Tax Analysts Blog

Magnum Opus: “Paying Taxes 2015: The Global Picture”

Posted on Nov 21, 2014

Nations ask much of their taxpayers and revenue systems. That is true for economic superpowers as well as struggling economies. Yet there's a widely shared perception that revenue systems around the world are often ill-suited to the demands placed on them. The need for structural reform and modernization is often acute.

The World Bank Group has long known that sound tax policy and efficient tax administration facilitate direct foreign investment and economic growth in less developed regions, thereby raising living standards and mitigating global poverty. For several years the World Bank has performed comparative analytical studies to establish benchmarks and best practices for national tax systems. These studies also raise awareness of the significant compliance burdens imposed on businesses.

On November 20 the World Bank and PricewaterhouseCoopers issued a detailed new report, “Paying Taxes 2015: The Global Picture,” which highlights the emerging trends and critical issues in worldwide tax administration and compliance. The 166-page document offers like-for-like analyses of tax regimes and taxpayer experiences across 189 different jurisdictions. The objective is to supply business leaders, public sector policymakers, and other stakeholders with an extensive data set to identify problems and influence future reforms. A free download is available via the PwC website here.

The report uses a case study approach based on a hypothetical midsize firm subject to a broad range of corporate income taxes, payroll taxes, consumption taxes, and other domestic taxes. The case study attempts to quantify both direct tax costs and indirect, but significant compliance costs. It focuses on three indicators: 1. Actual tax costs incurred by the firm; 2. Time required to comply with all formal tax obligations (measured in hours); and 3. Number of tax payments required during a typical tax year. Given the chosen parameters (a purely domestic enterprise and zero foreign trade), the case study doesn't address transfer pricing or other issues related to base erosion and profit shifting. The report is nevertheless thoroughly researched and uniquely informative.

The global averages for the selected indicators were as follows: 1.Total tax rate: 41 percent; 2. Compliance time: 264 hours; 3.Annual payments: 26. Over the last decade, each of these indicators has gradually trended downward. The report found the United States to have a higher than average total tax rate (44 percent), but lower than average compliance indicators (175 hours, 11 payments). An interactive online tool allows users to isolate data by country, geographic region, or other affiliations (e.g., OECD, G-20, BRICS).

Which nations come out of the study looking particularly lean and efficient? All the usual names you'd expect to see, including Singapore (18 percent total tax rate, 82 compliance hours, five payments). Which nations look embarrassingly bureaucratic and inefficient? Think Brazil (69 percent total tax rate, nine payments, and an astonishing 2,600 compliance hours). The ridiculously large amount of compliance time is largely explained by the Brazilian Constitution, which allows multiple levels of government to levy taxes, including 26 states or federal districts, and more than 5,000 local municipalities.

Surprisingly, profit taxes were the least burdensome from a compliance standpoint, requiring fewer hours and payments than labor taxes. Consumption taxes (for that part of the planet not called America, that would be the VAT) were among the most burdensome in terms of compliance efforts -- far surpassing profit taxes and labor taxes in terms of both compliance hours required and number of payments. That's somewhat ironic given that firms themselves don't actually pay VAT -- they merely collect it from customers, net out their business inputs, and remit the balance to the fisc.

The report emphasizes, however, that VAT regimes remain highly preferable to cascading retail sales taxes. In Gambia, for instance, the government's decision to replace its archaic sales tax with a modern VAT accounted for the most notable systemwide improvement. Also strong in terms of year-on-year standing were the nations of Central and Eastern Europe, which made great strides in online filing. Globally, 43 percent of nations surveyed have that functionality in place.

So just how much time is wasted on business tax compliance worldwide? Thanks to the report, it's possible to deduce an approximate answer. Aggregate annual compliance time is measured at 1.1 billion days. The parallel estimate, assuming best practices were adopted to optimize efficiency, is 0.3 billion days. The difference of 800 million days represents pure dead weight loss. According to one of the report's authors, that's enough time to dig 13 Panama Canals every year.

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