PwC-Studie "Paying Taxes 2013: The Global Picture"


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PwC-Studie "Paying Taxes 2013: The Global Picture"

  1. 1. PayingTaxes2013The global picture
  2. 2. ContactsPwC* The World Bank/IFCJohn Preston Augusto Lopez ClarosGlobal Head of External Relations, DirectorRegulation and Policy for Tax Global Indicators and Analysis.PwC (UK) +1 202 458 8945+44 (0)20 7804 2645 Packman Rita RamalhoTotal Tax Contribution Leader Program Manager, Doing Business UnitPwC (UK) +1 202 458 4139+44 (0)1895 522 104 Howlett Tea TrumbicDirector External Relations, Tax Private Sector Development SpecialistPwC (UK) +1 202 473 0577+44 (0)20 7212 7964* ‘ PwC’ refers to the network of member firms of PricewterhouseCoopers International Limited (PwCIL), Paying Taxes 20132or, as the context requires, individual member firms of the PwC network.
  3. 3. ContentsForeword 1Key themes and findings 3About Paying Taxes 9Chapter 1: Findings of the World Bank and IFC’sDoing Business 2013 report 13Chapter 2: PwC commentary 21An economic analysis 23The global results 29The regional analyses: Africa 41 Asia Pacific 57 Central America Caribbean 73 Central Asia Eastern Europe 85 EU EFTA 95 Middle East 109 North America 115 South America 123Appendix 1: Methodology 137Appendix 2: The data tables 145 Key themes and findings 3
  4. 4. Foreword Andrew Packman Augusto Lopez Claros Total Tax Contribution Leader Director, Global Indicators and Analysis PwC (UK) The World Bank Group1 Paying Taxes 2013
  5. 5. The Paying Taxes indicators (the Total In this year’s publication therefore we As in previous editions of the PayingTax Rate, the time to comply and have focussed on the trends that the Taxes publication we include athe number of payments) have now Paying Taxes data show, both at the number of articles from around thebeen part of the World Bank Group global level, and also by geographical world which give further insights onDoing Business project for eight years, region. Globally it is now easier for how governments are addressing themonitoring the changes and reforms firms to pay taxes than eight years ago. challenging issues that they face andmade to tax regimes around the world. Both the administrative burden and some of the specific policies that theyThe simple aim of the study is to supply the average tax rates have decreased are leaders and policy makers over this period. The studies for somewith robust data to enable tax systems time have shown a trend toward a We have also included the results ofto be compared on a like for like lowering of corporate tax rates and some additional analysis undertakenbasis, and to help inform the dialogue a broadening of the tax base. In last this year. As we now have eight yearswhich underlies the development of year’s publication the pace of reform of Paying Taxes data, we consider ittax policy. continued but with an increasing sufficiently robust for a comparison focus on improving the administrative to be made with some broaderThe study is unique in that it now aspects of the tax system. This macroeconomic indices around growthnot only covers 185 economies, but year’s results are more complex; and investment. In some respects theit also provides an insight into how administrative reforms have continued, results are perhaps not surprising,tax systems have developed over a but the fall in average global tax rates confirming that higher tax burdens aresignificant period of time, using a seems to have stalled; this may indicate associated with lower investment; theconsistent methodology. that tax rates are stabilising as the more striking result is that reducing pressure on public finances continues the administrative burden on businessThe period covered (2004 to 2011) to grow. appears to be linked with economichas been a particularly turbulent growth more strongly than cuttingone. Initially there was a period Taxes have historically been used as tax rates. Paying Taxes suggests thatof significant growth, followed by a policy instrument in a variety of administrative reform is the priorityan abrupt and severe economic ways, but with the continuing difficult for governments.downturn. We are now in a period economic environment, the tensionof slow, gradual, but inconsistent between the need to raise tax revenues We hope that the Paying Taxes studyrecovery. It is not surprising therefore and at the same time to provide a continues to generate data that you findthat with this volatile economic system which encourages economic useful, but if you have any commentsbackdrop, the interest in the payments activity is increasing. Governments or feedback on how we can developmade by business and received by need to raise revenues to enable this study further then we would begovernments has become more intense them to discharge their obligations delighted to hear from you.and widespread. to provide funding for infrastructure, education and public health, and in some cases there is still much to do to reduce the significant public deficits which persist. However, in a world which has now truly embraced Augusto Lopez Claros globalisation, some governments also see a need to put in place tax systems which are seen to be efficient, can help to attract investment, and in turn can help foster economic growth. A sensible business tax system is not just Andrew Packman about attractive tax rates but also tax rules which are simple and easy to comply with. Key themes and findings 2
  6. 6. Key themes and findingsIndicators at the global level 2011 -0.3% 27.2 Total Tax Rate 267 payments 44.7% hours Total Tax Rate -1 day Time to complyOn average it now takes our case study company 267 hoursto comply with its taxes, it makes 27.2 payments and paysan average Total Tax Rate of 44.7%. Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec -2 Number of paymentsTotal Tax Rate Time to comply Number of payments While the time to comply and number of payments have (hours) continued to fall significantly in 2011, the rate of decline for the Total Tax Rate slowed. The Total Tax Rate fell by 0.3%, the number of hours fell by a day and the number of payments by almost 2. 8% 54 6.5 2011 +0.1% Total Labour taxes Tax Rate +/- 0% Profit taxesOn average across the eight years of the study the cost of tax,the Total Tax Rate, has fallen by almost 1% for each year; the Jan Feb Mar May Apr Jun Jul Aug Sept Oct Nov Dec -0.4%time to comply has fallen by 54 hours (seven days); and the Other taxesnumber of payments has fallen by 6.5. In 2011 the average rate of profit tax has remained flat while the rate for labour taxes and social contributions increased by 0.1% and for ‘other’ taxes fell by 0.4%.3 Paying Taxes 2013
  7. 7. All three paying taxes indicators have The fact that the compliance The study continues to show that fallen consistently over the period of indicators (the number of hours corporate income tax is only part the study reflecting the reforms that and payments) continue to fall of the picture when looking at the governments have implemented with significantly, suggests that there contribution made by business to a view to making paying taxes easier is still scope for improvement in public finances. This is important for and so easing the burden for business many economies around the world, governments when considering the and government. and that the value of making such reforms which it feels are necessary improvements is understood. for the tax system. And for companies Not surprisingly in a world in which However, the reduction in the Total the challenge is to have a better globalisation is being embraced and Tax Rate has slowed reflecting the understanding of the full extent of comparisons are more easily made need for governments to deal with their contribution to the economy with geographic neighbours and different economic scenarios and in which they operate and an ability economic peers, the range of the circumstances which have arisen in to improve the way in which they indicators is narrowing suggesting the wake of the economic downturn, communicate on tax. a gradual move to what may be and to use a variety of policy options perceived as being sustainable. which they have at their disposal.Corporate income tax only part of the burden 2004 2011 105 economies 132 economies 12% 26% 36% Payments Time Total Tax Rate 101 Corporate income tax continues to represent only -350 hours part of the tax burden on business – it accounts for only 12% of payments, 26% of time and 36% of The distribution for the time to comply has also narrowed. the Total Tax Rate. This profile has changed very In 2011 132 economies spent between 101 and 350 hours little over the eight years of the study. on their tax compliance for the case study company compared with 105 of the economies in 2004.2004 201193 economies 116 economies 2010 2011 Reforms 35 31 12% Total Tax Rate between 26-50%The range of Total Tax Rates applied around the world hasnarrowed. 116 economies in the study now have a rate Reforms continue around the world. However the number ofbetween 26 and 50% compared to 93 economies in 2004. economies reforming has fallen from thirty five last year to thirty one in the most recent study. The focus continues to be on reducing the administrative burden of the tax system. Key themes and findings 4
  8. 8. Central Asia Eastern Europe hasThe regional picture* been the biggest reformer over the eight years of the study. Economies in this region have shown the largest fall in both the time to comply (200 hours) and number of payments (22.2) and apart from the Middle East have the largest fall in the Total Tax Rate (12.6%). Efficient tax systems Lowest payments High number of payments Highest total tax rateThe highest number ofpayments is now made inAfrica (37.0) and the lowest inNorth America (8.3) followedby the EU EFTA1 (12.8). Highest hours Compliance continues to take longest in South America (619 hours) and the least amount of time is spent in the Middle East (158 hours). This has been the position consistently through the eight years of the study.* he regional classifications are different from those used in the World Bank/IFC Doing Business report. For a list of economies in each region please refer to T the regional analyses which begin on page 411 E uropean Union European Free Trade Association (EU EFTA)5
  9. 9. Biggest It is not surprising that the economies in the Middle East reformer feature so prominently in the top jurisdictions of the Paying Taxes indicators. This can largely be attributed to the relatively few taxes levied on the case study company and a reliance on other sources of government revenues. The expectation is that this will change as new revenue raising measures are introduced. The economies in Central Asia Eastern Europe have led the charge over the period of the study to improve their tax compliance procedures and also to reduce their tax rates. While the Total Tax Rates for Africa still appear to be high, if the three countries with cascading sales taxes are excluded then the average falls to a level which is just aboveLeast Below the world average, leaving South the global America as the region with thedemanding highest Total Tax systems averages South America is also the region which demonstrates the heaviest compliance burden in terms of the hours to comply. This is driven by a mix of complicated tax systems, regimes which have multiple levels of government and tax authorities, and where regular changes to the tax system are common.The 2013 study shows that theMiddle Eastern states have theleast demanding tax systems for our The developed economies ofdomestic case study company. They Europe and North America nothave the lowest average Total Tax surprisingly have the most efficientRates (23.6%), the lowest time to tax systems but Total Tax Rates cancomply (158 hours), but the be high, driven in many cases bypayments indicator (17.6) suggests numerous labour taxes and socialthat improvements are still possible contributions.for electronic filing and payment. The Asia Pacific economies tend to have Total Tax Rates that are below the world average and they have The Middle East has had the lowest continued to fall as they look to Total Tax Rates and Africa has the compete in the world economy. highest throughout the eight years of the study. The elimination of the cascading sales tax regimes is improving Africa’s position. This has also helped reduce the global average along with large falls in the rates applied in Central Asia Eastern Europe, and the Middle East. Key themes and findings 6
  10. 10. Some economic insights Tax Total Tax Inward GDP Administrative GDP Rate investment growth complexity growthA comparison of the Total Tax Rate indicator with GDP andFDI suggests that higher Total Tax Rates for business areassociated with reduced ability for an economy to grow and Comparing the compliance indicators for the time to complyattract inward investment. and the number of payments with GDP suggests that a high level of administrative complexity in the tax system is associated with less economic growth, and to a greater degree than the tax cost – this is particularly the case in relation to the number of payments indicator, implying that a high number of taxes, and a lack of electronic filing and payment facilities are key reasons here.7 Paying Taxes 2013
  11. 11. The economic analysis to compare the Paying Taxes indicators with Gross Domestic Product (GDP) and Foreign Direct Investment (FDI) suggests that while higher business taxation can be linked to slower economic growth and international investment, GDP reducing the administrative burden and complexity growth of the tax system can potentially be linked to a greater change in overall growth. The implication is that Tax administrative complexity minimising the time and effort which businesses need to spend on complying with the tax system is equally important for governments when considering how best to stimulate and sustain economic growth.In economies where action was taken to reduce complexityin tax administration – both in terms of the number ofpayments and the time taken to deal with tax matters –there has been a positive change on economic growth. Key themes and findings 8
  12. 12. About Paying Taxesand this reportPaying tax is important. Taxes provide government withrevenues, and those who pay them have a stake in the systemand in how government spends its money. In view of the currentglobal economic climate, many governments spending and taxpolicies are now constrained by the need for deficit reduction tomaintain the confidence of financial markets, but there is also aneed to strike a balance when setting fiscal policy. Tax systemscan also contribute to an economic environment that is attractivefor inward investment and which can help domestic businesses togrow. For developing economies, the global economic downturnhas created an additional issue to address as the aid budgetsof developed economies have been cut. Governments in thesecountries need to consider how they can replace this funding.Looking at how they can improve their tax systems so that theyare capable of generating a more sustainable source of financingthan debt or aid is high on the agenda. The pressure fromgovernments for tax authorities to generate higher tax revenuesis likely to continue to increase.9 Paying Taxes 2013
  13. 13. About Paying Taxes 10
  14. 14. The Paying Taxes study looks at tax The objectives of the study are: • Total Tax Rate, (the cost of allsystems from the business perspective. taxes borne);Business plays an essential role in • to provide data which can be • time needed to comply with thecontributing to economic growth and compared between economies on a major taxes (profit taxes, labourprosperity by employing workers, like for like basis; taxes and mandatory contributions,improving the skills and knowledge • to facilitate the benchmarking and consumption taxes); andbase, buying from local suppliers and of tax systems within relevant • the number of tax payments.providing affordable products that economic and geographicalimprove people’s lives. Business also groupings, which can provide an The World Bank /IFC Doing Businesspays and generates many taxes. As opportunity to learn from peer project calculates an overall rankingwell as corporate income tax on profits, group economies; for the ease of paying taxes whichbusiness pays employment taxes, • to enable an in‑depth analysis of the is a simple average of the percentilesocial contributions, indirect taxes, results which can be used to help rankings on each of the sub indicatorsproperty taxes and a whole variety of identify good practices and possible with a lower threshold applied tosmaller taxes including environmental reforms, and the Total Tax Rate. The threshold istaxes. The Paying Taxes study shows • to generate robust data on tax defined as the highest Total Tax Ratethat corporate income tax is levied on systems around the world, among the 15% of economies withbusiness in 179 economies, value added including how they have changed, the lowest rates. The results for eachtax (VAT) is collected by business in which can be used to inform the sub-indicator, split by type of tax,154 economies, and a range of labour development of good tax policy. are included in Appendix 2 of thistaxes and social contributions is borne publication along with the overalland collected by business in 184 Paying Taxes uses a case study scenario ease of Paying Taxes ranking. Furthereconomies. Taxes borne and collected to measure the taxes and contributions details are also available on the Doingby business are therefore important paid by a standardised business Business and the PwC websites.2 Theand the impact that these taxes and and the complexity of an economy’s full methodology for the case studythe tax systems used to generate them tax compliance system. This case company and the indicators are alsohave on business is also important both study scenario uses a set of financial set out on these websites and somein terms of their direct cost, and in statements and assumptions about examples of how the indicators areterms of the compliance costs that they transactions made over the year. Tax calculated are included in Appendix 1impose on business as an unpaid tax experts from a number of different of this publication.collector for government. firms in each economy (including PwC), compute the taxes and Chapter 1 of this publication setsPaying Taxes is a unique study. It mandatory contributions due in their out this year’s perspective from theprovides data on tax systems around jurisdiction, based on the standardised World Bank.the world with an ability to monitor case study facts. Information is alsotax reform, and now over an eight compiled on the frequency of filing It looks at where paying taxes is easyyear period. It is unique because it and payments, as well as the time and where not, the reforms that weregenerates a set of indicators that taken to comply with tax laws in an made in 2011/2012, and some insightsmeasure the world’s tax systems from economy. The case study company is learned from the eight years of datathe point of view of business and also not intended to be a representativebecause it covers the full range of taxes company, but has been constructed to Chapter 2 provides a further analysispaid in 185 economies, measuring facilitate a comparison of the world’s by business complies with the tax systems on a like for like basis.different tax laws and regulations in This year the analysis begins byeach economy. Paying Taxes covers both the cost of the comparing the Paying Taxes indicators taxes which are borne by the case study with some key macroeconomicThis is the eighth year that the Paying company, and also the administrative measures. It then takes a look at theTaxes indicators have been included burden of the taxes that the company global results for this year’s study andin the Doing Business project run by bears and the taxes that it collects on a comparison of the results aroundthe World Bank Group. The indicators behalf of government (but which do the world by geographical region.measure the ease of Paying Taxes for not have an impact on the company’s The chapter goes on to take a detaileda small to medium sized domestic results). Both the tax cost and the tax look at the global trends over the eightcompany, in all of the 185 economies compliance burden are important years of the Paying Taxes study forthat it covers. from the business point of view and each of the sub-indicators, and again these are measured using three compares the movements in each of the sub‑indicators: geographical regions.2 w and taxes11 Paying Taxes 2013
  15. 15. Each region is then looked at in detail.This covers the tax profile for theregion and the economies within eachregion, a comparison for each of thesub-indicators and also how each ofthese has changed for that region witha focus on the some of the economieswhich have driven those movements.A selection of commentaries froma number of PwC offices aroundthe world is included in each of theregional sections. These look at theresults of Paying Taxes for theirparticular economy in more detailillustrating how the data is being usedin practice to inform and stimulatediscussion with governments and, theyalso refer to some of the reforms thathave been and are being implementedto address the issues arising insuch dialogues. About Paying Taxes 12
  16. 16. Chapter 1Findings of theWorld Bank andIFC’s Doing Business2013 reportJean-Baptiste Colbert, French philosopher and Ministerof Finance to King Louis XIV, once remarked that “theart of taxation consists in so plucking the goose as toobtain the largest possible amount of feathers with thesmallest possible amount of hissing.” How taxes arecollected and paid has changed a great deal since then.But governments still face the challenge of maximisingrevenue collection while minimising distortions.13 Paying Taxes 2013. World Bank and IFC commentary
  17. 17. Firms in the United Arab Emirates Belarus has advanced the mostface the lightest administrative toward the frontier in regulatoryburden in Paying Taxes. They practice in Paying Taxesmust make only four payments a since 2004.year and spend 12 hours doing so. The most common feature of taxFrom June 2011 to June 2012 reforms in the past eight yearsDoing Business recorded 31 was to reduce profit tax rates,reforms making it easier and less often in the context of parallelcostly for companies to comply efforts to improve tax compliance.with taxes. But in the past two years more economies focused on introducingLiberia made the biggest electronic systems.improvement in the ease of payingtaxes in the past year. Among regions, Eastern Europe Central Asia had the biggest improvement in the ease of Paying Taxes in the past eight years.For more information on good practices and research related to Paying Taxes, visit Findings of the World Bank and IFC’s Doing Business 2013 report 14
  18. 18. Doing Business records the taxes Figure 1.1: Where is Paying Taxes easy – and where not?and mandatory contributions that Economy Overall rank Most difficult Ranka medium-size company must pay United Arab Emirates 1 Cameroon 176in a given year and also measures Qatar 2 Mauritania 177the administrative burden of Paying Saudi Arabia 3 Senegal 178Taxes and contributions. It does thiswith three indicators: number of Hong Kong SAR, China 4 Gambia, The 179payments, time and Total Tax Rate for Singapore 5 Bolivia 180the Doing Business case study firm. Ireland 6 Central African Republic 181The number of payments indicates the Bahrain 7 Congo, Rep. 182frequency with which the company Canada 8 Guinea 183has to file and pay different typesof taxes and contributions, adjusted Kiribati 9 Chad 184for the way in which those filings Oman 10 Venezuela, RB 185and payments are made.3 The time Note: Rankings are the average of the economy’s rankings on the number of payments, time and Totalindicator captures the number of hours Tax Rate, with a threshold imposed on the Total Tax takes to prepare, file and pay three Source: Doing Business database. major types of taxes: profit taxes,consumption taxes, and labour taxesand mandatory contributions. TheTotal Tax Rate measures the tax cost Figure 1.2: Who made Paying Taxes easier and lowered the tax burden in 2011/12 –(as a percentage of profit) borne by the and what did they do?standard firm. The indicators do not Feature Economies Some highlightsmeasure the fiscal health of economies, Introduced or Albania; Belarus; Bosnia and Ukraine introduced an online filingthe macroeconomic conditions under enhanced electronic Herzegovina; Costa Rica; and payment system and made itswhich governments collect revenue systems Czech Republic; Georgia; use mandatory for medium-sizeor the provision of public services Germany; Kenya; Panama; and large enterprises. Russian Federation; Saudisupported by taxation. The ranking on Arabia; Slovak Republic;the ease of Paying Taxes is the simple Slovenia; Ukraine; United Arabaverage of the percentile rankings Emirates; Uruguayon its component indicators, with a Reduced profit tax Belarus; Brunei Darussalam; The United Kingdom reduced 2threshold applied to the Total Tax Rate rate by 2 percentage Fiji; Japan; Republic of Korea; corporate income tax rates: the(Figure 1.1).3 points or more Lao PDR; Liberia; Mali; Puerto main rate from 28% to 26% and Rico (U.S.); Slovenia; Thailand; the small-company rate from 21%Who reformed in Paying Taxes in United Kingdom to 20%.2011/12? Merged or eliminated Albania; Hungary; Liberia Liberia abolished the turnover tax.From June 2011 to June 2012 Doing taxes other thanBusiness recorded 31 reforms making profit taxit easier or less costly for firms to pay Simplified tax Jamaica; Mali; Panama; Jamaica introduced joint filing andtaxes (Figure 1.2). Sixteen economies compliance process Poland payment of all five types of socialmandated or enhanced electronic security contributions that firmsfiling, eliminating the need for 196 must make.separate tax payments and reducing Reduced labour Croatia Croatia made Paying Taxes lesscompliance time by 134 days taxes and mandatory costly by reducing health insurance(1,070 hours) in total. In Uruguay contributions contributions.small and medium-size companies can Introduced change in Swaziland Swaziland introduced value addednow file and pay corporate income tax, cascading sales tax tax to replace its cascadingvalue added tax and capital tax online. sales tax. Source: Doing Business database. 3 C ompanies sometimes prefer more frequent payments, to smooth cash flow, and less frequent filing.4 T he threshold is set at the 15th percentile of the Total Tax Rate distribution, and this year is 25.7%. All economies with a Total Tax Rate below this level receive the same percentile ranking on this component. The threshold is not based on any economic theory of an “optimal tax rate” that minimises distortions or maximises efficiency in the tax system of an economy overall. Instead, it is mainly empirical in nature, set at the lower end of the distribution of tax rates levied on medium-size enterprises in the manufacturing sector as observed through the Paying Taxes indicators. This reduces the bias in the indicators toward economies that do not need to levy significant taxes on companies like the Doing Business standardised case study company because they raise public revenue in other ways—for example, through taxes on foreign companies, through taxes on sectors other than manufacturing or from natural resources (all of which are outside the scope of the methodology).15 Paying Taxes 2013. World Bank and IFC commentary
  19. 19. Figure 1.3: Who makes Paying Taxes easy and who does not – and where is the Total This option was available only for largeTax Rate highest? taxpayers until 2011. Seven other economies implemented electronicPayments (number per year) filing for the first time, raising the number offering this option fromFewest Most 67 in 2010 to 74 in 2011.5 Thanks toHong Kong SAR, China 3 Antigua and Barbuda 57 improvements in electronic systemsSaudi Arabia 3 Guinea 58 for filing and paying social securityNorway 4 Senegal 59 contributions, Saudi Arabia this yearQatar 4 Panama 60 ranks among the 10 economies withSweden 4 Congo, Rep. 61 the fewest payments and lowest tax compliance time (Figure 1.3).United Arab Emirates 4 Sri Lanka 61Georgia 5 Côte dIvoire 62 Electronic systems for filing and PayingSingapore 5 Serbia 66 Taxes eliminate excessive paperworkChile 6 Tajikistan 69 and interaction with tax officers. TheyMalta 6 Venezuela, RB 71 can reduce the time businesses spend on complying with tax laws, increase tax compliance and reduce the cost ofTime (hours per year) revenue administration.6 But achievingFastest Slowest these results requires effectiveUnited Arab Emirates 12 Cameroon 654 implementation and high-qualityBahrain 36 Ecuador 654 security systems.Qatar 48 Senegal 666Bahamas, The 58 Mauritania 696 Twelve economies reduced profit tax rates in 2011/12: six high-incomeLuxembourg 59 Chad 732 economies (Brunei Darussalam, Japan,Oman 62 Venezuela, RB 792 Korea, Puerto Rico [territory of theSwitzerland 63 Vietnam 872 United States], Slovenia and the UnitedSaudi Arabia 72 Nigeria 956 Kingdom), four middle-income onesSeychelles 76 Bolivia 1,025 (Belarus, Fiji, Lao PDR and Thailand)Hong Kong SAR, China 78 Brazil 2,600 and two low-income ones (Liberia and Mali). Reductions in profit tax rates are often combined with efforts to widenTotal Tax Rate (% of profit) the tax base by removing exemptionsHighest and with increases in the rates ofColombia 74.4 other taxes, such as value added taxPalau 75.7 (VAT). Liberia improved the most inBolivia 83.4 the ease of Paying Taxes. It reduced the corporate income tax rate from 35% toTajikistan 84.5 25% and abolished the turnover tax.Eritrea 84.5 The Total Tax Rate fell from 43.7% ofUzbekistan 98.5 profit to 27.4%.Argentina 108.3 aComoros 217.9a Eleven economies introduced new taxes (Cambodia, Costa Rica, Cyprus,Gambia, The 283.5 a El Salvador, Ethiopia, Japan, Malawi,Congo, Dem. Rep. 339.7a Maldives, Mali, Nigeria, and República Bolivariana de Venezuela). OthersNote: The indicator on payments is adjusted for the possibility of electronic or joint filing and paymentwhen used by the majority of firms in an economy. increased profit or income tax ratesa A s a result of assumptions about the profit margin used to standardize the financial statements of (Botswana, the Dominican Republic the case study company, in four economies the amount of taxes due would exceed the profit of the company. To be able to comply with its tax obligations in these economies, the company would and Moldova)7 or social security therefore have to charge more for its products and generate a higher profit. The methodology does not contributions (Hungary and Poland). allow for price adjustments and assumes a standard cost markup of 120%.Source: Doing Business database. 5 One of the economies added to the sample in this year’s report, Malta, has offered electronic filing for several years and so is included in the count for 2010.6 M exico, for example, has relied heavily on technology and the use of electronic systems to lessen the administrative burden for taxpayers. These efforts simplified requirements for firms, reducing the number of annual tax payments recorded by Doing Business from 27 in 2007 to 6 in 2011 and the time to comply with major taxes from 549 hours to 337.7 A t the same time Moldova reduced the withholding tax for dividends from 15% to 6% and lowered the withholding tax for payments other than dividends from 15% to 12%. In addition, it introduced a new tax regime for small and medium-size enterprises under which small companies pay a single tax of 3% of revenues from operational activities. Findings of the World Bank and IFC’s Doing Business 2013 report 16
  20. 20. Figure 1.4: Tax reforms implemented by more than 75% of economies in the past eight years What have we learned from eightNumber of Doing Business reforms making it easier to pay taxes by Doing Business report year years of data?Reforms Since 2005 Doing Business hasSouth Asia (8 economies) recorded 296 tax reforms in 142 4 2 1 1 2 10 economies (Figure 1.4). Some of theseMiddle East North Africa (19 economies) reforms introduced online filing, added1 4 3 2 6 2 3 2 23 in 29 economies in the past eight years. These and other improvementsEast Asia Pacific (24 economies) 3 5 9 8 4 29 to simplify tax compliance reduced the time required to comply with theLatin America Caribbean (33 economies) three major taxes measured (profit, 4 5 5 8 6 2 7 5 42 labour and consumption taxes) by 54Sub-Saharan Africa (46 economies) hours on average, and the number of 3 8 8 6 11 11 7 4 58 payments by 7 (rounded).OECD high income (31 economies) 9 7 6 8 9 7 7 9 62 Eastern Europe and Central Asia hadEastern Europe Central Asia (24 economies) the biggest improvement, with the time 8 11 10 9 9 11 7 7 72 reduced by 181 hours and the number of payments by 24 (Figure 1.5). Doing Business 2006 Doing Business 2008 Doing Business 2010 Doing Business 2012 Upper-middle-income economies have Doing Business 2007 Doing Business 2009 Doing Business 2011 Doing Business 2013 advanced the most toward the frontierNote: An economy can be considered to have only one Doing Business reform per topic and year. The in regulatory practice in Paying Taxes,data sample for DB2006 (2004) includes 174 economies. The sample for DB2013 (2011) also includes followed by lower-middle-incomeThe Bahamas, Bahrain, Barbados, Brunei Darussalam, Cyprus, Kosovo, Liberia, Luxembourg, Malta, economies (Figure 1.6).Montenegro and Qatar, for a total of 185 economies.Source: Doing Business database. Besides lessening the administrative burden of taxes, many economies also reduced tax rates, often from relativelyFigure 1.5: Tax compliance simplified the most in Eastern Europe and Central Asia high levels and with complementaryAverage payments (number per year)Average payments (number per year) efforts to improve tax compliance. Sub-Saharan Africa had the largest OECD high income (31 economies)DB2013 1 2 8 12 reduction in the Total Tax Rate, 13.3DB2006 2 5 8 16 percentage points on average since Middle East North Africa (19 economies) 2005. Some of this reduction cameDB2013 2 11 8 21 from the introduction of VAT, whichDB2006 2 13 9 25 replaced the cascading sales tax.8 East Asia Pacific (24 economies)DB2013 4 11 10 25 Burundi, Djibouti, Mozambique, SierraDB2006 4 13 12 29 Leone and Swaziland all introduced Eastern Europe Central Asia (24 economies) VAT systems. In Sierra Leone taxDB2013 4 8 16 28DB2006 8 19 25 52 revenue remained relatively stable as South Asia (8 economies) a percentage of GDP, rising only fromDB2013 3 13 13 30 10.8% in 2005 to 11% in 2009. But theDB2006 3 12 15 30 share of revenue coming from taxes Latin America Caribbean (33 economies) on goods and services increased fromDB2013 4 11 15 31DB2006 5 17 18 40 11.9% to 24.6%.9 Sub-Saharan Africa (46 economies)DB2013 4 16 19 39DB2006 4 16 20 40 Corporate income tax Labour taxes Consumption taxesNote: To ensure an accurate comparison, the figure shows data for the same sample of 174 economiesfor both DB2006 (2004) and DB2013 (2011) and uses regional classifcations that apply in 2012. Theeconomies added to the Doing Business sample after 2004 and therefore excluded here are theBahamas, Bahrain, Barbados, Brunei Darussalam, Cyprus, Kosovo, Liberia, Luxembourg, Malta,Montenegro and Qatar. DB2006 data are adjusted for any data revisions and changes in methodology.Source: Doing Business database. 8 V AT is collected by the firm and its cost is fully passed on to the consumer. Because the firm has to make the payments and spend time filling out the returns, VAT is included in the indicators on payments and time. But the amount of VAT paid is not included in the Total Tax Rate. Cascading sales tax, which is paid at every point of the supply chain, is included in the Total Tax Rate, because the firm cannot deduct the sales tax it pays on its supplies from the amount it owes on its sales. Economies introducing VAT regimes to replace the sales tax regime have therefore seen a reduction in their Total Tax Rate.9 World Bank, World Development Indicators database, Paying Taxes 2013. World Bank and IFC commentary
  21. 21. Many African economies also reduced Figure 1.6: Middle-income economies have advanced the most toward the frontier in Paying Taxesprofit tax rates in the past eight years, 2011reducing the share of profit taxes inthe Total Tax Rate by 0.9 percentage 2004point on average in the region. But thebiggest reduction in this share occurred Average distance to frontier (%)in OECD high-income economies, 80where it fell by 4.1 percentage pointson average. Over the same periodtax revenue increased slightly as apercentage of GDP in Sub-SaharanAfrica and remained relatively stable in 60OECD high-income economies.10Such reforms have had positive effects.Matching the data available since 2005 40on Total Tax Rates with investmentdata indicates that a reduction of 1percentage point in the Total Tax Rateis linked to an increase in investment 20equivalent to 1% of GDP.11 0 Low income Lower middle income Upper middle income High income Note: The distance to frontier measure shows how far on average an economy is from the best performance achieved by any economy on the Paying Taxes indicators since 2004. The measure is normalised to range between 0 and 100, with 100 representing the best performance (the frontier). The data refer to the 174 economies included in Doing Business 2006 (2004). Eleven economies were added in subsequent years. The figure shows data for the financial years 2004 (measured by the Paying Taxes indicators in Doing Business 2006) and 2011 (measured in Doing Business 2013). Source: Doing Business database. 10 World Bank, World Development Indicators database, T he analysis controls for government consumption, institutional quality and corruption perception. It also controls for total trade openness and rents from natural resources. Eifert, Benjamin. 2009. “Do Regulatory Reforms Stimulate Investment and Growth? Evidence from the Doing Business Data, 2003–07.” Working Paper 159, Center for Global Development, Washington, DC. Djankov, Simeon, Caralee McLiesh and Rita Ramalho. 2006. “Regulation and Growth.” Economics Letters 92 (3): 395–401. Findings of the World Bank and IFC’s Doing Business 2013 report 18
  22. 22. Since 2004 there has been a Figure 1.7: Strong convergence across economies since 2004 – averages by quartileconvergence in business regulatorypractices in Paying Taxes. This means Time to pay taxes (hours per year)that laws, regulations and complianceprocedures are more similar across 700economies today than they were eightyears ago. The greatest convergence 600in regulatory practice has occurred Worstin time. Among the 174 economies 500 quartilecovered by Doing Business since 2004,the time to comply with taxes in that 400year averages 681 hours in the worstquartile of the economies as ranked by 300performance on this indicator, while it Best 3averaged 211 hours for the rest 200 quartiles(Figure 1.7). Since then the averagetime for the worst quartile has fallen to 100497 hours, getting closer to the averageof 201 hours for the rest. 0 2004 2005 2006 2007 2008 2009 2010 2011 Payments (number) 70 60 50 Worst quartile 40 30 Best 3 20 quartiles 10 0 2004 2005 2006 2007 2008 2009 2010 2011 Total Tax Rate (in % of profit) 100 80 Worst quartile 60 40 Best 3 quartiles 20 0 2004 2005 2006 2007 2008 2009 2010 2011 Note: Economies are ranked in quartiles by performance in 2004 on the ease of Paying Taxes. The data refer to the 174 economies included in Doing Business 2006 (2004). Eleven economies were added in subsequent years. Source: Doing Business database. 19 Paying Taxes 2013. World Bank and IFC commentary
  23. 23. Belarus has advanced the furthest Figure 1.8: Who has narrowed the distance to frontier in Paying Taxes between 2004 and 2011?toward the frontier in regulatory Most improved Change in distance to frontier (percentage points)practice in Paying Taxes since 2004 Belarus 61 (0 - 61)(Figure 1.8). Embarking on an Georgia 47 (39 - 86)ambitious tax reform in 2005, Belarusabolished several taxes, reduced Colombia 47 (13 - 60)tax rates, broadened the tax base, China 42 (19 - 61)simplified filing forms and the tax law Azerbaijan 37 (38 - 75)and invested in electronic systems that Ukraine 31 (16 - 47)make it easier to file and pay taxes. Sierra Leone 30 (34 - 64)These changes reduced the number Argentina 30 (14 - 44)of annual payments from 125 to 10,the time from 987 hours a year to 338 Yemen, Rep. 30 (33 - 63)and the Total Tax Rate from 137.5% of Uruguay 30 (31 - 61)profit to 60.7% (Figure 1.9). The efforts Note: The distance to frontier measure shows how far on average an economy is from the bestto make tax compliance easier and less performance achieved by any economy on the Paying Taxes indicators since 2004. The measure iscostly are paying off. While 1,681 new normalised to range between 0 and 100, with 100 representing the best performance (the frontier). The data refer to the 174 economies included in Doing Business 2006 (2004). Eleven economies were addedlimited liability corporations registered in subsequent years. The first column lists the top 10 most improved economies in order; the secondfor the first time in 2005 in Belarus, shows the absolute improvement in the distance to frontier between financial years 2004 and 2011. Source: Doing Business database. 6,142 did so in 2011. Indeed, the totalnumber registered in this periodincreased by 68.9% (from 27,619 Figure 1.9: Broad tax reform in Belarus reduces payments, time and Total Tax Rateto 46,653).12 Total Tax Rate Payments Time Time (Hours) 200 1000 160 800 120 600 80 400 40 200 0 2004 2005 2006 2007 2008 2009 2010 2011 0 Source: Doing Business database. 12 orld Bank Group Entrepreneurship Snapshots. The full data set is available on the Doing Business website ( W Findings of the World Bank and IFC’s Doing Business 2013 report 20
  24. 24. Chapter 2The PwC commentaryThe continuing turbulent economic environment ismaking decisions around tax policy more difficult.In the wake of the global economic downturn,economies are under increasing pressure to becompetitive, to implement tax systems that can helpencourage economic growth, while at the same timeaddressing public sector deficits, and putting economieson a more sound footing. Government spending cutsand a loss of public trust in business and concerns overwhether companies are paying the ‘right amount of tax’have intensified the calls for tax reform and transparencyaround how tax systems operate, with a view to holdingboth governments and businesses to account.21
  25. 25. Governments also see a need to putin place tax systems which are seento be efficient, can help to attractinvestment, and in turn can help fostereconomic growth. 22
  26. 26. An economic analysisTaxation, economic growthand investmentAndrew Sentance The disappointing performance of One important way in which theSenior Economic Adviser many economies – particularly the government can improve the ease ofPwC (UK) higher income countries in the West doing business in an economy is by – has focussed attention on how reducing the burden of the tax system governments can boost economic on firms. This can be done in a number growth. As the world economy has of different ways. First of all, it can emerged from the global financial be achieved by lowering tax rates and crisis, much emphasis has been on easing the overall burden of taxation. providing a stimulus to demand That is challenging because a reduction and improving the performance of in the overall tax burden in an economy the financial system. In addition, can only be achieved on a sustainable governments are starting to shift their basis if government spending as a share attention to the potential of supply-side of economic activity is also reined in to measures, which aim to improve the the same extent. ease of doing business in a country. The easier it is to do business, the more A second way of creating a more likely it is that new businesses will be business-friendly tax system is through formed and existing businesses will tax reform. Tax rates which directly grow – creating value-added and jobs. bear on business activity can be And economies where it is easier to do brought down by shifting the burden business will tend to attract investment of tax away from wealth-generating from overseas, providing an added activities and towards personal potential boost to economic growth expenditure – such as VAT. Another and jobs.13 way in which tax reform can help create a better climate for business, is by broadening the tax base which enables the same amount of taxation to be raised with a lower overall tax rate. The UK’s current approach to corporate tax reform is an example of this kind of approach.13 jankov, Simeon, Caralee McLiesh and Rita Ramalho. 2006. “Regulation and Growth.” Economics Letters 92 (3):395–401. D ifert, Benjamin. 2009. “Do Regulatory Reforms Stimulate Investment and Growth? Evidence from the Doing Business Data, 2003–07.” Working Paper 159, E Centre for Global Development, Washington, DC.23 Paying Taxes 2013. PwC commentary
  27. 27. One important way in which thegovernment can improve the ease ofdoing business in an economy is byeasing the burden of the tax system onfirms. This can be done in a number ofdifferent ways. An economic analysis 24
  28. 28. A third way in which changes to the tax What did our analysis show?system can help economic growth is by We used regression analysis to lookeasing the administrative burden on at the relationship between thebusinesses – reducing the time which Paying Taxes indicators which webusinesses need to spend dealing with have been measuring over the periodtax matters and the complexity of the 2004-11 and: (1) the economy’spayment systems. average economic growth rate over that period; and (2) the growth ofFor the last eight years, PwC has been the stock of inward investment overworking with the World Bank and IFC the same period. The hypothesis wasto measure how burdensome the tax that economies which had higher taxsystem is in different economies using burdens or more complex tax systemsthree simple indicators: the Total Tax would experience lower growth orRate of a case study company as a inward investment over a period ofpercentage of profits; the number of years. We also looked at the impact ofdifferent payments which businesses changes in the Paying Taxes indicators,need to deal with; and the time as it is also likely that economiesspent by businesses dealing with tax which are actively seeking to reducecompliance. Now that these measures the burden and complexity of the taxhave been calculated for a large system will also experience strongernumber of economies over the eight growth.year period, we feel we have a strongenough data set to conduct some Our analysis sought to take intostatistical analysis into the relationship account and control for the fact thatbetween the tax system in different emerging and developing economieseconomies and their economic have stronger growth potential becausegrowth and ability to attract overseas their economies are growing from ainvestment. lower base. So as well as including our Paying Taxes indicators in theFor this purpose we have analysed analysis we included the level of GDPthe experience of 166 economies in per head in each economy at the startour database14 – to see how the level of the period we were consideringof taxation on businesses in these (2004). This would be expected to haveeconomies and its complexity relates a negative correlation with growthto their rate of growth and ability to performance – with richer moreattract inward investment. mature economies experiencing lower growth rates and poorer countries having more scope to catch-up with the leading economies. This did indeed turn out to be the case. We need to be cautious about inferring too much from the results given the complex nature of the relationship between the tax system and economic growth. For example, changes in the tax system may well be correlated with other policy developments which improve the business climate in an economy and hence raise growth. However, the results are in the direction which we would expect – economies with lower tax rates on business and less complex tax systems experience stronger growth and attract more foreign direct investment.14 ome countries covered by the Paying Taxes study had to be excluded due to a lack of consistent GDP and FDI data for the full period of our analysis. Data S for economic growth was drawn from the IMF World Economic Outlook database and FDI data was from UNCTAD.25 Paying Taxes 2013. PwC commentary