Paying Taxes An African perspective. Paying Taxes An African perspective 1

Transcription

1 Paying Taxes 2010 An African perspective Paying Taxes An African perspective 1

2 2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member fi rms of PricewaterhouseCoopers International Limited each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP. 2 Paying Taxes An African perspective

3 Paying Taxes 2010 An African perspective In Egypt during the 18th dynasty, the pharaoh sent tax collectors three times a year. They were accompanied by a scribe who kept records. The scribe wrote down the names of the peasants and measured the fi elds. On the second visit the scribe and the tax collectors inspected the new crops. From this they calculated the taxes owed. The tax collectors made the third visit during the harvest to collect the pharaoh s share. The taxes were paid in sacks of grain 1. Tax systems have become much more complicated since these times! Paying Taxes 2010, the fourth edition of a report from PricewaterhouseCoopers ( PwC ) and the World Bank Group, shows that tax authorities worldwide (including in Africa) continue to overhaul tax systems by reducing taxes, streamlining administrative processes and modernising payment systems. The report is based on data collected in connection with the paying taxes indicator from the World Bank Group s Doing Business project, which assesses the regulatory climate which impacts a domestic, small to medium sized business during its natural life cycle. The study is unique in that it measures the ease of paying taxes across 183 economies, by assessing the impact on business of all the taxes that it has to comply with including both the cost of taxes and the administrative burden of tax compliance. The report focuses on the number of tax payments made, the time it takes to comply, and the total cost of taxes borne by business (the Total Tax Rate) in order to determine the overall ease of paying taxes. The report uses the methodology of the PwC Total Tax Contribution Framework, which is designed to help companies identify and measure all the taxes that they pay, either in a particular country, or on a global basis. Companies around the world are increasingly using the framework, both to communicate data around the taxes contributed by companies to national treasuries and to assist with the management of risk for all taxes. The report also included additional questions which are not used in calculating the indicators, but which nevertheless provide useful insights into tax systems. For example, contributors to the study identifi ed the way in which tax audits are dealt with and the approach of the tax authorities in dealing with businesses as the elements of the tax system in most need of improvement. The report, which also tracks tax reform by governments around the world, is expected to prompt further dialogue between governments and businesses on improving tax systems. In this newsletter, we highlight some of the key overall fi ndings as well as fi ndings specifi c to Sub-Saharan Africa. 1 Oracle Education Foundation, ThinkQuest, Daily Life of the Egyptians Paying Taxes An African perspective 3

4 1 Key Overall Findings This year s study has been conducted against the background of a global recession which has meant falling tax revenues around the world, and the need for governments to make diffi cult tax policy choices. Some of the key fi ndings from the study are as follows: Despite the economic downturn, government focus around the world has remained on tax reform and, for the fi rst time, has been as much about making compliance easier as it has been reducing the rate of tax. 45 of the 183 economies studied made it easier to pay taxes in 2008/9 this is 25% more than in the previous year. 20 economies reduced corporate income tax rates, while 18 economies focused on making it easier to fi le tax returns and pay taxes. The results show that corporate income tax is just one of the taxes that business has to comply with. On average, the case study company pays 9.5 different taxes and corporate income tax accounts for only 12% of payments, 26% of the time to comply and 38% of the tax cost. The administrative burden of complying with taxes is considerable for the case study company. On average, across all economies surveyed, the small to medium sized and simple company spends 286 hours (equivalent to a full-time person for around two months) complying with its tax obligations, and is required to make 31 tax payments. Other matters highlighted include the following: In general, the preparation time required for tax returns, i.e. to gather and analyse data etc., is the most time consuming part of the compliance process. It is considered good practice to have one tax per base (for example on profi ts, labour, consumption, and property). This eases the tax compliance burden for companies. The Paying Taxes results show that the time needed to comply can increase where there are multiple taxes. Labour taxes and consumption taxes add considerably to the time to comply. The requirement to keep separate books for tax, other than those required for accounting purposes, can also add to the time to comply. The ability to pay and fi le electronically has a signifi cant positive impact on the number of payments indicator. World Bank Group suggests that electronic fi ling and payment of taxes is of benefi t for both government and business. Business understands that it needs to pay taxes and that levying taxes is not an easy task for government. What is important, is how the tax system fulfi ls economic and social objectives, and whether higher taxes fl ow through to infrastructure, social services and a better quality of life for citizens. 4 Paying Taxes An African perspective

5 2 An African Perspective In the quest for development and poverty reduction, a key imperative for Africa is to enable small and medium sized enterprises to thrive. The Doing Business project points out that particularly in developing countries such enterprises are key drivers of competition, growth and job creation, but that in such economies up to 80% of economic activity takes place in the informal sector. Firms may be discouraged from entering the formal sector where the costs of such formalisation, for example excessive bureaucracy and regulation, are too high. But informality comes at a cost: fi rms in the informal sector typically grow more slowly, have poorer access to credit and employ fewer workers. The size of the tax burden on businesses matters for investment and growth. Where taxes are high and corresponding gains seem low, the incentive for businesses to opt out of the formal sector increases. A recent study 2 shows that higher tax rates are associated with lower private investment and fewer formal businesses. Every year PwC carries out a global survey of CEOs seeking their views on business issues. In the 2008 survey 3, 1,124 business leaders around the world were interviewed. One of the questions asked was which aspects of a country s tax regime were important in infl uencing their investment decisions. Over 70% said that the total amount of taxes they pay was critical or important. From a tax perspective, the costs are not only the taxes paid, but also the costs of complying with the tax laws. Where tax compliance imposes heavy burdens of cost and time, it can create a disincentive to investment and encourage informality. Particularly in developing countries large informal sectors contribute to the creation of an uneven playing fi eld for formal small and medium sized enterprises, squeezed between smaller informal competitors and larger competitors whose greater resources can help win a more effective audience with government and thus greater tax concessions. 2 Djankov and others (forthcoming). 3 12th Annual Global CEO survey Redefi ning Success published by PwC in 2009 Paying Taxes An African perspective 5

6 3 Reforms in Sub-Saharan Africa in 2008 Sub-Saharan Africa had the second largest number of reforms, accounting for almost a fi fth of the total. This is timely in a region where businesses still face the highest average tax burden in the world. Comparison of the Total Tax Rates by Region 70% 60% 50% 40% 30% 20% 10% 0% Asia Pacific Profit taxes Labour taxes Other taxes European Union OECD Central Asia and Eastern Europe Latin America & Caribbean Note: The chart shows the average result for the economies in each region and for the world average for all economies in the study. Source: Doing Business database World Average G20 African Union On average, African fi rms must pay 68% of profi ts in taxes and mandatory contributions and spend 38 days a year complying with 37 tax payments and fi lings. Benin, Cape Verde, Sudan and Togo reduced the corporate income tax rate by 8.75 percentage points on average. Benin also reduced its payroll tax, by four percentage points. Sudan enacted a new tax code, reduced the capital gains tax by fi ve percentage points and abolished an additional tax on labour. South Africa abolished the stamp duty, and Cameroon exempted new companies from the business license tax for two years. Electronic fi ling became more popular across the region. Angola and Kenya introduced electronic systems, making it easier to pay taxes. Sierra Leone eased tax compliance and increased transparency through administrative reforms at the tax authority and publication of a consolidated income tax act, now available online. The report points to Mauritius as a case study where reforms, in terms of a move to a single corporate tax rate with a broader tax base combined with a move to a streamlined and electronic tax administration, resulted in corporate tax collections 13.5% in excess of estimates 4. 4 Cuttaree and Trumbic (forthcoming). 6 Paying Taxes An African perspective

7 4 Rankings for Africa Time to Comply In the African Union ( AU ), the average time to comply with tax affairs of 307 hours is close to the world average of 286. However, the range of hours across this group is large ranging from 76 in the Seychelles to 1,400 in Cameroon. Number of Payments The number of tax payments indicator refl ects the total number of taxes and contributions paid, the method of payment, the frequency of payment and the number of agencies involved, for the case study company. Comparison of the number of payments by region Number of payments Profit taxes Labour taxes Other taxes OECD G20 European Union Asia Pacific World Average Latin America & Caribbean African Union Central Asia and Eastern Europe Note: The chart shows the average result for the economies in each region and for the world average for all economies in the study. Source: Doing Business database Total Tax Rate When looking at regions, the report fi nds that the AU has the highest average TTR of 67%, ranging from 9.6% in Namibia to 322% in the Democratic Republic of Congo ( DRC ). A feature of some African tax systems is the high level of other taxes. In the countries with the largest TTRs, the cascading sales taxes are a feature. Burundi, DRC, Gambia and Sierra Leone all have these taxes. Paying Taxes An African perspective 7

8 The TTR in the African Union 100% 90% 80% Profit taxes Labour taxes Other taxes 203.8% 235.6% 278.6% 292.4% 322% 70% 60% 50% 40% 30% 20% 10% 0% Namibia Zambia Botswana Lesotho Mauritius Malawi South Africa Ethiopia Rwanda Nigeria Ghana Mozambique Uganda Sudan Swaziland Djibouti Madagascar Zimbabwe Comoros Egypt, Arab Republic Côte d Ivoire Burkina Faso Note: The chart shows the TTR for the economies in the African Union split by each type of tax Source: Doing Business database. Liberia Seychelles Gabon Tanzania Guinea-Bissau Senegal Niger São Tomé and Principe Cape Verde Kenya Guinea Cameroon Mali Togo Angola Equatorial Guinea Chad Tunisia Congo, Republic Algeria Benin Eritrea Mauritania Central African Republic Sierra Leone Burundi Gambia Congo, Dem. Rep. Overall Ease of Paying Taxes In terms of overall ease of paying taxes, the top three places are held as in the prior year by Mauritius, Botswana and South Africa, who both this year and last year, came within the top 25 globally. In total only 8 AU countries came within the top quartile globally, whereas 21 came within the bottom quartile. The table at the end of this newsletter sets out a summary of the rankings for AU countries in terms of number of payments, time to comply, total tax rate ( TTR ) and an overall ( ease of paying taxes ) ranking. 8 Paying Taxes An African perspective

9 5 Mining Sector The tax contribution of the mining sector in Africa is a topical one. The report notes that in 2008, PwC carried out the fi rst global TTC study for large mining companies. The results show that when considering what mining companies contribute in the countries where they extract natural resources, it is important to look at all the different taxes including mining taxes and royalties and licence fees in addition to corporate income tax. On average in any country, corporate income tax was less than half (48%) of the taxes and contributions borne by mining companies. On average the companies in the study paid an amount equal to 12.5% of their turnover to government in taxes and other contributions borne. Paying Taxes An African perspective 9

10 6 Insights on Tax Administration Contributors to this year s study were asked to provide additional data, which is not used in calculating the indicators, but which provides additional insight into tax systems. Some of the areas highlighted in response to the questions raised include the following: Over a fi fth of contributors (22%), regarded the tax rules in their country as ambiguous. In some countries, the guidance notes published by tax authorities are not considered helpful. Contributors in over a third of the economies (34%) could not point us to a published statement of government tax revenues, as a sign of transparent government. Decentralised tax systems do not seem to add to complexity, but do tend to increase the time to comply for business. A requirement to keep extra books, solely for tax, can add signifi cantly to the compliance time. Generally speaking, it seems to be quicker to receive a tax refund in the more developed economies. Tax audits are seen as less diffi cult when tax authorities use a risk assessment method of selection. In 28% of our economies, contributors either said there is no independent appeal process (5%), or where there is a process, they regarded it as ineffi cient (23%). Dealing with tax audits and disputes, and the approach of tax authorities, are seen as the aspects of tax systems around the world which most need improvement. Particularly pertinent for Africa are the responses on timeliness of refunds and on the effectiveness of independent appeal processes. Tax Refunds How long it takes for a taxpayer to receive a refund could be seen as one useful test of the effi ciency of tax authorities. This is also important for business in view of the impact on corporate liquidity and the time value of money on delayed refund processing. In this regard the report notes that in the AU, 19% reported a typical time of less than three months, and 30% indicated more than a year. Tax Appeal Process On the question of how effective is the independent appeal process, 18 out of the 50 AU countries in the survey ranked the process as ineffi cient or very ineffi cient comparing poorly with the response to this question from European Union countries. In your opinion, how effective is the independent appeal process European Union 52% African Union 10% 22% 8% 8% 12% 32% 6% 24% 1 Very efficient 2 3 Moderate 4 Inefficient 5 Very inefficient No data supplied Note: Results for all economies in the region reporting an independent appeal body 26% Source: PwC analysis of non indicator data. 10 Paying Taxes An African perspective

11 7 What makes a good tax system? Some possible hallmarks Clear Purpose 1. Raises revenue to fund public expenditure. 2. Balances the budget (over a period of time). 3. Meets social objectives. 4. Improves human development. Coherent and Efficient 9. Minimises the administrative burden. 10. Clear and understandable rules. 11. Consistent with wider (non tax) law and international principles. 12. Consultation on policy and administration. Strategic 5. Stable and consistent, enabling long-term business investment. 6. A fair value for natural resources. 7. Encourages international trade. 8. Encourages changes in behaviour which society is agreed upon. Fair and Transparent 13. Based on law rather than the practice of tax authorities. 14. Consistently enforced. 15. Independent and effective route for resolving disputes with the tax authority. 16. Mutual trust and respect between taxpayers and the tax authority. Paying Taxes An African perspective 11

12 African Union Rankings Economy 2008 Payment (number) 2008 Time (hours) 2008 Total Tax Rate 2008 Overall Percentile for ranking Ranking by Payment Ranking by Time Ranking by Total Tax Rate Global overall ranking 2008 Global overall ranking 2007 AU overall ranking 2008 AU overall ranking 2007 Mauritius % Botswana % South Africa % Malawi % Seychelles % Zambia % Comoros % Ethiopia % Swaziland % Rwanda % Lesotho % Djibouti % Uganda % Madagascar % Ghana % Liberia % Sudan % Namibia % Mozambique % Gabon % Eritrea % Cape Verde % Burundi % Tunisia % Tanzania % Guinea-Bissau % Zimbabwe % Nigeria % Chad % Angola % Egypt, Arab Rep % Niger % Burkina Faso % Côte d'ivoire % Togo % Congo, Dem. Rep % Mali % São Tomé and Principe % Sierra Leone % Equatorial Guinea % Kenya % Benin % Algeria % Cameroon % Guinea % Senegal % Mauritania % Gambia % Central African Republic % Congo, Republic % Paying Taxes An African perspective