The study, Paying Taxes 2008, is the third of its kind, and was a collaborative effort between PwC and the World Bank. TAXtalk spoke to Paul de Chalain, managing partner at PwC Tax Services, Southern Africa about the findings.
What was the purpose of this study?
The study involved gathering information on the tax affairs of a modest-sized company in 178 countries around the world.Three indicators were studied; the number of tax payments made during the year, the time it takes to be tax compliant in a given year and the cost of paying tax.These three indicators were weighted to produce an overall ranking for each country in terms of the ease of paying tax.South Africa ranked 62nd out of the 178 countries studied.Benchmarking is vitally important to companies, and this study affords them the opportunity to compare tax regimes around the world so as to improve their risk management and streamline their strategic decision-making when it comes to tax.
What was the reaction to the findings of the study?
The findings were enthusiastically received by the revenue authorities and treasuries of governments around the world, as well as by institutional investors, trade unions and the media.
The findings that made headlines were:
•The number of tax payments made by companies per year. In Uzbekistan the number stands at 177, compared to only 10 in the UK. South African companies make 24 tax payments on average per year.
•The taxes companies pay over and above corporate income tax.There are several taxes that are not a cost to the corporate sector, but are collected and paid over to revenue authorities, such as VAT, PAY and custom duties.Companies bear the cost of collecting these taxes, and in actual fact act as (unpaid) tax collectors for the fiscus.
What were the key results of the study?
Corporate income tax is only part of the story, and there are many other business taxes to consider in addition to corporate taxes.The study showed that corporate income tax accounted for only 37% of the total tax rate, took up only 26% of the hours spent on tax compliance and constituted a mere12% of the number of tax payments made.Labour taxes (such as PAYE and UIF) add significantly to the tax cost and compliance obligations in some countries.Other culprits that add to compliance costs are indirect taxes and consumption taxes.
How did African countries compare in the Total Tax Rate (TTR) rankings?
Seven of the ten countries with the worst tax rankings are on the African continent, but then again three out of the ten best-ranked countries are also African.This highlights the differential in the tax systems across the continent.South Africa has a total tax rate of just over 37% and as mentioned before, came 62 nd out of the 178 countries ranked.
Are governments taking note of these findings, and are they doing something to reform tax structures globally?
Absolutely.Governments across the world are recognising the benefits of tax reform.Over the past year 31 countries improved their tax systems with Bulgaria and Turkey coming out tops.Six countries in Africa reformed, South Africa being one of them.Reducing the corporate tax burden was the most popular tax reform this year.Previously governments were reluctant to do this, as it could result in less income flowing into state coffers.However, some governments that have implemented this tax reform have reaped the benefits of higher investment and economic growth – Egypt being a case in point.
Two years ago this country implemented major tax reforms, which included reducing the corporate income tax rate by almost half.This has subsequently increased the government’s tax base and revenues.Since 2005, 90 reforms in 65 countries pointed to the four most popular being:
•Introducing online filing;
•Simplifying tax administrations; and
•Reducing tax rates and broadening the base.
What could businesses learn from this study?
Businesses need to be more transparent in communicating their total tax contribution to their stakeholders and to the outside world.This will facilitate an understanding of how tax fits in with the companies’ corporate responsibility, and will help assess their economic footprint.Anglo is one company that publishes a section on total tax contribution in its annual report.
In order to make better business decisions companies should understand the impact of all taxes.It is important for any business to have hard information available on how much tax it is paying in total and how the tax burden is split between the various taxes.This will enable businesses to benchmark against their local competition and their peers in other countries.
What are the future trends that emerged from this study?
Trends suggest that consumption taxes and indirect taxes are becoming an important way in which governments collect taxes.Consumption taxes (such as VAT) are popular as they are relatively easy to collect and difficult to evade.The downside is that these taxes are regressive in that all consumers pay them, whether they are rich or poor.Consumption taxes also change behaviour – environmental taxes are a good example.
Another trend that has become evident is that simplifying a country’s tax system offers a win-win situation for governments and businesses alike.By simplifying the tax system, companies can cut the significant cost that tax compliance holds for them, whereas a simpler tax system means improved compliance and more money flowing into state coffers.
If you could change one thing in the South African tax system, what would it be:Assuming further rate cuts are a given - simplification and uncluttering, just as we should live our own lives.
Source: By Paul de Chalain (TaxTALK)