1. Tax compliance cost surveys:
Findings from developing
and transition countries
Jacqueline Coolidge
Washington DC
February 1, 2012
1

2. INTRODUCTION
2

3. What are tax compliance costs?
Enterprises’ tax compliance and associated reporting
costs – these are NOT amounts of taxes paid and NOT
• Enterprises’ tax compliance and statistical reporting costs – these are
costs of general bookkeeping or accounting, but costs:
NOT amounts of taxes paid, but costs:
•
• of working time spent by accountants and other staff on calculation
of working time spent by accountants and other staff on calculation
taxes, preparing all reports (including statistical), providingauthorities,
taxes, preparing all reports, providing explanations to tax
trips to tax offices, etc. statistic authorities, trips to these bodies
explanations to tax and
• for purchasing all necessary forms of declaring/filing, updates on
purchasing, installation and maintenance of corresponding
equipment (cash registers)or regs, etc. (on workflow automation)
changes in tax legislation and programs
•
• for outsourcingall necessary forms of reporting,fee-for-service basis
for purchasing to tax preparers on retainer or etc.
• for outside consultants
• for purchasing, installation and maintenance of required equipment
(e.g., cash registers) and/or software (amortized as appropriate)
3

4. Why should we care about tax
compliance costs?
• Tax compliance costs add significantly to the
cost of doing business
• Tax compliance costs can be extremely
regressive: a relatively minor burden for large
firms but extremely onerous for small firms
• The costs and risks of tax compliance (e.g., the
risk of incurring severe penalties) can deter
business formation and formalization of informal
firms.
4

5. Examples of TCCS
• South Africa, Kenya, Burundi (Uganda upcoming)
• Yemen
• Ukraine, Uzbekistan, Armenia, Georgia
• Peru
• India (Bihar), Lao, Nepal (Bangladesh upcoming)
• What data did we get and how did we use it???
5

6. BASIC TAX COMPLIANCE
COSTS
6

7. South Africa Tax Compliance Burden -
coverage
• Time and cost estimates for main business taxes:
– Income Tax (IT), including provisional tax
– Value Added Tax (VAT)
– Employees’ Tax (ET)
• Significant processes:
– Preparation, completion of returns
– Tax filing and payment
– Objections, Appeals & Alternative Dispute Resolution
– Audits, inspections & written queries from SARS
7

8. Armenia: Tax Compliance Costs incurred
by an average Enterprise in 2009
D
R
A
• In person-hours:
F
T Total time spent on tax compliance of all staff
F
O • In money:
R
D Time cost X labor costs (salary and wages)*
I
S
C 400 person-hours (50 business days),
U which is
S
S AMD 428 892 (~$1,181*)
I
O * Beware: imputed salaries for business owners/managers can be very
N * average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.
problematic and can lead to very wide variation in valuations.
8
8

9. Ukraine: Most costly taxes for enterprises
Time spent on tax accounting (analysis of tax legislation, tax
accounting, preparation of reports, paying taxes) of different
taxes in 2007 per average enterprise
Tax Average time, hours per year
VAT (including preparation of VAT 650
invoices)
Enterprise Profit Tax 280
Personal Income Tax 142
Social contributions 146
Unified Tax 65
Fixed Agriculture Tax 90
9

10. Other expenses related to
compliance with tax in Ukraine
Average costs per Average costs per
Expenses
enterprise*, UAH sole proprietor*, UAH
1500 498
Accounting software
1000 279
Consulting and legal database,
tax literature, consultations and
seminars etc.
Tax templates, books and other 350 83
tax reporting forms
Registers for settlement 700 842
transactions
Total average: 3600 394
Average costs calculated among enterprises and sole proprietors who incurred
these costs
10

11. Nepal: 84 percent of eligible taxpayers
don’t file for VAT Refund
1. Eligible for VAT 2. Applied for VAT 3. Status of application
Refund (N=517) Refund (N=50) (N=19)
Dont
know Disapprove Still in
1% d process
Not 24% 12%
Applied
84% Applied
Not Eligible 16%
Eligible 7%
92% Approve
d
64%
4. Received VAT refund
Reasons for Not Demanding VAT Refund (N=13)
in Cash
Complicated formalities for rebate 50.3
Received
Not worth because the rebate amount was too fully
31.2
small 33%
We would not get the rebate anyway 50.7 Received
partially
Might induce a tax audit in our enterprise 9.0 67%
Other (please, specify) 4.2
11

12. TCCS TEND TO BE VERY
REGRESSIVE, AND A
MAJOR BURDEN FOR
SMALL BUSINESSES
12

13. Developed country TCC/turnover
24
Tax Compliance Cost as a percentage of turnover (scale for
19
14
New Zealand)
9
4
0.1 0.06 0.09 0.09
0.02 0.006
-1
4
6
98
3
5
0
9
15
44
8
3
87
45
10
21
43
54
31
90
,8
9,
6,
1,
1,
81
18
31
Turnover in 000 USD
Canada United Kingdom Netherlands New Zealand
13

14. Regressive Compliance Costs –
South Africa (Pre reform)
Compliance Burden for preparation of tax returns as
a percent of turnover (firms registered/not registered
for VAT; mandatory at R300,000)
6.0%
% of turnover
5.0%
4.0% Firms registered for VAT
3.0%
2.0%
1.0% Firms not registered for VAT
0.0%
0.15 0.3 0.65 3.5 10
Turnover (in R million)
14
Source: FIAS Tax Compliance Cost Survey South Africa, 2007 14

15. Country-specific examples of TCC/turnover
20
Tax Compliance Cost as a percentage of turnover
18
16
14
12
10
8
6
4
2
0
Turnover in 000 USD
South Africa Armenia India (Bihar) Georgia
15

16. Nepal – threshold may be too low
Tax Compliance Cost vs Revenue of Business
4.00%
3.50% 3.43%
3.00% VAT
Thresh-
2.50% hold
2.00%
1.50%
1.00% 0.87%
0.48% 0.55%
0.50% 0.43%
0.32% 0.19% 0.09% 0.05% 0.10%
0.00%
30,001 - 100,001 - 500,001 - 1,000,001 - 2,000,001 - 5,000,001 - 10,000,001 - 50,000,001 - 100,000,001 Above
100,000 500,000 1,000,000 2,000,000 5,000,000 10,000,000 50,000,000 100,000,000 - 250,000,000
250,000,000
16

17. WHAT CAN REDUCE TAX
COMPLIANCE COSTS FOR
SMALL BUSINESSES?
SIMPLIFIED TAX REGIMES?
17

18. Peru – Tax Regimes / Turnover
100%
5.1% 8.0%
90% 8.6%
80% 23.2%
43.6%
70% 58.4%
60%
More than S/. 360,000
50% 16.8% S/.150,001 - S/.360,000
86.3% Less than S/. 150,000
40%
68.8% 16.0%
30%
20% 39.6%
25.5%
10%
0%
All Regimes RUS RER RG
Regime of client
1949 175 388 1386
18

19. Advantages and disadvantages of simplified
regimes – Peru: reasons offered …
….Not to file under RER … to File
under RG other reasons
other reasons
do not know about this allows to emit
regime all invoices
lowest tax
requirements are too difficult
compliance
to comply cost
the only regime
client's expectations to grow
that allows
above S/.500,000 client to grow
only regime for
fixed assets >S/.126,000 which client is
eligible
easiest regime
net income >S/.500,000
to understand
does not allow for client's
did not advise
economic activiy
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%
N=1302 n=1289
19

20. The simplified regime in Ukraine appeared
to broaden the Tax Net…
Table 5: Ukraine’s Presumptive Tax System
Year Unified/Single tax Number of Number of
special trade fixed tax payers
patents (‘000)
Legal entities (‘000) Natural purchased
persons (‘000) (units)
1999 28.6 66.1 16,873 318
2000 66.6 182 7,411 327.4
2001 91.7 345.1 6,986 339.3
Source: Barbone and Sanchez (2003)
20

21. … but it was still no panacea
Table 6: Registered Enterprises in the Presumptive Tax System
Enterprise size Number of Estimated Estimated Estimated
employees number of employ- percentage
enterprises ment of regis-
tration
0 (Sole entrep- 2,651,433 2,651,435 24.6
reneur)
Small 1 to 5 148,976 516,947 37.6
6 to 10 104,608 850,460 94.1
11 to 50 123,757 3,189,226 99.5
Medium 51 to 250 33,169 4,206,444 99.5
Large more than 10,851 9,822,542 99.4
250
Total 3,073,244 21,237,054 -
Source: Thiessen (2001)
21

22. Why offer a simplified regime? Compliance
capacity is often low: e.g., in Yemen
22

23. WHAT ELSE CAN REDUCE
TAX COMPLIANCE COSTS?
TAX SOFTWARE, E-FILING
AND OTHER TAX I.T.
23

24. Use of computers and Internet for
business purposes in Armenia
D
R
A
F 46.7% Enterprises 82.6%
T
Sole proprietors
F
O 23.0%
R 16.8%
13.5%
D
I 7.9% 8.5%
1.6%
S
Using Using Using No, do not
C business personally business as using Using Using Using No, do not
U owned owned well as computer business personally business as using
S computer only computer only personally owned owned well as computer
owned computer only computer only personally
S computers owned
I computers
O
N 73.2% of enterprises who used 70.8% of sole proprietors who used
computers had internet computers had internet connection
connection 24
24

25. Accounting Software is not used at the majority
of micro and small enterprises in Armenia …
D
R
A
79%
F
T
62%
55%
F 52%
O 34% 41%
R 24% 34% 32% 34%
26% 24% 25%
D 19%
18%
20%
13%
I 8%
S
C
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 More than 58.35 Average for all
U million million (Large enterprises
S taxpayers)
S
Annual turnover of enterprises, AMD
I
O
N
Manually PC using non specialized software PC using specialized software
25
25

26. …and is even less common among sole
proprietors in Armenia
D
R
A
F 99.2%
95.6%
T 91.4%
85.8%
76.6%
F
O
R
D
10.6%
I 15.1%
2.7%
S 8.3% 5.2% 3.4%
1.7% 3.6%
.0% .8%
C
U up to 1,000, 000 1,000,001 – 2,000,000 2,000,001 – 5,000,000 More than 5,000,000 Average among all
S SPs
S
Annual turnover of enterprises
I
O
Manually PC using non specialized software PC using specialized software
N
26
26

27. Ways of submitting tax reports in Armenia
D
R Sole proprietors
A Enterprises
F
T
On paper in
61.3%
person
F On paper in person 78.4%
O
R On paper via post 36.6%
On paper via post 21.6%
D Electronically via
2.2%
I internet
S
C The most recent way of submission,
The most recent way of
U submission, share of enterprises share of sole proprietors
S
S
I
O The most popular answer among those who submitted tax reports on
N
paper in person is – “it was the most reliable way”
27
27

28. OUTSOURCING VERSUS
IN-HOUSE TAX
COMPLIANCE
28

29. Outsourcing patterns in South Africa
Small and large businesses are more likely to outsource than medium sized
businesses
35 44 20 45 Le s s than R300K
31 56 13 41 R300K to R1000K
43 48 9 33 R1000K to R6000K
45 49 6 30 R6000K to R14000K
49 42 9 26 Ove r R14 m illion
43 46 11 34 Total
Com ple te ly outs ourcing Partially outs ourcing Not outs ourcing at all Outs ourcing inde x
29

30. Why outsourcing is and is not used
in South Africa
Reasons for the decision …
to outsource or not to outsource
It is not
difficult to
It is difficult to Other
complete
keep up-to- 1%
tax forms
date with for my
changes in It costs too business
Tax laws much to 10%
7% outsource
10%
Tax expertise
of my current Tax is a
specialist field Have
Tax
73% sufficient in-
Practitioner
house tax
9%
expertise
80%
No time to do
it internally
10%
9
30

31. Cost of tax compliance for those who fully
outsource versus those who do everything in-
house in South Africa
0 10000 20000 30000 40000 50000 60000
Less than R300K Full outsourcing Full in house
R300K to R1000K
R1000K to R6000K
R6000K to R14000K
Over R14 million
Total
31

32. Cost of partial outsourcing versus no
partial outsourcing in South Africa
Cost of partial outsourcing is significantly higher than either doing
everything in house or fully outsourcing everything.
Cost of tax compliance - thousands of Rands
0 10 20 30 40 50 60 70 80 90
Less than R300K
R300K to R1000K
R1000K to R6000K
Turnover groups
R6000K to R14000K
Over R14 million
All turnover groups
No partial outsourcing Some partial outsourcing Total
32

33. TAX INSPECTIONS AND
OTHER VISITS
33

34. Ukraine - High incidence of inspections
tax authority Pension fund social insurance funds
76%
73%
60%
% of inspected companies
50% 48% 48%
45%
40% 42%
35% 37% 36% 35%
32% 31%
30% 32%
29%
less than UAH UAH 300 000 - UAH 1 million - UAH 5 million - over UAH 35 Ukraine
300 000 UAH 1 million UAH 5 million UAH 35 million million (average)
Anuual turnover, UAH
34

35. Length of KRA inspections – registered
businesses in Kenya
1 Hour or Less 65%
2 to 3 hours 20%
4 to 5 hours 1%
6 to 10 hours 10%
More than 10 5%
0% 20% 40% 60% 80%
35

36. South Africa: Incidence of inspections by
region
Income tax VAT Employees’ tax
0.5 1.5 2.5 3.5 0.5 1.5 2.5 3.5 4.5 5.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5
Northern Cape 0.9 2.2 6.2
Freestate 3.0 1.7 4.3
North West 1.9 4.4 1.7
Mpumalanga 1.5 5.7 0.5
Gauteng 1.8 3.3 2.0
Kwazulu Natal 1.4 3.2 1.5
Eastern Cape 1.3 2.1 2.4
Western Cape 1.5 2.7 1.1
Limpopo 1.6 1.6
Mean by respondents 1.7 3.1 2.2
Mean by provinces 1.7 3.0 2.3
VAT related inspections seem to be more frequent than inspections related to
other taxes
36
36

37. Georgia: Control of Proper Usage of Cash Registers
is the most Frequent Type of Tax Inspection
Frequencies of Different Types of Tax Inspections per Inspected Firm
Control of cash register usage 2.5
Stock-taking/inventory 0.1
Visual Inspection 0.5
Controlling purchases 0.8
Chronometrage 0.0
Unplanned/control field tax audit 0.3
Planned field tax audit 0.1
Desk tax audit 0.1
0 1 2 3
37
37

38. Georgia: Penalties & Fines are the Most Common
Negative Events Associated with Tax Inspections
Negative Events Associated With Tax Inspections Experienced by Inspected
Respondents in 2009
0% 10% 20% 30% 40% 50% 60% 70%
47%
Penalties and/or fines 45%
66%
50%
30%
Wasted time of employees 21%
33%
28%
10%
Closure or delay in operations 12%
30%
14%
0%
Necessity of unofficial costs 2%
3%
1%
1%
Confiscation of goods 0%
1%
1%
Micro Small Medium Overall
38
38

39. INFORMAL BUSINESSES
AND THEIR PERCEPTIONS
ABOUT TAX COMPLIANCE
39

40. Lack of information can be a substantial problem :
e.g., Kenya, where they know they need a license…
Non-registered businesses in Kenya: Are
you required to have licenses? (Correct
answer – YES) 6%
Yes
No
94%
40
40

41. … but don’t seem to understand they are required
to get registered for tax!
Non-registered business in Kenya: Are you
required to pay taxes? (Correct answer: YES)
24%
Yes
77% No
41
41

42. Reasons for not registering with Kenya
Revenue Authority
Top reasons not to pay or file for taxes
No local government office
Weak enforcement/ no punishment
The products are already taxed
Most businesses don't, why should I?
Lack of information about "what and how to do it"
Registration would result in tax administration…
Tax compliance is too difficult
I simply do not see any benefit
Registration would impose excessive tax financial…
My businesses profit margin is too low to pay for…
0% 20% 40% 60% 80%
42
42

43. Disadvantages of not registering with KRA
Others
No disadvantages whatsoever
Theft by employees/suppliers/buyers
No inspections
Large labor turnover/limited skills development
Limited access to raw materials
No access to broader market
No access to Government programs
No tax reclaims
No access to and insecurity of premises/land/legal rights
Inability to sell to/buy from formal enterprises
Limited access to finance (loans)
Fear of government retribution
Need to pay bribes to avoid "formal" procedures
0% 10% 20% 30% 40% 50% 60%
43

44. Informality comes with significant costs
for many firms – evidence from Yemen
• Percentage of informal Yemeni businesses facing costs to avoid
tax payments/ remain informal
44
Source: FIAS Tax Compliance Cost Survey in Yemen, 2008 44

45. Reported incidence of bribes to tax officials
by formal businesses in Yemen (%)
68
70
60
50
41
37 39 38
40
30
20
10
0
Micro Small Medium Large Total
45

46. WHO AMONG INFORMAL
BUSINESSES MIGHT BE
WILLING TO FORMALIZE?
A CASE STUDY FROM
SOUTH AFRICA
46

47. S. Africa - Likelihood of registering for tax
(by sector) among informal businesses
62
Services
38
66
Trade
34
Sector
Agriculture, 78
construction,
manuf acturing 22
66
Total
34
0 20 40 60 80 100
Percentage of inf ormal businesses likely or not likely to register f or tax in the next 2
years
Not likely/Neutral Likely
47

48. Record keeping and likelihood of registering
Not keeping complte
63
f inancials
Record keeping practices
Keeping complete
f inancial on paper or 75
computer
Total 66
50 55 60 65 70 75 80
Percentage of inf ormal businesses likely to register
48

49. Renters are more likely to formalize
Place of business
59
changes
Separate premises -
74
Place of business operation
rented
Separate premises -
65
ow ned
Same premises
62
w here you live
Total 66
50 55 60 65 70 75 80
Percentage of inf ormal businesses likely to register
49

50. Location vis-à-vis SARS office and
likelihood of registration
Doesn't know w here
57
SARS of f ice is
Distance to SARS office
More than 30 minutes 67
30 minutes or less 75
Total 66
50 55 60 65 70 75 80
Percentage of inf ormal businesses likely to register
50

51. View of government services and
likelihood of registration
Attitude: Government gives a good return on taxes paid
Agree 80
Disagree 57
Total 64
50 55 60 65 70 75 80 85
Percentage of inf ormal businesses likely to register
51

52. Perceived ease of bookkeeping and
likelihood of registration
2 2.5 3 3.5 4
Keep the accounting 3.2
Bookkeeping and tax accounting related tasks
records and books for
the business 3.8
2.8
Fill out and submit tax
forms
3.4
To be able to hire and pay 2.4
for a
bookkeeper/accountant
to prepare tax returns 2.6
Average score on 1 - 7 scale, 1 being "very dif f icult", 7 being "very easy"
Not likely/Neutral to register Likely to register
52

53. Perceived ease of tax compliance
and likelihood of registration
2 2.5 3 3.5 4
Business capability for tax compliance in terms of...
3.2
The required skills and
expertise
3.9
3.2
The cost to your
business
3.9
Average score on 1 - 7 scale, 1 being "Not at all capable", 7 being "completely
capable"
Not likely/Neutral to register Likely to register
53

54. TAX MORALE AND TAX
EVASION
54

55. Tax morale (agreement with statement,
scale 1 – 5) in Yemen, 2008
55

56. Percent of taxes businesses say they “get back”
through government services in Yemen
56

57. Estimated profit reported for tax purposes
in Yemen
Micro 46 27 10 16
Groups by turnover and size
Small 53 30 4 12
Medium 26 46 2 26
Large 53 17 13 16
Total 48 29 8 15
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
25% or less 26% - 50% 51% - 75% 76% - 100%
57

58. Armenia: Tax evasion
D
R The main popular ways of tax evasion for
A
F enterprises and sole proprietors*
T
Enterprises
F
O
R Declare only part of the revenue 52.4%
D Payment of unofficial salary 26.0%
I
S Overstate of costs 8%
C
U Use fiction firm 7.4%
S
S Fraudulent abuse of tax privileges 5.1%
I
O No way 1.5%
N
Among the share of respondents who reported at least one way of tax evasion
58
58

59. Armenia: Tax evasion
D
R What allows evading of taxes?*
A Enterprises
F
T
Fallibility of legislation
F 55.2%
O Possibility of conclusion unofficial agreement
25.7%
with control authorities
R
Bad control system 8.1%
D
I
S Incompetence of control authorities 7.7%
C
U Small amount of penalties 2.6%
S
S
I Nothing .6%
O
N * The share of respondents who reported at least one reason
59
59

60. Businesses with Bank Accounts
Percent of businesses with a bank account in Nepal
120
Percent of Businesses
100
80
Yes
60
No
40
20
0
Less than Rs. 2 Million Rs. 2 to 10 Million Rs. 10 to 250 Million
Turnover
60

61. For businesses with bank account, percent
of transactions using cash - Nepal
61

62. PERCEPTIONS ABOUT TAX
OFFICIALS
62

63. Kenya: KRA perceived as relatively
uncorrupt
Corruption presence by office
Judiciary 1%
Ministry of Land offices 1%
Ministry of Immigration 1%
Busy Town Centers 2%
Health 2%
Others 2%
KRA 3%
Everywhere 6%
Government Offices 7%
Police 9%
Inspection officers 9%
License Offices 17%
None 21%
Local government Offices 37%
0% 5% 10% 15% 20% 25% 30% 35% 40%
63

64. Kenya - Perception of KRA - competence
64
64

65. Perception of KRA - helpfulness
65
65

66. Perception of KRA - fairness
66
66

67. RESEARCH AGENDA FOR
TCCS
67

68. Hypotheses to be tested:
• Simplified tax regimes can reduce TCC for small
businesses
• Accounting software and e-filing can reduce TCC
• E-filing and e-payment can reduce opportunities
for corruption
• Risk-Based Audit can reduce TCC and
opportunities for corruption
• What else???
68