Report Provides Snapshot of Global Business Taxes

December 18, 2006—If a business in Brazil followed the tax law to the letter, it would spend an average 2,600 hours a year to comply—thanks to a continuously evolving tax system that averages 55 rule changes a day.

But it's likely most businesses don't spend anywhere near that amount of time or pay all of their taxes, says Rita Ramalho, coauthor of Paying Taxes: The Global Picture, which expands on findings in the World Bank Group's annual report, Doing Business 2007: How to Reform.

“When you make the system so complicated, most people just don't comply with it,” she explains. “That's the problem with complex systems – evasion is more likely.”

The 2006 Paying Taxes report, the first full report of its kind, was compiled by the World Bank Group with the help of accounting firm PriceWaterhouseCoopers.

The report ranks 175 countries on the ease of paying taxes, based on the amount of taxes a medium-sized firm would pay, as well as the time it would spend complying with tax law.

Paying Taxes found that businesses last year submitted an average 35 pages of tax returns a year (ranging from 175 pages in Cameroon to 17 in Australia). That amount of paper is equivalent to 100,000 trees, even accounting for countries where business taxes can be filed electronically, notes the report.

The report also found that high corporate income tax rates and complex tax systems   encourage tax evasion and that government and industry would both benefit if they worked together to simplify tax systems and improve revenue collection.

“The best strategy is to simplify the tax collection system, make the tax law simple and straightforward and easy to comply with,” says Ramalho, an economist and member of the World Bank Group’s Doing Business team.

“Straightforward tax administration and a simpler tax collection process are fundamental to an effective tax system,” adds Caralee McLiesh, program manager and co-founder of the Doing Business.

“There are benefits both for governments, by increasing tax revenues, and for business, by making it easier to comply.”

Tax Realities

Perhaps unexpectedly, poorer countries often have more complicated tax systems and higher taxes than rich nations, notes Ramalho.

“Everyone thinks the Nordic countries are high taxation countries,” she says.

“They actually have relatively low tax rates and simple steps to comply with, and are ranked quite high in our ranking system—among the top 20 countries that have easier tax systems to comply with.”

That top 20 includes tax havens the Maldives and St. Lucia, oil-rich Middle Eastern countries like Oman, United Arab Emirates and Saudi Arabia, and, more surprisingly, Ireland, Singapore, Switzerland, New Zealand, Iceland, Denmark and Norway.

Among the bottom 20: Bolivia, Venezuela, China, Algeria, Congo Republic, Central Africa Republic, Colombia, Mauritania, Ukraine, and Belarus.

“When people think of business taxation, they focus just on taxes on profits. What we've seen is that taxes are much more than that, and actually taxes on profits as part of the tax burden are not the biggest part at all, both in the administration of the process and the actual amount paid,” says Ramalho.

She says poorer countries tend to have more complex tax systems, and require businesses to pay a greater number of taxes apart from the corporate income tax.

Such taxes typically fall on a relatively small number of large, highly visible and profitable companies, because a large segment of the economy—as high as 80 percent—operates outside of the official business world in the “informal sector” and isn't subject to taxation.

Remahlo says countries make up for their narrow tax base by imposing higher taxes. But the right strategy would be “the other way around—have lower taxes and a much wider base, so you can actually increase revenues that way.”

“High tax rates aren't a great strategy for increasing tax revenues in a country with a big informal sector,” she says. “Getting more people into the formal sector – into the sector that is actually paying taxes—would be a better strategy for increasing tax revenue.”