Tax Rate Policies Vary Globally as Economies Continue to Reform Tax Compliance Systems
04 December 2013
Posted by: Author: PwC
Worldwide, economies are adopting a range of policies as they strive to strike a balance between raising tax revenues and encouraging growth, according to a new report released by the World Bank and professional services firm PwC. The ‘Paying Taxes 2014’ report found that 32 economies continued to take steps during the period from June 2012 through to June 2013 to make it easier to pay taxes.
The study of tax regimes in 189 economies found that for the third consecutive year the most common tax reform was the introduction or improvement of online filing and payment systems for tax compliance. The compliance burden (the time to comply with tax obligations and the number of payments) has continued to fall in 2012, but the rate of decline has slowed.
Overall, South Africa’s worldwide paying tax ranking improved from 32nd position to 24th position, placing it in the same position as 2011. "According to the study, South Africa’s improved ranking is largely due to the success of e-filing and the way in which returns are filed, as well as a reduction in the total tax rate,” says Kyle Mandy, PwC Tax Technical Partner. On average businesses in South Africa only have to make 7 tax payments, whereas in Africa the average is 36.
South Africa’s total tax rate saw a significant reduction in 2012, falling from 33.3% to 30.1%. "This reduction is largely due to South Africa replacing the secondary tax on companies, which was levied on a company declaring a dividend, with a dividends tax that is levied on the shareholder,” says Mandy. The Total Tax Rate has also reduced substantially from 37.6% in 2004. "There are currently no proposals that could lead to further significant changes in the Total Tax Rate in the short term; however, in the medium term, increases are possible, particularly having regard to the proposed National Health Insurance,” he adds.
The study shows that the Total Tax Rate for Africa has fallen significantly since 2004 – from 70.3% to 54.3% in 2012.However, Africa still continues to have the highest Total Tax Rate of any region, which is well above the world average of 43.1%. This is due in part to the continuing presence of cascading sales taxes in Comoros and The Gambia.
Sub-Saharan Africa had the largest reduction in the Total Tax Rate: 17.5 percentage points on average since 2008. A major contributor to this reduction was the introduction of Value -Added Tax (VAT), which replaced the cascading sales tax. Burundi, the Democratic Republic of Congo, Djibouti, The Gambia, Mozambique, Sierra Leone and Swaziland all introduced VAT systems. Some Sub-Saharan economies also lowered profit tax rates over the past five years, including Benin, Cape Verde, the Republic of Congo, The Gambia, Madagascar, Mali, Niger and Sudan.
While Africa has a higher than average number of taxes, it is the lack of electronic filing in the region which contributes most to the difficulty of paying taxes. In only three (South Africa, Mauritius and Tunisia) of the 53 economies in Africa do the majority of companies use electronic filing for all major taxes. In 2012/13 electronic systems have also become more popular among taxpayers in Kenya, Madagascar, Rwanda and Uganda.
Charles de Wet, PwC Tax Partner, says: "For tax authorities, e-filing lightens workloads and reduces operational costs such as for processing, handling and storing tax returns. At the same time, e-filing increases compliance with tax obligations and saves time for taxpayers. Revenue authorities around the world are taking steps to streamline and modernise payment systems. Taxpayers in 76 economies can now file tax returns electronically from virtually anywhere on the planet.”
The 2014 report finds that on average a medium-sized company has a total tax obligation of 43.1% of profits, making 26.7 payments and needing 268 hours to comply with its tax requirements in the countries covered by the report.
Over the last nine years, the average time to comply with tax obligations in Africa has fallen by 28 hours, with almost 60% of the decline coming from reductions in the time to comply with labour taxes, consistent with the global trend. Across the continent, the number of tax payments has declined slightly since 2004. The smallest decline is in profit taxes, with labour and ‘other’ taxes each declining by roughly one percent over the last nine years. This pattern is in line with the global norm.
Africa also remains the region with the highest number of tax payments (36.1) due to a lack of availability of electronic filing and payment, a large number of separate taxes, and the fact that taxes can often be levied by more than one level of government. Africa has an average of 320 hours to comply with tax requirements, which is almost 20% above the world average. Consumption taxes (VAT) take the most time in Africa to comply – namely, 127 hours on average.
The Total Tax Rate measures the burden of all the taxes that a company must pay in relation to its commercial profit. Therefore all kinds of taxes that impose a cost on the business are considered, such as property taxes, labour taxes, and other payments that do not require filing, such as a dividend tax, capital gains tax, environmental tax, financial transaction tax, and vehicle and road tax. The study uses a standardised company to measure the taxes and contributions paid by a company in each of the countries forming part of the study, allowing for comparisons across countries.
The purpose of the study is to provide analytical data to facilitate the debate on tax policy and tax administration, and encourage tax reform.
The time taken for companies to comply with their tax obligation in South Africa has been on a declining trend since e-filing was introduced in 2003.Continued improvements have been made over the years, including the ability to file a single monthly return for a number of payroll taxes and reduced requirements for submitting supporting information with corporate income tax returns.
South Africa’s tax system continues to be ranked number one among the BRICS (Brazil, Russia, India, China, and South Africa) economies for its efficiency and in easing the compliance burden for taxpayers.
The top reformer was the United Arab Emirates for the second consecutive year. However, it is worth noting that a number of the oil-rich economies such as Qatar and Saudi Arabia continue to have little or no corporate income tax, which may explain why their overall Total Tax Rate is so low.
Paul de Chalain, PwC Head of Tax for Africa, says: "Trends in the international tax environment, such as the globalisation of business and increasing competition among countries for tax revenues, have transformed the tax landscape. The world’s tax systems need to be reformed and updated to meet modern needs.
"The information contained in the ‘Paying Taxes’ study can help inform the discussion around tax reform which includes the questions around who needs to be taxed, how they will be taxed and by how much.”
This article first appeared on pwc.co.za.