Brussels, November 19, 2007—Tax reforms that make it easier for firms to pay taxes can increase government revenues by broadening the tax base, says a new report launched today by the World Bank, IFC, and PricewaterhouseCoopers. Paying Taxes 2008, the second report in an annual series on tax systems, covers 178 countries worldwide. The report concludes that there is a win-win opportunity for governments and firms if governments simplify tax systems, ease the compliance cost on business, and reduce tax rates.
This year, 31 economies improved their business tax systems, and 65 have done so over the past three years. Bulgaria was the top reformer, and Turkey was runner-up. While reducing corporate income tax was the most popular reform, implemented in 27 economies worldwide, many countries have reduced the compliance burden by simplifying or eliminating other business taxes. Countries in Eastern Europe and Central Asia had the most reforms in 2006 and 2007, but tax rates remain highest there and in Africa. The compliance burden is highest in Latin America and in Eastern Europe and Central Asia.
“Reducing the tax burden was the second most popular reform of the business regulatory environment this year. Despite previous reluctance to reduce tax burdens for fear of cutting government revenues, some governments that have implemented tax reform have reaped the benefit of higher investment and economic growth,” said Rita Ramalho, coauthor of the report and tax specialist with the World Bank–IFC Doing Business project. “Economies with a lower business tax burden also have more new firms entering the market.”
The case of Egypt is instructive. Two years ago it implemented major tax reforms, which included reducing the corporate income tax rate by almost half. This has increased the government’s tax base and revenues.
This year the top 10 economies for ease of paying taxes are, in order, Maldives, Singapore, Hong Kong (China), United Arab Emirates, Oman, Ireland, Saudi Arabia, Kuwait, New Zealand, and Kiribati. The 10 economies where it is most difficult are, from 169 to 178, Panama, Jamaica, Mauritania, Bolivia, the Gambia, Venezuela, the Central African Republic, the Republic of Congo, Ukraine, and Belarus.
Complying with administrative tax requirements remains a real burden for business. Globally, on average, a company spends almost two months a year complying with tax regulations—15 days for corporate income taxes, 21 for labor taxes and contributions, and 21 for consumption taxes. However, there are wide variations between countries. For example, it takes 105 days to comply with consumption taxes in Azerbaijan but only one day in Switzerland.
The study allows direct comparison of tax systems from around the world. It shows how businesses are affected not only by tax rates, but also by the procedural burden of compliance. The report focuses on the number of tax payments made, the time it takes to comply, and the cost of taxes, which is measured by the total tax rate. The total tax rate covers five types of taxes that firms pay: profit, social, property, turnover, and other taxes, such as municipal fees and fuel taxes. The steps, time, and cost indicators are used to determine the overall ease of paying taxes.
Compliance issues can significantly affect the overall ranking, either counteracting the benefit of a low tax rate or mitigating the impact of a high tax rates. Scandinavian countries, while known for high taxes, do well on the ease of paying taxes because of a low compliance burden.
The report calls on businesses to play a strategic part in reform. Susan Symons, coauthor of Paying Taxes 2008 and tax partner at PricewaterhouseCoopers LLP, said, “Businesses need to be more upfront in revealing their total tax contributions, to help governments assess their real economic footprint. More and better information about the taxes paid and the cost of compliance is essential to understanding how tax systems affect businesses. It is clear that governments need to look across all taxes when considering reform. We hope the new information on the ranking system for ease of paying taxes in this year’s report will help focus public debate on where reform efforts are most effective. Ultimately, this will give business more confidence and willingness to invest.”
The European Union illustrates how widely tax systems vary. Three countries are in the top 15 of ease of paying taxes: Ireland (6), the United Kingdom (12), and Denmark (13). But three others rank in the bottom third globally: Poland (125), Hungary (127), and Romania (134). The overall rankings for the EU on ease of paying taxes are, in order, Ireland, the United Kingdom, Denmark, Luxembourg, Latvia, Estonia, the Netherlands, Sweden, Slovenia, Belgium, Portugal, Germany, Lithuania, Austria, France, Finland, Greece, Bulgaria, Spain, the Czech Republic, Italy, the Slovak Republic, Poland, Hungary, and Romania.
The findings demonstrate that when considering reform, governments need to look at all taxes paid by companies. Corporate income tax is only a part of the story, accounting for only 37 percent of the total tax rate, 26 percent of the number of hours spent on tax compliance, and 12 percent of the number of tax payments. Labor taxes and contributions add significantly to the tax cost in some countries and also to the compliance obligations.
Notes to editor
About Paying Taxes 2008
The Paying Taxes study was carried out by PricewaterhouseCoopers and the World Bank Group as part of the World Bank Group’s Doing Business 2008 report. The methodology applied to calculate the total tax rate for each country uses the broad principles from the PricewaterhouseCoopers Total Tax Contribution Framework and looks across all taxes that businesses pay. The total tax rate indicator measures the amount of all taxes borne by the business in the second year of operation, expressed as a percentage of commercial profits.
PricewaterhouseCoopers provides industry-focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience, and solutions to develop fresh perspectives and practical advice. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
About the Doing Business Project:
Doing Business 2008 rankings are based on 10 indicators of business regulation that track the time and cost to meet government requirements in business start-up, operation, trade, taxation, and closure. The rankings do not reflect such areas as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates. Since 2003, Doing Business has inspired or informed more than 113 reforms around the world.