Tax compliance burden falls, but new data highlights post – filing administration and cash-flow challenges

Despite year on year progress in simplifying and reducing the burden of tax compliance on business, the latest report by The World Bank Group and PwC finds that post-filing processes for Value Added Tax and Corporate Income Tax returns are amongst the most challenging and lengthy to comply with. In some cases, the length of the processes can create cash flow and administrative delays of up to two years for companies.

The findings are from the latest edition of the Paying Taxes 2017 report which examines how easy it is to pay taxes in 190 countries. The report models business taxation in each country using a medium sized domestic case study company. This year’s study has been extended to examine post – tax filing processes for the first time.

Overall, the study finds that, year on year key indicators of how easy it is for a business to pay taxes (time, number of payments, and the Total Tax Rate) continue to fall.

On average, the Total Tax Rate (as defined under the Doing Business methodology) is 40.6 percent of commercial profits, down by just 0.1 percentage point from last year. It makes 25 tax payments per year (down 0.8 payments) and takes 251 hours to comply with its tax requirements, a drop of eight hours compared to last year.

The reduction in the global average for time to comply of eight hours is higher than in recent years reflecting ongoing improvements in electronic tax systems, and in particular as a result of reforms implemented in Brazil. Similarly, the fall in the payments sub-indicator is largely due to the introduction and use of electronic filing and payment systems, which was the most common feature of tax reform in the past year. The small decrease in the Total Tax Rate results from 44 economies increasing taxes while 38 recorded a reduction. It also represents a combination of a decrease in ‘other taxes’ offset by small increases in both profit and labour taxes.

However the new additional research finds the interactions which a company has with tax authorities in order to secure agreement of a tax return can be some of the most challenging. The processes vary significantly from one jurisdiction to another.

In 2015, 162 economies had a VAT system, with a VAT refund available to the case study company in 93 economies. A fast and efficient process can be critical to ensure that a company does not face cash flow difficulties. For economies with a VAT refund system, on average it takes just over 14 hours to make the VAT refund claim, but it then has to wait over 5 months (almost 22 weeks) to receive the refund.

The analysis shows it typically takes less time to comply with a VAT refund in high income economies (almost 8 hours) than in low income economies (almost 27 hours). A VAT refund triggers an audit in 70% of economies, of which over half (58%) will mean a comprehensive audit.

The study also shows that 180 economies in the study levied corporate income tax in 2015. A voluntary correction to a corporate income tax return is likely to lead to a tax audit in 74 of these. On average, it takes the case study company almost 17 hours to correct the error in the CIT return. If the tax authority requires an audit, it will take just over 17 weeks to finalise. Examining the difference between low and high income countries, the study finds low income countries are twice as likely to conduct an audit, and that it can take more than twice as long to comply with procedures to correct CIT errors.

Augusto Lopez-Claros, Director, Global Indicators Group, Development Economics, World Bank Group said:

“Until now there has been little information around the cost of post filing procedures. The new post-filing index has shown that there are considerable variations around the world in how tax authorities approach VAT refunds and corporate income tax audits. We hope that the new data will allow governments to better understand the impact that these procedures have on business and will help encourage them to reform and enhance them to make it easier for companies to do business. ”

Andrew Packman, leader for Tax Transparency and Total Tax Contribution at PwC said:

“While we recognise the pressures on governments to raise tax revenues to fund public spending, Paying Taxes has shown that in many economies, governments and tax authorities can make it easier for companies to pay their taxes and this includes the ability to claim a VAT refund or deal with a corporate income tax audit. More efficient tax systems are good for businesses which in turn helps to promote economic growth and investment.”

About the study

1. Paying Taxes 2017 measures all mandatory taxes and contributions that a medium-size company must pay in a given year as well as measuring the administrative burden of complying with post-filing processes. Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees. For more information about the Paying Taxes study, visit: www.pwc.com/payingtaxes.
2. For the first time, this year’s Paying Taxes study has been extended to look at the processes that take place after a tax return has been filed. The new post-filing index measures two processes that might take place after filing; claiming a value added tax (VAT) or goods services tax (GST) refund, and correcting an error on a corporate income tax (CIT) return.
3. Paying Taxes builds on the World Bank Group’s Doing Business reports’ chapter on Paying Taxes. For more information on the Doing Business report series, visit: www.doingbusiness.org

About the World Bank Group

The World Bank Group plays a key role in the global effort to end extreme poverty and boost shared prosperity. It consists of five institutions: the World Bank, including the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA); the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Working together in more than 100 countries, these institutions provide financing, advice, and other solutions that enable countries to address the most urgent challenges of development. For more information, please visit www.worldbank.org, www.miga.org, and ifc.org.