdensome tax system disproportionately hurtssmaller businesses, especially in the services sector,and this is where most women work. In Colombia,where women outnumber men almost two to oneamong the unemployed6, small businesses have topay 82.4% o their commercial prots, make 69 taxpayments a year and spend 47 days to comply with alltax requirements. This is changing, thanks to a new taxlaw enacted by the Columbian Congress in late 2006.

There is good news: paying taxes is now easier,especially in Eastern Europe and Central Asia, whichhad the most reorms in 2006/07. Revenues aregrowing as well. For example, the Czech Republic sawits tax revenue rise by 2% ater reducing the corporateincome tax between 2004 and 2005.7 This is part oa longer global trend the tax burden on businesses

3 Djankov, Simeon, Caralee McLiesh, Rita Ramalho and Andrei Shleier.

2007. Taxation, Investment and Entrepreneurship. Harvard University,

Department o Economics, Cambridge, Mass.4 Monteiro, Joana C. M., and Juliano J. Assuno. 2006. Outgoing the

Shadows: Estimating the Impact o Bureaucracy Simplication and Tax

Cut on Formality and Investment. Ponticia Universidde Catlica,

Department o Economics, Rio de Janeiro.

5 Alesina, Alberto, and Ichino, Andrea. 2007. Gender-Based Taxation.

Harvard University, Department o Economics, Cambridge, Mass.

Azmat, Ghazala, Maia Guell and Alan Manning. 2006. Gender Gaps in

Unemployment Rates in OECD Countries. Journal o Labor Economics

24 (1): 138.

6 World Bank. 2007. World Development Indicators 2007. Washington,

D.C.

7 World Bank. 2007. World Development Indicators 2007. Washington,

D.C.



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Table 2.2Who makes paying which taxes easy and who does not?

Corporate income taxes Labour taxes Other taxes

Payments (number per year) Payments (number per year) Payments (number per year)

Fewest Most Fewest Most Fewest Most

Aghanistan

Argentina

Australia

Austria

Belgium

Bolivia

Brunei

BulgariaBurkina Faso

Burundi

1

1

1

1

1

1

1

11

1

Cameron

Finland

Indonesia

Nicaragua

Venezuela

El Salvador

West Bank and Gaza

RomaniaUzbekistan

Belarus

13

13

13

13

13

14

14

1616

24

Argentina

Bulgaria

Chile

Denmark

Ecuador

Hong Kong, China

Ireland

ItalyKazakhstan

Latvia

1

1

1

1

1

1

1

11

1

Mali

Philippines

Senegal

Congo Rep.

Korea

Colombia

Jamaica

MotenegroRomania

Ukraine

36

36

36

37

37

48

48

4848

60

Maldives

Oman

Saudi Arabia

Sweden

Brunei

Hong Kong, China

Norway

United Arab EmiratesSeychelles

Singapore

1

1

1

1

2

2

2

23

3

Sri Lanka

Ukraine

Panama

Cte dlvoire

Tunisia

Serbia

Congo, Rep.

Kyrgyz RepublicBelarus

Uzbekistan

33

33

34

39

39

42

47

5164

90

Notes: not including 6 countries that do not have proft

taxes

Including 15 countries that do not have labour payments Not including 3 countries that have no other taxes

Time (hours per year) Time (hours per year) Time (hours per year)

Least Most Least Most Least Most

Comoros

Jordan

Grenada

Solomon Islands

SwazilandTonga

Ireland

West Bank and Gaza

St Lucia

Mauritius

4

5

8

8

88

10

10

11

13

Mexico

Congo, Rep.

Syria

Vietnam

UkraineNigeria

TimoreLeste

Cameroon

Brazil

Belarus

264

275

300

350

421480

480

500

736

960

Papua New Guinea

Singapore

Oman

Tonga

United Arab EmiratesLuxembourg

Norway

Australia

Bhutan

Ethiopia

8.5

10

12

12

1214

15

18

24

24

Jamaica

Venezuela

Vietnam

Czech Republic

ArmeniaBolivia

Nigeria

Brazil

Cameroon

Ukraine

336

360

400

420

480480

480

491

700

732

Switerland

Singapore

Burundi

New Zealand

ItalyLuxembourg

Albania

Ethiopia

GuineaBissau

Trinidad and Tobago

8

9

12

15

1623

24

24

24

24

China

Venezuela

Armenia

Bolivia

MauritaniaPakistan

Senegal

Azerbaijan

Ukraine

Brazil

384

384

480

480

480480

480

602

932

1374

Notes: not including 6 countries that do not have proft

taxes

Not including 2 countries that do not have labour tax by

employee or employer

Only time to pay consumption taxes included, not

including 19 countries that do not have consumption

taxes

Total Tax Rate (% o prot) Total Tax Rate (% o prot) Total Tax Rate (% o prot)

Lowest Highest Lowest Highest Lowest Highest

UzbekistanZambia

Saudi Arabia

Latvia

Guatemala

Kyrgyz Republic

Kuwait

Belgium

Czech Republic

Argentina

1.2%1.7%

2.1%

2.2%

2.6%

3.0%

3.7%

5.4%

5.9%

6.0%

BruneiNew Zealand

Kenya

St. Kitts and Nevis

Japan

Bhutan

Sao Tome and Principe

St. Vincent and the Grenadines

Gambia

Central Arican Republic

31.8%32.1%

35.5%

32.7%

33.2%

34.2%

36.9%

37.6%

41.4%

176.8%

NamibiaMalawi

Bhutan

New Zealand

Denmark

Mauritius

Chile

St. Vincent and the Grenadines

Swaziland

South Arica

0.0%1.1%

1.1%

2.4%

2.5%

3.6%

3.8%

3.9%

4.0%

4.3%

HungaryCzech Republic

Slovakia

Brazil

Italy

Ukraine

Belarus

China

France

Belgium

39.4%39.5%

39.7%

40.6%

43.2%

43.4%

44.1%

46.0%

52.1%

57.1%

BruneiSamoa

Oman

Indonesia

Fiji

Botswana


Vietnam

Ghana

Seychelles

0.0%0.0%

0.1%

0.1%

0.2%

0.2%

0.3%

0.3%

0.4%

0.5%

UzbekistanEritrea

Liberia

Argentina

Belarus

Mauritania

Congo, Dem. Rep.

Sierra Leone

Gambia

Burundi

66.9%75.8%

76.3%

77.5%

87.5%

89.9%

221.9%

222.2%

232.4%

253.3%

Notes: not including 13 countries that do not pay proft tax Not including 13 countries that do not pay labour taxes Not including 6 countries that do not pay other taxes



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20


has decreased every year since 1985.8 However, a ewplaces much o Arica, some countries o the ormerSoviet Union and several Latin American countries have yet to catch on (see Section three).

Types o taxes

There are six countries that do not tax prots, 13do not have labour taxes or contributions paid bythe employer, and three do not have other businesstaxes additional to prot tax (corporate income tax)or labour taxes and contributions. On average, acompany spends 56 days time complying with tax

regulation, 15 days or prot taxes, 21 or labour taxesand contributions and 21 or consumption taxes. Thedispersion in compliance time is high. It takes 105days to comply with consumption taxes in Azerbaijan,while it takes only one day in Switzerland (Table 2.2).

Where do the big dierences in prot taxes comerom? Statutory tax rates do have a role in thosedierences, but maybe not the leading role. Thetax rules dening the computation o the corporatetax base can be crucial. A good example can beseen in the Czech Republic and Russia which both

have the same statutory corporate tax rate o 24%.However, the eective prot tax is over twice as highin Russia. One reason or this is due to dierences indepreciation rates. In the Czech Republic, machinerycan be depreciated or tax purposes in ve years,using the accelerated method, while in Russia it takesat least seven years to depreciate the same assets.

What are the other taxes and why are they sodierent? Other taxes include all the taxes amanuacturing company is liable or, excluding thoserelated to prot or labour (which are already includedin other categories). The dierences in these taxesacross economies can be striking. Sweden has onlyone other tax (property tax). Kyrgyz Republic hassix other taxes (two taxes on property, two turnovertaxes, one tax on interest and one uel tax). Propertytax is the most common among other taxes with 145economies levying it. However, dierences across thistax can be signicant. A property tax can be based on

8 Slemrod, Joel. 2004. Are Corporate Tax Rates, or Countries,

Converging? Journal o Public Economics 88 (6): 1169-86.

the size, value or usage o the property. In the CzechRepublic, property tax is less than 0.1% o protswhile in Belarus it is over 32%. Although other taxesare oten considered less relevant than prot or labourtaxes, countries with higher other taxes have lowerinvestment rates9.

Who is reorming?

Thirty-one economies made it easier to pay taxesin 2006/07 (Table 2.3). Reducing corporate incometax rates was the most popular reorm implemented

in 27 economies. Moldova, Mongolia, Sierra Leone,Syria, Turkey and Uruguay made major revisions intheir tax codes. Colombia, Israel, the Kyrgyz Republic,South Arica, Uruguay and Uzbekistan reduced thenumber o taxes paid by businesses by consolidatingor eliminating taxes. Azerbaijan, Bulgaria, Colombia,Lesotho, Malaysia, the Netherlands, Turkey andUzbekistan simplied the process o paying taxes byintroducing or expanding electronic ling and reducingthe requency o payments.

Bangladesh, the Dominican Republic, Hungary,

Venezuela and Zimbabwe increased the tax burden onbusinesses. Bangladesh raised its corporate incometax rom 37.5% o prots to 40%. Only Comorosand So Tom and Principe have higher corporateincome tax. The Dominican Republic passed a lawrequiring companies to submit paper receipts everymonth. Hungary introduced a temporary 4% tax onprots (the solidarity tax) and increased employerslabour contributions by 3.5 percentage points bothwith the aim o reducing the budget decit. Venezuelaintroduced three new taxes: science, technologyand innovation tax; anti-drug tax; and workplacepreventions, conditions and environment tax. But onlythe rst is in practice as o now. Zimbabwe increasedthe road tax and the tax on cheque transactions.It also introduced a new corporate tax orm toaccompany each quarterly payment. This increasedthe time or tax compliance by 40 hours a year.

9 Djankov, Simeon, Caralee McLiesh, Rita Ramalho and Andrei Shleier.

2007. Taxation, Investment and Entrepreneurship. Harvard University,

Department o Economics, Cambridge, Mass.


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Bulgaria was the top reormer in 2006/07: it reducedthe corporate tax rate rom 15% to 10% andemployers labour taxes by 7%. In addition, onlineling is now widely used or corporate income tax andsocial security contributions.

Turkey was the runner-up in reorms. It reduced thetop rate or corporate income tax rom 30% in 2005to 20% in 2006 and introduced a new corporate taxcode. Turkey also reduced the tax on interest rom18% to 15% in 2006 and simplied other taxes,such as the property tax and the tax on chequetransactions. It also improved e-ling, reducing thetime businesses need to comply with tax regulations

by 31 hours.

Eastern Europe and Central Asia accounted or abouta third o the reorms in 2006/07. Besides Bulgaria,eight countries reduced their corporate income ratetax and six reduced social contributions paid byemployers. Uzbekistan reduced the corporate tax raterom 15% in 2005 to 12% in 2006 and 10% in 2007.It also gradually reduced labour contributions rom33% in 2004 to 24% in 2007, expanded the single taxpayment regime or small businesses, and abolishedecology tax. Moldova is taking the most ambitious

step: reducing the corporate income tax rate rom15% to 0% in 2008 ater already lowering it rom 18%in 2006. FYR Macedonia is committed to reducingthe corporate income tax rate rom 15% in 2006

to 12% in 2007 and 10% in 2008. Albania reducedsocial security contributions paid by the employerrom 30.7% to 21.7% in 2006. Azerbaijan reducedcorporate income tax rates by two percentage pointsand simplied the administrative process o payingthis tax. Kazakhstan increased depreciation ratesreducing the base or prot tax. Kyrgyz Republic cutthe corporate tax rate in hal and decreased labourtaxes and contributions by three percentage points.Romania and Slovenia reduced labour taxes. Sloveniais going a step urther and plans on eliminating payrolltax by 2009.

In Eastern Europe, a main motivation or simpliying

taxes is joining and being competitive in the EuropeanUnion. This has created pressure on Western Europeancountries to simpliy taxes too. The Netherlands hasreduced the top rate or corporate income tax rom31.5% in 2005 to 29.6% in 2006 and 25.5% in 2007.It also reduced three o the labour contributions. Andit introduced e-ling or social security contributions,greatly simpliying the process o paying taxes.Greece, Portugal, and Spain all reduced theircorporate income tax rates. Both Greece and Spainollowed a gradual tax reduction strategy: rom 35% in2004 to 25% in 2007 or Greece and rom 35% in 2006

to 30% in 2008 or Spain (Table 2.4).

Six countries reormed in Arica. Sierra Leone reduceda cascading sales tax a sales tax that must be paid

Table 2.3

Reducing tax rates the most common reorm in 2006/07

Reduced prot tax

Reduced labour taxes orcontributions

Simplied process opaying taxes

Revised tax code

Eliminated taxes

Azerbaijan, Bulgaria, Colombia, Cote dlvoire, Greece, Israel, Kazakhstan, KyrgyzRepublic, Lesotho, FYR Macedonia, Malaysia, Mauritius, Mexico, Moldova,Mongolia, Netherlands, Portugal, Slovenia, South Arica, Spain, Syria, Trinidad,and Tobago, Tunisia, Turkey, Uruguay, Uzbekistan, West Bank and Gaza

Albania, Bulgaria, Israel, Kyrgyz Republic, Mexico, Moldova, Netherlands,Romania, Seychelles, Slovenia, Sourth Arica, Uzbekistan

Azerbaijan, Bulgaria, Colombia, Lesotho, Malaysia, Netherlands,Turkey, Uzbekistan

Moldova, Mongolia, Sierra Leone, Syria, Turkey, Uruguay

Colombia, Israel, Kyrgyz Republic, South Arica, Uruguay, Uzbekistan



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22


on raw materials and cannot be deducted upon saleo the nal product rom 15% to 10%. Next year, itis likely to complete the process o replacing this taxwith a value added tax. Four other Arican countrieslowered their corporate income tax rate, and tworeduced labour contributions. Mauritius is graduallyreplacing the standard prot tax rate o 25% with thenew rate o 15%. This rate will apply to all sectorswith no exceptions rom July 2009. But Arica is stillthe region with the highest tax rates with the CentralArican Republic, the Democratic Republic o Congo,Sierra Leone, Burundi and Gambia each requiringbusinesses to pay more than 200% o their prots.

In Latin America and the Caribbean, Trinidad andTobago made the biggest reduction in the TTRby cutting the corporate income tax rate by vepercentage points. Uruguay passed a new tax law thateliminates 15 taxes, simplies the social contributionsand reduces the prot, personal income and valueadded taxes. Colombia eliminated the system oadjustment or infation, simpliying tax computation.Mexico continues to reduce the corporate income taxrate gradually.

Four economies in the Middle East and North Arica

made their tax law more business riendly. While themain ocus o reorms was reducing the prot tax rate,some countries went beyond that. Israel eliminatedstamp duty. Syria developed a large-taxpayer unitto make it easier or large businesses to pay taxes.Both Tunisia and West Bank and Gaza reducedconsumption taxes.

Only two countries reormed in East Asia and Pacic,the region with the second lowest tax rate (Figure 2.2).Mongolia put in place new laws or corporate income,value added and personal income taxes, including anew fat tax or individual income. Malaysia reducedthe prot tax rate by one percentage point (withanother one percentage point reduction planned by2008) and simplied online tax ling.

Table 2.4

Major cuts in corporate income taxes in 2006/07

Region Changes in corporate incometax rate

Eastern Europe& Central Asia

Sub-SaharanArica

Latin America& Caribbean

OECD high

income

Middle East &North Arica

East Asia &Pacic

AzerbaijanBulgariaKyrgyz RepublicMacedoniaMoldovaSloveniaTurkeyUzbekistan

Cte dlvoireLesothoMauritiusSouth Arica

ColombiaMexicoTrinidad and TobagoUruguay

Greece

NetherlandsPortugalSpain

IsraelSyriaTunisiaWest Bank and Gaza

MalaysiaMongolia

24 to 2215 to 1020 to 1015 to 1218 to 1525 to 2330 to 2015 to 12

35 to 2735 to 2525 to 22.512.5 to 10

35 to 3429 to 2830 to 2530 to 25

29 to 25

29.6 to 25.527.5 to 26.535 to 32.5

31 to 2935 to 2835 to 3016 to 15

28 to 2730 to 25

Data are or the secondary company tax, paid on top o the corporate

income.Source: Doing Business database.


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Figure 2.2Business taxes lowest in the Middle East and North Arica

Midd

leEast&

No

rthArica

EastAsia&

Pacifc

S

outhAsia

OE

CD:High

income

LatinA

merica&

C

aribbean

EasternEurope

&Ce

ntralAsia

Sub

-Saharan

Arica

Prot taxes Labour tax Other taxes

Total Tax Rate (% o prot)

80%

20%

60%

40%

0%


What to reorm?

Tax reorms are usually controversial, attractingintense political debate. The choice is oten perceivedas being between lower taxes with more votes, but

potentially less government revenue and higher rateswith discontented voters, but potentially smaller scaldecits. In reality there is oten no trade-o betweenrevenues and votes as reorm can involve more thanadjusting tax rates. Since 2005, 90 reorms in 65economies have pointed to the our most successulreorms:

Introduce online ling.

Combine taxes.

Simpliy tax administration.

Reduce tax rates and broaden the base.

O those 65 economies, our improved their tax systemevery year: Albania, Bulgaria, Mexico and Moldova.Eighteen others reormed twice: the Czech Republic,Estonia, Ghana, Greece, Hungary, India, Israel,Latvia, Lesotho, Lithuania, Morocco, the Netherlands,Pakistan, Senegal, Sierra Leone, Spain, Turkey andUzbekistan (Figure 2.3).

Figure 2.3Most reorms since 2004/5 occurred in Eastern Europe and

Central Asia

EastAsia&

P

acifc

SouthAsia

LatinAme

rica&

Caribbean

MiddleEast&

North

Arica

Sub-Sa

haran

Arica

Highincome:

OECD

EasternE

urope

&Centra

lAsia

5 6

9 9

20

10

31

Number o reorms in paying taxes since 2004/5


Introduce online fling

A quarter o the worlds countries have electronicling and payment o business taxes. That meansno need or paper documents and no need or

personal interaction with tax ocers. A third o theworlds countries now use electronic payment suchas bank transer and hal use payment by cheque.In Mozambique the tax authority avours chequepayments by clearing them aster than bank transers.But this choice has not been incident ree: somecheques were deposited in accounts belonging to taxocers. Some o the countries that have introducedonline ling within the past three years are Bulgaria,Latvia and Madagascar.

Combine taxes

Almost 50% o countries have more than one labourtax or contribution, 27% more than one tax onprots and 41% more than one tax on property. Ithe base is the same (salaries, prots or propertyvalue), why not just combine them? Having multipletaxes increases the bureaucratic burden or both thetaxpayer and the tax administration. Poland has thehighest administrative costs o tax collection among


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24


OECD countries, at 2.62% o revenue.10 The reason?A business has to make 41 tax payments a year,including our dierent labour taxes. Many countries inEastern Europe and Central Asia have a similar burden(Figure 2.4). In contrast, tax administration in Swedencosts only 0.59% o revenue, since all business taxescan be paid online.

Several countries have joint tax payments. Bosnia andHerzegovina combines three labour contributions, andUruguay our, in one monthly payment. In Portugalcompanies can pay two taxes on prots together.

Figure 2.4

Administrative burden biggest in Eastern Europe andCentral Asia

OECD

:High

In

come

MiddleE

ast&

North

Arica

EastAsia&

P

acifc

SouthAsia

LatinAme

rica&

Caribbean

Sub-Sa

haran

Arica

EasternE

urope

&Centra

lAsia

183

237272

306

407

316

451

15 25 27 313939 46

Payments per year Hours per year


Slovakia has also consolidated several socialsecurity and related contributions into a single socialcontribution tax which unds health insurance,sickness insurance, old age pensions, disabilityinsurance, unemployment benets, injury insurance,guarantee insurance and reserve und contributions.

Simpliy tax administration

More than hal o the countries in our study requirespecial accounting books or tax purposes. Two-thshave more than one law per type o tax. This meansbusinesses spend a lot o time complying with tax

10 OECD (2007).Tax Administration in OECD and Selected Non-OECD

Countries: Comparative Inormation Series(2006).Paris.

regulations (Figure 2.5). Making the tax rules orbusinesses complex is unlikely to generate morerevenue quite the opposite. Countries that do notrequire special books o account or tax purposeshave 10% more revenue (as a percentage o GDP) onaverage than countries that do. Countries with cleartax laws increase tax revenues by 6% on average.11

Figure 2.5

More complexity, more time paying taxes

Ambiguity

397 396 385

309 328

282

Law is

ambiguousMany laws

per tax

Mandatory orms

or record keeping

Law is

clear

One tax,

one lawDiscretionary

orms or

record

keeping

Redundancy Rigidity

Time to comply with tax regulations (hours per year)

Yes No


Clarity on tax authority audit rules can make a bigdierence. While the vast majority o countries have asystem o sel-assessment or calculating taxes, onlyabout 16% use risk analysis as the basis or their taxaudits. Yet tax audits are potentially a big opportunityor bribes. Using clear rules (and even statisticalanalysis) to determine who is subject to and how toconduct an audit, as well as provisions or robuststatistical analysis can reduce this opportunity andincrease tax revenue. Indeed, countries with auditsbased on risk analysis have higher tax revenue as apercentage o GDP 18% higher on average despite

having lower tax rates.

The reason is that businesses have ewer incentivesto hide revenues. One example: a 2007 study otransition economies nds that businesses that reportrequent tax audits are also 17% less likely to borrowrom banks. Instead, they resort to inormal lenders.

11 World Bank. 2007. World Development Indicators 2007.

Washington, D.C


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That way, the borrowed money stays out o thetax records.12

Tanzania simplied its income tax regime signicantlyin 2004/5 with the introduction o a new, morecomprehensive statute. In addition to reducing thetax rates on income, the new law broadened the taxbase, closing loopholes and introducing taxpayersel-assessments. In the same year, Georgia cut thenumber o taxes rom 21 to nine as part o the eatureso a new, simpler system which was widely praised bythe business sector.

Figure 2.6

Higher tax rates, greater obstacle to business. Reduce taxrates and broaden the base

Easiest

2nd

3rd

4th

Mostdifcult

Major

obstacle

No

obstacle

Countries ranked by ease o paying taxes, quintiles

Tax rate as perceived obstacle to business

Note: Relationships are signicant at the 1% level and remain signicant

when controlling or income per capita.

Source: Doing Business database, World Bank Enterprise Surveys.

12 Saavian, Mehnaz, and Joshua Wimpey. 2007. When Do Enterprises

Preer Inormal Credit? World Bank, Enterprise Analysis Unit,

Washington, D.C.

Croatia ollowed suit in 2005/6 simpliying its tax ormsby cutting eight pages o tax returns and shorteningthe time required to comply with tax regulations byve days. Azerbaijan, Bulgaria, Colombia, Lesotho,Malaysia, the Netherlands, Turkey and Uzbekistan allundertook broad tax system simplication measuresin 2006/7.

Reduce tax rates and broaden the base

High tax rates can orce companies into the inormalsector (Figure 2.6). In the Democratic Republic oCongo, with taxes twice as high as the commercialprot or a company with a prot margin o 20%,

businesses have a strong incentive to evade taxes.Indeed, hal the countrys manuacturing activity is inthe inormal sector.13 Such countries can potentiallyincrease tax revenue by lowering rates and persuadingmore businesses to comply with the new tax system.Even countries with a smaller inormal sector cangain rom this strategy. Greece saw its corporate taxrevenue grow rom 4% o GDP to 5% ater reducingthe corporate tax rate in 2005 . Egypt saw the numbero complying taxpayers increase by a million aterreducing both corporate and personal income taxrates in 2005.14

13 Schneider, Friedrich. 2005. Shadow economies o 145 countries all over

the world: what do we really know? CREMA Working Paper 2005-13.

Center o Research in Economics, Management and the Arts, Zurich.

14 Ramalho, Rita.2007. Adding a million taxpayers. In World Bank,

Celebrating Reorm. Washington, D.C.: World Bank Group and U.S.

Agency or International Development.


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Section three

Understanding Total Tax

Contribution and thePaying Taxes data aPricewaterhouseCoopersperspective


27/72


Corporate income tax is only part o the burden otaxes on business. The Paying Taxes study shows thatoverall, corporate income tax accounts or only 37%o the Total Tax Rate, 12% o the tax payments madeand 26% o the compliance time (see Figure 3.1).These gures are very similar to the ndings or lastyear (36% o the TTR, 11% o payments and 25% ocompliance time).

Figure 3.1

Corporate income tax is only part o the burden o taxes

12%

26%37%

39%

49%

37%

37%

33%

30%

Payments

Corporate income tax Labour tax Other taxes

Time TTR


In the Doing Business project, the ranking thatis published is the overall ranking or ease opaying taxes which is an equal weighting o thethree components as described earlier in thispublication. In Paying Taxes 2008, in response toeedback, we are also publishing the individualranking or each o the components to addtransparency and clarity to the understanding othe data generated.

This greater transparency around the data will helpinorm governments and other stakeholders onhow tax systems impact businesses across thecost and compliance indicators in connection withthe circumstances o this standard modest-sizedcompany. It can help give some indication as to theactors that encourage, or discourage such businessesto invest. It is clear that governments need to lookacross all the taxes when considering reorm, andgreater transparency around the components o the

overall ranking may help ocus on where eorts inreorm are most eective.

What ollows is an initial commentary and observationson some o the ndings o the study. Only a smallselection can be covered in this commentary. A ulllist o the rankings or each o the indicators and theircomponents is included in Appendix 1. Further detailo the results generated or each country can be oundat: www.doingbusiness.org/exploretopics/payingtaxes

Feedback rom the countries:

The commentary includes comments rom

PricewaterhouseCoopers in a selection o countries.These give a good insight into the increasingrecognition o the Total Tax Contribution conceptand the Paying Taxes data as a way to assist withthe benchmarking and comparisons o countriestax systems. They also show how there is a growinginterest rom businesses in each country to understandtheir total tax contribution and how they rank withtheir peers.

1 Total Tax Rate (TTR)

Table 3.1 shows the countries that are in the top 10and the bottom 10 or the TTR indicator. It is importantto understand that the overall ranking or ease opaying taxes is also infuenced by the two indicatorsrelated to the compliance burden as well as by the taxcost. This is well illustrated by some countries listed inTable 3.1.

Six o the countries shown here with the lowest TTRare not in the overall top 10 rankings or ease o payingtaxes with, or example, Lesotho having a low overallranking at 49. Six o the countries with the highest TTRare not in the overall bottom 10 rankings with Eritreabeing best placed overall at 103. This illustrates thatcompliance issues can signicantly aect the overallranking, either counteracting the benet o a low TTRrate as in the case o Lesotho or mitigating the impacto high tax rates as in the case o Eritrea. Table 3.2shows the ull rankings or Lesotho .

Section threeUnderstanding Total Tax Contribution and the PayingTaxes data a PricewaterhouseCoopers perspective


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28


Table 3.1

TTR rankings

Lowest Highest

1

2

3

4

5

6

7

89

10

Vanuatu

Maldives


Kuwait

Saudi Arabia

Zambia

West Bank and Gaza

BotswanaSamoa

Lesotho

8.4%

9.1%

14.4%

14.4%

14.5%

16.1%

17.1%

17.2%19.8%

20.8%

169

170

171

172

173

174

175

176177

178

Eritrea

Uzbekistan

Mauritania

Argentina

Belarus

Central Arican Republic

Congo, Dem. Rep.

Sierra LeoneBurundi

Gambia

84.5%

96.3%

107.5%

112.9%

144.4%

203.8%

229.8%

233.5%278.7%

286.7%


150%

50%

200%

250%

300%

350%

100%

0%

Corporate Income tax TTR Labour tax TTR Other taxes TTR

Zambia

Botswana

Sudan

Mozambique

Gabon

Kenya

Egypt

Angola

Eritrea

Lesotho

Malawi

Swaziland

Tanzania

SoTomandPrincipe

Togo

CapeVerde

Mauritania

Mauritius

Uganda

SouthArica

Ctedlvoire

Mali

Algeria

Seychelles

Tunisia

CentralAricanRepublic

Nigeria

Ghana

Djibouti

Senegal

Cameroon

Benin

Comoros

EquatorialGuinea

Congo,Dem.Rep.

Burundi

Ethiopia

Rwanda

Niger

Madagascar

Zimbabwe

Liberia

BurkinaFaso

Congo,Rep.

SierraLeone

Gambia

Figure 3.2

Arican Union comparison o Total Tax Rates



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Table 3.2

Analysis o overall ranking or Lesotho

Payments (number)

Compliance (hours)

Total Tax Rate

Overall ranking

Result

22

342

20.8%

Rank

58

128

10

49


Some other regional and economic groupings areinteresting to consider and these illustrate some o thebroad themes generated by the survey results aroundthe TTR.

Sales taxes and their impact on TTR

Section one o this publication pointed to the dierenttypes o sales tax systems in use around the world.The results o the study show that, o these, cascadetype sales taxes and turnover taxes can signicantlyimpact the TTR.

This can be illustrated in Arica where the variation inTTRs is wide (Figure 3.2).

Zambia has a TTR o 16% (ranked six in the world onthis measure alone), whereas Gambia collects 287% oa companys commercial prot through taxes, rankingbottom in the world on this measure. Figure 3.3 showscomponents o this 287% tax charge compared withthe commercial prot in the bar chart. Below this,the pie chart shows the proportions that each tax inGambia has in relation to the TTR or that country.

There are a number o Arican countries along withGambia that have TTRs in excess o 100%. These arethe Central Arican Republic, Sierra Leone, Burundiand Mauritania. The extremely high tax rates in SierraLeone and Burundi are, as with the Gambia, due to theimpact o cascade sales taxes. This sort o tax hasa signicant impact on a companys TTR due to thenature o its operation and calculation. Cascade salestax on purchases becomes a tax borne and cannotbe oset against sales tax on sales (as is the case

or VAT). The high TTRs in Mauritania and the CentralArican Republic are largely caused by corporateincome taxes with a minimum tax based on turnoverwhich is binding in the circumstances o the casestudy company.

Figure 3.3

Gambia total taxes borne

350%

250%

150%

50%

300%

200%

100%

0%Commercial

prot

Total taxes

Fuel tax

Capital gains tax

Contribution to injuriescompensation und

Environmental tax

Corporate income tax

Social security contributions

Municipal business licence

Property tax

Vehicle tax

Business registration

Fringe benets tax providedto employees

National education levy

Sales tax

Commercial prot


Gambia analysis o TTR

Sales tax 77.1%National Education

Levy 1.5%

Municipal business

license 2.1%


12.3%

Fringe benets tax providedto employees 0.1%

Social security

contributions 3.9%

Fuel tax 0.1%

Capital gains tax 2.1%

Vehicle tax 0.1%

Property tax 0.1%

Contribution to injuries

compensation und 0.4%

22.9%


Seven o the 10 countries in the world with the highestTTRs are Arican countries, and it is largely the impacto these seven countries, and the sales and turnovertaxes, that drive the average TTR or the sub SaharanArican countries to nearly 70% the highest o anygeographical grouping (see Figure 3.4).

287%

Cascadesales tax


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30


Figure 3.4Geographical groupings comparison o Total Tax Rates

MiddleEast&

N

orthArica

EastAsia&

Pacifc

SouthAsia

O

ECD:High

Income

Latin

America&

Caribbean

EasternEurope

&C

entralAsia

Sub-Saharan

Arica

80%

50%

30%

10%

60%

70%

40%

20%

0%


TTR average

Labour tax TTR average Other taxes TTR average


In contrast, three Arican countries are in the countrieswith the lowest TTRs; this highlights the dierentials intax systems across the Arican continent. The variationacross the continent in the time to comply indicator isdiscussed urther on in this section.

Turnover taxes also have a major impact on the TTR

in Argentina. The turnover tax in Argentina is paidmonthly and is calculated as 3% o gross sales. Thissort o turnover tax is a cost to the company andthereore signicantly impacts the TTR as illustrated inTable 3.3.

Table 3.3

Argentina breakdown o TTR

Type o tax

Turnover tax by city o Buenos AiresSocial security contributionsTax on nancial (cheque) transactionsCorporate income taxLabour risk insuranceProperty taxFuel taxStamp tax on sale o real estateVehicle tax

Total Tax Rate

Impact onTTR

53%25.9%17.6%6.0%3.4%3.4%2.4%0.8%0.2%

112.9%


Impact o labour taxes on TTR

Labour taxes and contributions borne by the employercan also have a signicant impact on the TTR. Figure3.4 shows that labour taxes are more prevalent inOECD countries, the Middle East and Northern Arica,and also Eastern Europe and Central Asia. Figure 3.5gives the breakdown o the TTR or the G8 countries.

Figure 3.5G8 comparison o Total Tax Rates

United

Kingdom

Canada

UnitedStates

Germany

Russia

Japan

France

Italy

80%

90%

50%

30%

10%

60%

70%

40%

20%

0%

Corporate income tax TTR Labour tax TTR Other taxes TTR


For the modest-sized company used by thecase study, labour taxes borne are the largestelement o the TTR in France, Italy and Russia. InItaly, labour taxes make up more than hal o theTTR o 76.2%. The taxes borne by companiesin Italy in relation to their employees includetaxes connected to retirement, maternity, amily,unemployment, sickness, redundancy and pensions.


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Frank Dierckx rom PricewaterhouseCoopers in Belgiumcomments on the Belgian system.

Once again Belgium remains towards the bottom o the league in an international Total Tax Rate comparison.With a ranking o 154 out o 178, we are behind almost all European countries, with the exception o Franceand Italy. This is hardly surprising, as Belgium eectively has a very high tax burden with a marginal personalincome tax rate o around 54% (with community taxes), personal social security contributions o above 13%and company contributions o 35% o wages, a VAT rate amounting to 21% and a corporation tax rate o 34%.

Despite this heavy burden, Belgian scal policy has clearly improved over recent years. We would cite thenotional interest deduction, the drop in personal income tax and, more recently, the introduction o VAT grouping.But the road is still a long one and competition with other countries is brisk in attracting investment. We thereorehave to continue to adapt our system as scal policy remains one o the main decisive actors in the huntor investment.

The government took measures aimed at reducing tax, but the tax and social security revenue percentage othe GDP remained at 44.2% or 2007, showing that this objective has not been attained. In absolute terms,Belgium still has a very high tax burden, even though comparatively we get a lot back in return social security,healthcare reunds, inrastructure in numerous orms, etc.

PwC Belgium is currently running a Total Tax Contribution survey together with the Federation o Enterprisesin Belgium to determine and assess more precisely the total amount o business taxes paid in Belgium bycompanies. Results o this survey are expected in early 2008.


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Figure 3.6France proportions o the total taxes borne

Fuel tax 2%

Corporate income tax 13%

Business tax 7%

Payroll tax 9%

Social security contributions 69%


In France labour taxes account or 78% o the TTR(Figure 3.6).

Whilst payroll taxes contribute 9% o the TTR, socialsecurity contributions make up 69%. The latterconsists o a variety o contributions such as healthcoverage, old-age state pension, amily benets, workrelated accidents contributions, transportation o

employees, apprenticeship and training.

It is interesting to note, however, that the number andsize o labour taxes borne by the employer may notnecessarily correlate to the size o the complianceburden. In France, it takes our case study company80 hours to comply with its compliance obligations orlabour taxes, in Italy 320. The compliance obligationswill o course include taxes collected as well astaxes borne.

Figure 3.7 shows that labour taxes borne are oten a

signicant element o the TTR across the EU.

Impact o corporate income tax on TTR

It is interesting to consider the impact o corporateincome tax on the TTR. For example, there hasundoubtedly been a trend across the EU countries inrecent years to reduce the statutory rate o corporateincome tax to attract business investment. Estoniaand the Czech Republic provide examples o this withEstonia reducing its rates rom 24% to 23% between

2005 and 2006 and an intention to reduce them to20% by 2009, and the Czech Republic reducing itsrate by 2% between 2005 and 2006.

Figure 3.7

EU comparison o Total Tax Rates

30%

10%

40%

50%

60%

80%

70%

90%

20%

0%

Ireland

Latvia

Slovenia

Lithuania

Germany

Belgium

Denmark

Netherlands

Greece

Sweden

France

Luxembourg

Portugal

CzechRepublic

Austria

Italy

UnitedKingdom

Romania

Estonia

Hungary

Bulgaria

Poland

Finland

Slovakia

Spain



Figure 3.7 shows however that whilst both countriesnow have low statutory rates or corporate income tax,they both rank in the third highest quartile across the

EU or TTR.

It also shows that labour taxes are an importantelement o the taxes borne by business inboth countries.

Figure 3.8ASEAN comparison o Total Tax Rates

Cambodia

Singapore

LaoPDR

Malaysia

Indonesia

Thailand

Philippines

50%

30%

10%

60%

40%

20%

0%





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Denmark appears to be an exception in the EU,with labour taxes borne by the company accountingor only a small part o the TTR. It is the employeein Denmark that bears the signicant element olabour taxes.

A contrast to the EU is shown in the ASEAN countries,the Association o South East Asia Nations (Figure3.8). Here corporate income tax is the most signicantelement o the TTR and labour taxes borne by theemployer are less signicant.

2 Time to comply in hours per year

Table 3.4 shows the countries that are in the top 10and bottom 10 or the time to comply indicator.

Honours or the lowest number o compliancehours are spread around the world. The United ArabEmirates provides an example o a country where ourcase study company requires the least time to complywith its taxation obligations (Table 3.5). Only three

taxes are imposed by the United Arab Emirates thevehicle registration ee and trade licence which donot eature in the time to comply measure, and thecountrys social security contributions system, wherethe tax payable is based on gross salaries and takesonly 12 hours to comply with.

Table 3.5

Analysis o overall ranking or UAE

Payments (number)

Compliance (hours)Total Tax Rate

Overall ranking

Result

14

1214.4%

Rank

31

23

4


Brazil is the country where it takes the case studycompany longest to comply with its tax obligations. Itis only the low number o tax payments that lits Brazilto 137 in the overall ranking.


Table 3.4

Time to comply in hours per year

Least hours Most hours

Rank Hours Rank Hours

1

2

3

4

5

67

8

9

9

9

12

Maldives


Singapore

Luxembourg

Oman

SwitzerlandNew Zealand

St. Lucia

Ireland

Seychelles

St Vincent & The Grenadines

Saudi Arabia

0

12

49

58

62

6370

71

76

76

76

79

165

169

170

171

172

172174

175

176

177

Czech Republic

Azerbaijan

Vietnam

Bolivia

Nigeria

ArmeniaBelarus

Cameroon

Ukraine

Brazil

930

952

1050

1080

1120

11201188

1400

2085

2600



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Impact o consumption taxes on compliance hours

As an emerging economy and one o the so-calledBRIC countries (Brazil, Russia, India and China), Brazilis out o line with the others in the grouping.

Figure 3.9BRIC comparison o hours to comply

India Russia China Brazil

2,500

1,500

500

3,000

2,000

1,000

0

Corporate income tax time Labour tax time Other taxes time


The time to comply with the tax system in Brazil is

some 2,600 hours; the equivalent measure in India is271 hours. This puts India on a par with the averagehours to comply in both the G8 (254 hours) and EU(257 hours) but leaves Brazil at the bottom o the worldranking on this measure alone.

Figure 3.10

Brazil hours to comply

ICMS (similar to VAT) 1,374

Social security contributions (INSS) 491

Corporate income tax (IRPJ) 736


Over hal the hours in Brazil are needed on compliancewith the ICMS system, a consumption tax which iscollected on behal o the tax authorities but not borneby the company. So while this tax does not orm parto the TTR o the company in Brazil, it contributessignicantly to the administrative burden (Figure 3.10).

The Ukraine is the country where the case studycompany needs the second largest number ocompliance hours and, as or Brazil, a signicantnumber o the hours spent relate to the administrationo consumption taxes collected (here VAT), which doesnot orm part o the TTR (Figure 3.11).

Figure 3.11Ukraine hours to comply

Value added tax (VAT) 932

Pension und contributions 732

Corporate income tax 421


The impact o consumption taxes on compliance timecan also be seen across the EU (see Figure 3.12).

Companies in the Czech Republic and Bulgaria,where time spent complying with the tax system isthe highest in the EU, spend a signicant number ohours complying with the administration and paymento consumption taxes. In the Czech Republic some360 hours are spent dealing with the collection oVAT this tax does not contribute towards the TTR(assuming ull recovery is possible).



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Carlos Iacia rom PricewaterhouseCoopers in Brazil comments onthe Brazilian tax system and in particular on compliance issues.

As last year, the Paying Taxes study revealed one o the most concerning issues o the Brazilian tax system. InBrazil, taxpayers spend more time than anywhere else (2,600 hours a year) complying with their tax obligations.

The issues range rom the number o taxes charged, to the competence granted to each government authority(Federal, State and Municipal) to charge such taxes. The Brazilian VAT, ICMS (tax on the movement o goods,

transport services and communication services), can be charged by the 27 states o the Brazilian Federation.The municipal tax on services (ISS) is charged by more than 5,000 Brazilian municipalities. Each one o thesegovernmental bodies has the power to legislate on the tax computation and collection, guided by one major lawthat provides general rules - the National Tax Code (CTN).

When we think o compliance, it may seem an easy task: it is only a matter o calculating and paying taxes.However, this process o computation is extremely complicated in Brazil since the taxpayer has to considerthe legislation and compliance obligations o each taxing body. These, in most cases, require taxpayers to leseveral dierent monthly returns including the total tax accrued, paid or oset.

In addition, companies require tax clearance certicates, which are essential documents or the purposes oobtaining loans, participating in bidding and applying or tax incentives. This gives rise to urther bureaucracyand obstacles or the development o corporate business.

In view o the above, companies are required to maintain proessionals among their tax personnel who are ullydedicated to the correct compliance with such tax matters, in order to avoid potential errors or distortions whichmay end up increasing the Brazilian tax burden even more.

Thereore, the World Bank survey is very important since it evidences the urgent need or huge reorm in theBrazilian tax system. Several dierent bills o law have been discussed at the Brazilian National Congress,proposing, among other tax changes, the unication o ICMS. The approval o these changes, which are soimportant or the development o the country, requires discussions among the Federal, State and the Municipalbodies as they all have their numerous and dierent interests and needs, considering the conditions o eachregion o the country, and the level o tax collections. The issue, thereore, is to put together all these interestsand make a air distribution o the tax income, which represented 34.23% o the GDP (gross domestic product)

in 2006.


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36


It is a similar story in Bulgaria where consumption taxaccounts or nearly hal o the time spent complyingwith the tax system. In both cases most time is spentin preparation which can include gathering datarom internal records or the actual calculation o thetax liability including inputting data into sotware orspreadsheets (Figure 3.13).

Figure 3.12

EU comparisons o hours to comply

300

100

400

500

600

800

700

900

200

0

Luxembourg

Ireland

Belgium

Romania

Spain

Poland

Estonia

Lithuania

Latvia

Portugal

Bulgaria

UnitedKingdom

Austria

Slovenia

Hungary

CzechRepublic

Sweden

Paying Taxes 2008

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