EFRIS: How are countries making it easier to pay taxes?

Over the 15 years that Doing Business has been comparing tax systems globally, countries have made it easier for companies to pay their taxes, new data on tax reform shows. For the 174 economies included in the analysis, there has been a 32% drop in the number of required tax payments since 2004. Over the same period, the average length of time spent by companies in meeting their tax obligations has fallen by 27%.

These improvements have largely been driven by advances in technology, specifically the implementation of electronic filing and payment systems. In 2004, only 43 economies had an online system for filing and paying taxes. Fifteen years later, more than twice as many — 106 — do. In addition, two other types of reforms have become common over the same period: consolidation of taxes and reduction of profit rates.

The most notable progress in making it easier to pay taxes has been in Eastern Europe. Moldova, Belarus, Ukraine, Kosovo and Romania are among the countries that accomplished the most in this area over the past fifteen years. In 2013, for example, Romania developed an electronic system for filing and paying corporate income tax, value added tax and all mandatory labor contributions.

China is another country that has successfully implemented business tax reforms consistently over the past 15 years. In 2004, businesses in Beijing spent 832 hours a year on average to prepare, file and pay taxes, and had to make 37 payments. By 2018, this had been reduced to 138 hours a year and seven payments. China has also implemented numerous improvements to its tax system, including the introduction of a taxpayer services hotline (2005), the formation of a specialized Taxpayer Services Department and online filing and payment for the major taxes (2008), a campaign to improve cooperation between the State Taxation Administration and local tax bureaus (2013), integration of taxpayer services functions through a mobile tax application (2014), and, recently, data sharing among government bodies.

Advanced economies have also improved their tax administrations over this period, to the benefit of both taxpayers and tax authorities. Spain launched Cl@ve, an integrated online platform for the entire public administration in 2014. The new system accepts tax returns online and retrieves historical data to automatically populate certain fields in the current year’s forms. Spain also extended the use of electronic invoicing.

Electronic filing has become widespread in Africa. Rwanda rolled out its first electronic filing system for corporate income tax, value added tax, and labor contributions in 2012. A second step is on the way: in 2018, the country began replacing physical electronic billing machines (EBMs) with Internet-based software that is offered free to all VAT-registered taxpayers.

Countries around the world have taken a range of other steps to ease compliance with tax obligations over the same 15-year period, such as lowering the frequency of tax filings and payments by consolidating taxes or allowing joint payment of several taxes. The Republic of Korea began allowing businesses to file and pay five labor taxes and contributions jointly in 2011. Albania has allowed corporate income taxes to be paid quarterly rather than monthly since 2013. In the same year, Tajikistan merged the minimal income tax with the corporate income tax and abolished the retail sales tax. Canada unified federal and municipal sales taxes in 2010.

For several years after the 2007-2009 global financial crisis, reducing profit tax rates was the most common type of tax reform. In 2018, the average total tax rate for 190 economies was 40.5% of profit, 12.5 percentage points lower than 15 years ago. Reductions in profit tax rates are usually combined with efforts to widen the tax base by eliminating exemptions and increases in the value-added tax. Many economies made these reductions rates gradually. For example, the United Kingdom lowered its corporate income tax rate by one or two percentage points a year over a dozen years.

On the heels of these three trends in easing tax payments – introduction of electronic filing and payment systems; consolidation of taxes; and reduction of profit rates — research can follow by focusing on what really matters: are more taxes in fact being collected, and how are these additional tax revenues being deployed? Once companies see the benefits of their taxes in terms of improved education or infrastructure, a virtuous cycle of associating tax payments with better public service delivery may follow.

Authors:

Simeon Djankov

Senior Fellow, Peterson Institute for International Economics