Tax Compliance Costs Survey in the Republic of Tajikistan in 2012

Transcription

1 Tax Compliance Costs Survey in the Republic of Tajikistan in 2012 Summary Dushanbe, June

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3 Table of content 1. Research Methodology 2. Tax Compliance Cost in Terms of Time 3. Financial Costs of Tax Administration 4. Assessment of complications to meet the tax legislation requirements 5. Tax Inspections, penalties and appeals 6. Shadow economy Annex 1. Summary Table of Average Time Costs Associated with Specific Procedures of Tax Administration Applied by Different Categories of Taxpayers in

4 1. Research Methodology At present IFC implements the Tax Project in the Central Asia. The increased transparency and simplified tax administration should decrease the private business expenses associated with compliance with the tax legislation, and, as a result, should stimulate development of the economy in Tajikistan. The research objective was to assess the expenses incurred by the private business during fulfilment of obligatory requirements according to the tax legislation. This research will be a baseline for development of recommendations to improve tax practice regulations, and will also serve as a reference point for further evaluation of the efficiency of the reforms being implemented. The research targets were the private commercial enterprises legal entities and individual entrepreneurs involved in the economic activity and submitted tax reports in The survey was conducted in all regions of Tajikistan during the period from November, 2013 to February, The survey method used was the personal formalized interview with a structured questionnaire. The respondents were the owners (individual entrepreneurs) or the heads of enterprises, taxpayers, or other the most competent specialists in this area (like finance directors, accountants etc.). The survey sampling was stratified by the following criteria: type of taxpayer (a legal entity or an individual entrepreneur), region, type of activity, turnover and a taxation regime. Table 1. Distribution of the interviewed taxpayers by criteria/strata Type of Taxpayer Legal entities % Individual entrepreneurs % Total % Region Dushanbe % DRS % Sughd oblast % Khatlon oblast % Total % Sector Production % Trade % Services % Total % Taxpayer Size (turnover) Micro (less than somoni) % 4

5 Small (from to somoni) % Medium (from to 5 million somoni) % Large (over 5 mln somoni) 113 7% Total % Taxation regime Simplified regime % General regime % Total % The taxpayer database for the survey was identified and provided by the Tax Committee under the Government of the Republic of Tajikistan upon the request and in accordance with the survey methodology developed by the specialists of IFC. The total sampling size was 1502 respondents. 2. Tax Compliance Cost in Terms of Time 1 In 2012, on average 53.6 working days were spent by the taxpayers of Tajikistan to comply with the tax legislation (hereinafter tax administration) 2. At the same time the time costs of legal entities made 67.2 days, which significantly exceeds the costs of individual entrepreneurs by 26.3 days a year. The maximum tax accounting workload belongs to the taxpayers working based on general taxation regime (taxpayers subject to payment of the profit tax from legal entities), and the minimum tax related workload falls to the taxpayers working based on simplified taxation regime. If the taxpayers subject to pay the profit tax spent in average 71.3 days on tax administration, the taxpayers applying a simplified taxation regime allocated only 44.7 days in Also there is rather natural tendency of increased time costs related with tax accounting due to increased size of the taxpayer: from 45.9 for micro enterprises to days for large taxpayers. 1 Costs on implementation of the tax legislation include tax accounting, completion of primary documents, calculation of tax sums, filling out tax reporting forms and their submission to the tax authority, tax payments, tax audits and other activities associated with implementation of the tax legislation. Tax accounting costs include expenditures associated with time spent on compiling and processing primary documents, calculation of tax sums, filling out tax reporting forms, development and processing of invoices for the VAT etc. 2 Here and after, if there is no special reference, the time costs expressed in person- days. 5

6 Diagram 1. Time Spent on Tax Administration in 2012, depending on the taxpayer turnover and taxation regime, person-days General regime 76.2 Large Simplified regime 46.4 Medium Small In average 53.6 Micro 45.9 Overall, it is possible to say that tax administration costs remains obstacle for private business of Tajikistan. Findings of similar researches conducted in various countries for the past years show that the situation in Tajikistan is almost equal in comparison with other emerging economies but is significantly worse in comparison with the best practice. Among 9 countries where similar researches were conducted, Tajikistan with an indicator of 77.0 days is in the middle of rating of time expenditures among "mid-size" taxpayers (by turnover) 3. In the Republic of South Africa, the same indicator makes only 13.1 days, which demonstrates that there is a need to continue reforms in tax regulation area and to decrease the administrative load of private business. Diagram 2. Time costs on tax accounting at "mid-size" taxpayers (by turnover), according to the research conducted in the different countries, person-days RSA Uganda Nepal Kyrgyzstan Tajikistan Peru Yemen Armenia Vietnam The main part of time allocated for tax administration comprises the work at the office, i.e. tax accounting, calculation of taxes and filling out the tax forms. Office work takes almost half of the 3 The mid-size taxpayer is defined for each country specifically. In Tajikistan mid-size taxpayer is a company with annual turnover from to 5 million somoni ( million USD). For example, in Kyrgyz Republic it is a company with annual turnover from 4 to 20 million soms ( million USD). 6

7 time allocations from individual entrepreneurs and takes over half of the tax administration time for the legal entities. Next steps include trips to the Tax Committee and payment of taxes. Diagram 3. Structure of time spent on tax administration in 2012, depending on tax regime, in person-days , Other tax-related activity Tax payment ,3 Travel to the Tax Committee Work at taxpayer office on tax issues Legal Entities Individual Entrepreneurs Survey results show that the larger the taxpayer is the less time will be allocated for trips to tax authorities in the general structure of time expenditures. In contrary, the percent of time for tax accounting work directly increases at the office: from 52% at micro enterprises to 66% at the larger companies. Besides, there are differences in tax accounting time distribution depending on the taxation regime. With higher general workload on tax administration, work at the office takes almost twice time from the taxpayers applying the general regime (41.8 days), in comparison with the taxpayers applying the simplified mode of taxation (22.9 days). Diagram 4. Structure of time spent on tax administration in 2012, depending on the tax regime, in person-days , General regime , Simplified regime Other tax-related activity Tax payment Travel to the Tax Committee Work at taxpayer office on tax issues 7

8 One of the possible factors contributing to reduced time on trips to tax authorities will be more active use of electronic tax reporting practice via Internet by the large companies. Minor number of interviewed taxpayers used online-based electronic tax reporting in 2012 that may be explained that the Tax Committee was launched active implementation of e-filing in Respondents noted that there were only two main and the most common reasons why the taxpayers did not submit their tax reports via Internet. Every third respondent (34%) admitted that he/she was unaware of such an opportunity, and almost the same percentage of respondents (33%) had no possibilities to submit electronic reports due to the lack of possibility to connect to Internet. Considering the fact that travels to tax authorities take the second place within the time costs to comply with the tax legislation, and also make the majority of time from all travels spent for the purpose of tax report submissions, increasing awareness among businessmen on possibility of electronic report submission via Internet, and also development of information infrastructure are considered the direct solutions to decrease administrative burden of taxpayers. Distribution of staff time allocated for administration of different types of taxes at the office depends on the tax regime the taxpayer used in Thus, the legal entities complying with general taxation regime, most of their staff time spent on accounting of the profit tax and the VAT: on the average, more than 10 working days a year on each of these taxes. In the legal entities complying with the simplified taxation system, the most of their staff time (on the average 10.1 days) allocated to tax accounting for a simplified tax. It should be noted that the most widespread types of tax to be paid irrespective of the taxation mode complied by the legal entity, also are rather time consumable for their administration. Legal entities spent 7-9 person days on average in 2012 to administer personal income tax and social tax. Diagram 5. Structure of legal entity time expenditures on tax accounting, by the taxation regime applied in 2012, in working days Profit tax/minimum income tax Simplified tax VAT Road users tax General regime Simplified regime Retail sales tax Personal income tax Social tax

9 3. Financial Costs of Tax Administration Financial costs of tax accounting include taxpayers payment of staff working hours spent on tax administration, and the other expenses associated with it, like fees for services offered by thirdparty organizations, purchase of forms, invoice pro forma, books and other tax forms, purchase and technical maintenance of cash registers, obtaining tax information, acquisition and support of specialized programs to process tax accounting and other expenses. In 2012 average financial costs of a taxpayer on compliance with taxes was about 2.6 thousands somoni or 547 US dollars a year. While the legal entity expenditures are higher (3.3 thousands somoni), they exceed by 2.5 times the similar average expenses of individual entrepreneurs (1.2 thousands somoni). As the main share of financial expenses for tax accounting belongs to staff salary (72%), the financial expenses correlate with the time costs, and the main tendencies remain: the larger the taxpayer is (by turnover), the more costs it incurs for tax administration. Besides, as it was already mentioned, the VAT and the profit tax are the most time consuming taxes, therefore the taxpayers applying the general taxation regime allocate much more funds to tax administration in comparison with the taxpayers applying the simplified tax regime. Diagram 6. Financial costs for tax administration in 2012, depending on the taxpayer size and a tax regime, in thousands of somoni Large 6.7 General regime 3.7 Medium Small Simplified regime 2.1 Micro 2.0 In average 2.6 The new Tax code which took into the force in 2013 eliminated retail sales tax. That should decrease total tax compliance costs, on average, by 6.7% at least for payers of retail sales tax due to elimination of tax accounting and reporting requirements (from 3.1 thousands to 2.85 thousands somoni annually). Additionally, there were unified personal income tax and social tax reporting forms into single form. In average, taxpayers spent on tax accounting personal income tax and social tax 282 somoni and 254 somoni respectively in Unification of reporting forms into single form may decrease additionally total tax compliance costs by 2% annually. Elimination of minimum income tax by merging with profit tax may decrease time and money on compliance with tax. Taxpayers spent about 498 somoni to keep tax accounting and filling in reporting forms for profit tax and minimum income tax in If time on tax accounting of these taxes and filling 9

10 in reporting forms decreases by 10% the total tax compliance cost would decrease by 1% for profit tax payers. The analysis of relative financial costs for tax administration shows that the most financial burden lies on micro taxpayers with financial turnover below somoni a year. Average tax related expenses for this category of taxpayers make about 4% from their annual sales/turnover, which is considered as an essential barrier both for the development of such taxpayers, as well as serves as a reason to avoid the official registration of informal business. Despite of the huge financial expenses of large taxpayers, due to large turnover their relative costs on tax accounting are minimum; and it make only 0.5% of their annual turnover. Small and medium taxpayers incur comparable expenses on tax accounting ranging from 1 to 2% of their annual turnover. Diagram 7. Share of financial costs on tax administration to the taxpayers annual turnover in 2012, depending on the taxpayer turnover 4% 4% 3% 3% 2% 2% 1% 1% 0% 3.7% 1.9% 1.0% 0.5% Micro Small Medium Large According to the Tax Committee data there were more than 10 thousands active private legal entities and more than 50 thousands active individual entrepreneurs 4 in Thus, total tax compliance costs for all active private legal entities and individual entrepreneurs was about 98.8 million somoni (20.7 million USD) in Tajikistan in 2012 which is about 0.27% country s GDP 5. Total tax compliance costs for all active private legal entities was about 36.2 million somoni (7.6 million USD) and for all individual entrepreneurs (except patent holders and dehkan farms) was about 62.6 million somoni (13.1 million USD) in Total tax compliance costs among legal entities was about 18.6 million somoni (3.9 million USD) for all general tax regime taxpayers and about 17.6 million somoni (3.7 million USD) for all simplified tax regime taxpayers. 4 Except patent holders and dehkan farms. 5 GDP of Tajikistan was USD in

11 4. Assessment of complications to meet the tax legislation requirements The respondents were asked to assess the complexity of separate stages of financial accounting and tax accounting based on a 5-score scale starting from "it is very difficult" to "not difficult at all". Among all considered stages of the financial accounting and tax accounting, the highest percentage of the interviewed respondents (21%) identified tax report submission as a problematic stage. Difficulties with tax administration at taxpayers office (tax accounting, tax amount calculations and tax forms filling out) along with accounting were noted only by one tenth part of respondents. Diagram 8. Percentage of respondents rating financial and tax accounting procedures as "difficult" and "very difficult" Bookkeeping accounting 8% Tax calculations Tax forms filling out 11% 10% Tax report submission 21% Tax payment procedures 16% Despite of the fact that in most cases the different groups of taxpayers had similar opinions, there are some variations in ratings, depending on specifics of a respondent. Essential distinctions are observed between the legal entities and individual entrepreneurs, and also depending on a taxation regime applied. The percentage of individual entrepreneurs who considers this or that tax accounting procedure difficult or very difficult is high compared to legal entities. These ratings are common for all procedures of bookkeeping and tax accounting. Therefore, for instance, tax form filling out was called problematic by 17% of individual entrepreneurs, which exceeded the same indicator for legal entities twice (7%), and tax payment was difficult for 22% of individual entrepreneurs compared to 13% among legal entities. The same tendency is observed among the analyzed replies of respondents diversified by the type of taxation regime applied in their enterprises. For the respondents working under simplified tax regime, all procedures are more difficult, compared to the taxpayers applying the general tax regime. Assumption is that they have limited possibilities to attract qualified bookkeepers, rather than complicated tax administration procedures for the simplified tax regime compared to the general one. 11

12 5. Tax Inspections, penalties and appeals Based on respondents opinion during 2012 the tax authorities carried out various type of inspections of the interviewed taxpayers (about 46%). Such inspections were indicated by 57% of individual entrepreneurs and 41% of legal entities. At the same time, there was no significant difference between taxpayers that used different tax regimes. One can say that the probability of checks by tax authorities is much higher among the large taxpayers. In 2012 two third of large enterprises were checked by tax authorities, while this indicator much lower among micro taxpayers (45%) (legal entities and individual entrepreneurs). Herewith the analysis of average number of inspections showed the reverse tendency: the average number of inspections increases with the reduction of the taxpayer turnover. If large taxpayers were inspected generally not more once by the tax authorities in 2012, the average number of inspections among the micro taxpayers makes already 2.3 inspections. This may be explained by that large taxpayers usually are inspected fully once a year, but small taxpayers usually are checked specifically, for example cash checks, verification of record keeping of all incomes or calculation of specific tax due declared by taxpayer. Diagram 9. Percentage of taxpayers (legal entities and individual entrepreneurs) inspected by the tax authorities and the average number of inspections depending on taxpayers turnover 70% 60% 50% 40% 30% 20% 10% 0% Percentage of inspected Average number of checks 68% % % % Mirco Small Medium Large In average, taxpayers spent about 404 somoni to support all type of inspections in At that average cost for legal entities was in two times more than the cost for individual entrepreneurs (456 somoni vs. 197 somoni respectively). Total tax compliance costs for supporting all type of inspections for all active private legal entities and individual entrepreneurs (except patent holders and dekhan farms) was about 7.8 million somoni (1.6 million USD) in Expected decreasing inspection coverage by 10% for example (from 41% to 31% for legal entities and from 57% to 47% for individual entrepreneurs) should lead to decrease total compliance costs associated with inspections by 1.5 million somoni (316 thousands USD) per year. This does not include a cost of inspections for tax authority. One of the most efficient way to reduce number of inspections and inspection coverage and as result cost for business and government is introduction of risk based approach to select taxpayers for audit which is being actively implemented by the Tax Committee. 12

13 There was a very high percentage of taxpayers who have got various consequences (like wasted working time on the inspections, the imposed penalties and fees, adjusted additional amounts of taxes) by the results of inspections. Over two thirds the taxpayers who underwent different type of inspections in 2012 (69%) declared about those consequences. Thus the highest indicator is among the large taxpayers (84%) and medium enterprises (85%). Diagram 10. Consequences named as a result of the last tax inspection in 2012 Significant watse of time Penalties, fines 39% 36% Increased tax amount 22% Informal payments 9% Temporary suspention of activity Confiscation of goods 2% 1% Approximately every fifth interviewed taxpayer had cases of paying a penalty, fine or the additional amount of taxes in It is natural that with the increased attention to the large companies, while the taxpayers turnover grows, the share of similar sanctions has increased. Thus, over half of the large taxpayers (54%) faced the penalties, fines or the additional amounts of taxes imposed by the tax authorities in Also the taxpayers working under the general taxation regime faced much more penalties in comparison with the taxpayers working under the simplified regime. Diagram 11. Share of taxpayers faced imposed penalty, fines or the additional amounts of taxes in 2012, by the size and a taxation regime Large 54% General regime 30% Medium Small 26% 40% Simplified regime 19% Micro 18% Average 22% Thus, the majority of respondents consider the imposed penalties justified and fair. On the average, 62% of respondents agree with this opinion. Besides, among those taxpayers who did not agree with the imposed sanctions, only 18% addressed with appeals to the tax authorities. 13

14 6. Shadow economy According to the respondents, taxpayers declare on average 88% of the real revenue for the taxation purposes. Officially paid salary estimates also do not significantly differ by groups. On average, according to the respondents, the most part (81%) of the real wages is officially paid. Thus, the informal salary (full or partial) is the most widespread scheme to decrease the taxable base, 38% of the interviewed respondents agree with this statement. According to the respondents, the key factors enabling taxpayers to use various schemes to decrease the taxable base are imperfection of the legislation and opportunity to negotiate with the tax authority representatives. 14

15 All taxpayers Legal entities Individual entrepreneurs Legal Entities (general taxation regime) Legal Entities (simplified taxation regime) Legal Entities (micro) Legal Entities (small) Legal Entities (medium) Legal Entities (large) Tax Compliance Costs Survey in the Republic of Tajikistan in 2012 Annex 1. Summary Table of Average Time Costs Associated with Specific Procedures of Tax Administration Applied by Different Categories of Taxpayers in 2012 Time Costs for Specific Tax administration Procedures, person-days 1. Office work to keep tax accounting, calculation of tax amount, filling in of tax report forms 2. Travels to the tax authorities to submit reports, purchase of VAT invoices, receipt of information and consultations 3. Travels to bank to make tax payments 4. Other activities, associated with tax compliance 29,2 37,9 11,8 43,9 32,7 33,0 39,1 47,0 67,4 13,0 15,2 8,4 16,2 14,5 14,9 15,0 16,1 18,7 7,6 9,1 4,4 9,5 8,8 8,8 9,1 10,3 9,9 3,8 4,9 1,7 4,8 5,1 4,6 5,6 5,0 6,0 15

16 Time Costs for Tax Accounting by the Specific Taxes, person-days Profit tax/minimum income tax 9,7 10,2 4,0 10,2 8,2 9,2 9,5 16,1 Simplified tax 7,8 10,5 3,7 10,1 10,4 10,7 11,7 11,3 VAT 10,0 10,1 4,0 10,5 8,5 7,3 9,4 12,3 12,3 Road users tax 7,1 7,4 7,5 7,7 9,7 Retail sales tax 5,0 7,0 2,7 6,7 7,2 6,8 6,2 6,6 10,0 Personal income tax 7,1 8,6 3,4 8,8 8,4 8,6 8,4 7,9 10,8 Social tax 6,5 7,9 3,5 8,2 7,7 7,8 8,0 7,4 10,5 Other taxes 9,3 10,4 5,6 11,3 9,5 9,5 8,8 12,9 17,7 Time Costs for Travels to the Tax Authorities, person-days Travels to the tax authorities to submit reports Travels to the tax authorities to purchase VAT invoices Other travels to the tax authorities 9,7 11,2 6,8 11,5 10,9 11,1 10,9 11,2 14,1 2,8 3,0 1,7 3,3 2,6 2,7 3,7 3,3 3,9 4,4 2,8 4,8 4,0 4,2 4,4 5,1 5,1 Tax Inspection Coverage and Taxpayer Time Costs for Tax Inspections Percentage of inspected taxpayers Average number of inspections among the inspected taxpayers Time costs for tax inspections among the inspected taxpayers, person days 46% 41% 57% 44% 38% 35% 42% 51% 70% 2,1 1,8 2,5 1,6 2,0 2,1 1,6 1,5 1,3 5,3 6,6 3,6 8,2 5,0 4,7 7,4 8,3 12,5 16