Third Administrative Cost Measurement Study Serbia

Branko Radulović

Third Administrative Cost Measurement Study

• First Study: 2010; Second Study: 2012

• Third Study: 2014

• Objectives– Identify burden of administrative costs faced by businesses– Identify new cost-cutting options– Comparison (limited) with countries where findings of similar

studies are available

• The Standard Cost Model (SCM, or ‘Dutch Model’) is a simple method for measuring administrative costs and burden of compliance

• Used to:– Examine new regulations and burden of compliance they

may pose– Measure current administrative costs (burden of compliance)

Standard Cost Model

Standard Cost Model (Continued)

– Works by disaggregating procedures (information requirements) imposed on entities subject to regulation into individual administrative activities that entities subject to regulation are required to perform

– Based on time needed to perform each activity and cost of each activity, the SCM measures administrative costs and undue administrative burden

Costs of Compliance

Information Requirements• Entail collection, reporting, or recording of information

as mandated by regulatory authorities– Not just data collection and reporting: this also includes keeping

records of information for the purpose of making it available to inspection authorities or submitting it when required

• May include requirements to notify the state or third parties

• Each information requirement entails undertaking various administrative actions, such as collecting data, becoming acquainted with regulations, etc.

What is not measured?• Costs of:

– Paying taxes, customs duties, charges, fines...

– Compliance with technical requirements and standards

– Obtaining professional titles– Waiting to obtain licences,

approvals, etc.– Appeals and court

proceedings– ‘Annoyance costs’

What is measured?• National level

– Construction permitting procedures not taken into account

• Business sector– Not administrative costs

incurred by private individuals

• As a rule, includes administrative fees but not charges

Standard Information Requirements – 12 Requirements

No. Standard Requirement

1 Notice of activity or event

2 Reporting

3 Information (labelling) for use by third parties

4 Other information for use by third parties

5 Application for individual licence or approval

6 Application for general authorisation or approval

7 Registration

8 Product or process certification

9 Inspection by government authority

10 Co-operation with inspections and record-keeping

11 Application for subsidy, grant, etc.

12 Other

Standard Administrative ActivitiesNo. Standard Activity

1 Understanding information requirement2 Staff training in connection with information requirement3 Collecting necessary information based on existing data4 Adjustment of existing data5 Preparation of new data and documentation6 Preparation of information materials (e.g. advertisements, etc.)7 Submission of forms8 Meetings (internal and with third parties)9 Verification (includes assistance to inspection authorities)10 Photocopying, labelling, etc.11 Provision of information12 Completion of forms13 Procurement of IT equipment and supplies14 Other

Standardised means of applying legislation

Reports, licences, permits, certificates, registration

Law, Government Order, Rulebook...Regulation

Information requirements and specific data

Time(H)

Frequency(F)

Tariff(T)

Additional cost(A)

No. of entities subject to regulation

(N)

Cost of individual administrative activity (P) No. of administrative activities per year (Q)

Administrative costs = P x Q

Administrative activities

x + x

How were procedures selected?

• Primary criteria – reach, frequency, cost• Slightly under 800 administrative requirements

considered• ‘80:20’ Rule applied:

– 20% of administrative requirements create 80% of administrative costs

– Marked concentration of administrative costs: limited number of administrative requirements create most administrative costs

Renewed Increase in Regulatory Activity in 2014

81 laws and 900 byelaws enacted in 2013Annual regulatory activity in 2014: over 1,000 regulations

NEW REGULATION BY TYPE, 2014 TOTAL ENTERED INTO FORCE

REPEALED

Laws (new) 29 26 3Laws (amended) 70 36 34

Government Orders (new) 115 79 36

Government Orders (amended) 45 21 24

Decisions (new) 411 221 190

Decisions (amended) 83 40 43

Rulebooks (new) 209 183 26

Rulebooks (amended) 131 77 54Orders (new) 5 2 3

Orders (amended) 1 0 1

Instructions (new) 8 3 5

Instructions (amended) 3 2 1

Total 1110 690 420

Example: Savings due to amended requirement to audit financial statements

Business Size Old Law, Financial Statements for 2013

New Law, Financial Statements for 2014

Large 925 336Medium-sized 2,878 1,225Small 92,104 8,812Micro / 83,386

Total 95,907 93,759

Audit is mandatory for financial statements of large and medium-sized legal entities (categorised as such under accounting legislation), public entities (under legislation governing capital markets, regardless of size), as well as of all legal entities and sole traders with annual revenues of more than EUR 4.4 mn in the preceding fiscal year (‘statutory audit’)

Savings due to limited reach of mandatory audit of financial statements

Online tax returns

• Introduction of online tax returns has contributed to quicker, more efficient, safer, and cheaper filing: all documents can be filed using the Tax Administration’s e-Porezi portal

• Major step in eliminating unnecessary administrative procedures

Example: VAT return

• Procedure has remained the same (i.e. taxpayer is still required to complete VAT return; this is a recurring activity at the monthly or quarterly level, depending on volume of turnover)

– Taxpayer may file individually or through accountant– Monthly or quarterly– Key assumption: percentage of taxpayers filing individually vs. through

accountants• Quarterly VAT filings: vast majority of taxpayers use accountants

• Measurement of administrative costs associated with VAT has revealed the average user now needs just five minutes to file a return, as opposed to one hour under the old arrangement

Costs of filing VAT returns reduced by 48%

Findings: 3.46% of GDP

Assumption

Lower salaries

and costs of engaging

third parties

Higher salaries and

costs of engaging

third parties++

Fixed costs(x1.2) 80:20 rule

Initial estimate before

adjustment

I II=Ix1.2 IIIa=Ix1.2 IIIb=IIx1.2 IV a IV b V

2010 2.26% 2,72% 2.72% 3.26% 3.39% 4,07% 4.20%*

2012 1.95% 2.34% 2.34% 2.81% 2.92% 3.50% 3.67%*

2014 1.93% 2.32% 2.32% 2.78% 2.88% 3.46%

• Initial and first estimate were adjusted following publication of revised GDP data and new data needed for calculation

++ Salaries of staff with undergraduate degrees higher by 50%; salaries of staff with college degrees higher by about 5%; costs of engaging third parties vary widely, highest and lowest values must be determined

Pregled ključnih indikatoraIndicator 2010 2012 2014GDP (RSD mn) at current prices 3,067,210

3,584,236

3,908,470

GDP (EUR mn) 29,766

31,683

33,319

Average gross monthly salary 54,532

57,430

61,426

Average gross hourly rate* (at 168 hours per month) 324.6 341.8 365.6Average gross hourly rate (EUR) 3.15 3.02 3.12Calculated total administrative costs (TACs), RSD mn at current prices

69,319

69,733

75,101

Total administrative costs as % of GDP 2.26% 1.95% 1.92%TACs as % of GDP (80:20 rule) 2.83% 2.43% 2.40%TACs, assumed lower costs w/ fixed costs and 80:20 rule 3.39% 2.92% 2.88%TACs, assumed higher costs w/ fixed costs and 80:20 rule 4.07% 3.50% 3.46%Initial estimate (before data review) 4.20% 3.67%TACs, higher level (RSD mn) 124,835

125,519

135,182

Change to TACs (higher level, RSD mn)

- 684

10,347

Inflation (2010 cumulative = 100) GDP deflator 100

116

125

TACs as % of GDP, change relative to 2010 - -13.96% -15.02%TACs in EUR mn 1,211

1,110

1,152

RSD/EUR exchange rate (annual average) 103.0 113.1 117.3RSD/EUR exchange rate (at end of year) 105.5 113.7 121.0

Costs and savings in EUR

Reduction in administrative costs of 15 %

• Usual EU target is to reduce administrative burden by 25%

• Between 2010 and late 2014 Serbia managed to reduce administrative costs by 15%– Review of some calculations is expected to reveal slightly

greater savings

• This is a relatively good result

Comparison with other countries

• Administrative burden by country: Austria 2.8%, Czech Republic 2.9%, Denmark 2.1%, Netherlands 1.7%

• Latest calculations: Greece (13 areas in 2011 – 2.3%), Cyprus (8 areas – 4.38%)

• Serbia has begun to reduce costs but a lot remains to be done– EU countries needed five to seven years to reach 25%

target

Key actual savings?

• Application of new accounting and auditing regulations• Electronic tax returns• Some recommendations and easy savings remain to be

calculated but are to be implemented – regulations amended in 2015:– Health insurance cards– KEPU ledger