Tax rates and the amount of time it takes to comply have become much more business-friendly in some parts of the world in the past decade, research by PwC and the World Bank suggests.
Worldwide, tax rates and the time it takes businesses to prepare, file, and pay their taxes continued to drop, particularly in Africa, according to Paying Taxes 2015, a PwC and World Bank study that has measured the ease of paying taxes worldwide since 2004. The average total tax rate fell by 1.3 percentage points in 2013, the most recent year the study analysed. Time to comply decreased by four hours for the year.
The World Bank set up a case study company to compare data across 189 countries. On average, it took the company 264 hours to comply with taxes. The average total tax rate the company paid was 40.9%.
The Middle East was the most business-friendly. In 2013, the region’s overall tax rate was 24%, and it took 160 hours per year to comply. South America had not only the most time-consuming tax system – it took 620 hours to comply – but it also had the highest overall tax rate in 2013 at 55.4%.
In North America, a region made up of the US, Canada, and Mexico, the World Bank’s case study company paid an overall average 38.9% tax rate and took 213 hours to comply.
Impact of the crisis and technology
The global financial and economic crisis of 2008 and 2009 did much to contribute to the decline in tax rates, according to the PwC and World Bank research. Governments worldwide reduced the rates (47 economies cut their corporate income tax rates from 2008 to 2010) and broadened the base for corporate income tax, while increasing the rates for consumption tax or value-added tax (VAT). Over the nine years the World Bank tracked, the average total tax rate fell by 9.1 percentage points, or about 1 percentage point per year.
At the same time, increased availability of electronic systems made tax compliance easier. More than one-quarter of the 314 reforms introduced worldwide since 2004 involved online filing and payment systems. This reduced the time it took business to comply by an average six hours per year during the same period.
Still, the ease of paying taxes and tax rates businesses pay differ significantly from region to region:
Africa. The total tax rate for Africa has been falling consistently. Since peaking at 72.2% in 2005, it has dropped to 46.6% in 2013, which is the second-highest behind South America’s total tax rate. Corporate income taxes, labour taxes, and other taxes, such as indirect and municipal taxes, each account for about one-third of the tax rate.
African countries that contributed to the drop in the total tax rate are The Gambia, which replaced a cascading sales tax with a VAT, and the Democratic Republic of Congo, where gross national income per capita increased.
The time to comply in African countries, which was 317 hours in 2013, decreased slightly in the past decade. Much of the decrease was attributable to changes in Kenya’s VAT system, which cut the time to file and pay by 106 hours. Two African countries remained in the five economies with the most cumbersome tax systems in 2013. In Nigeria, Africa’s largest economy, it took 908 hours per year to comply, and in Libya it took 889 hours.
Asia Pacific. The region, which includes China, India, Australia, Japan, South Korea, and countries in Southeast Asia, changed little. In 2013, the overall total tax rate was 36.3%, about the same as in 2012, with corporate income taxes making up about half of the tax rate. The time to comply was 229 hours per year, down from 232 hours in 2012. Both indicators were below global averages.
Overall, China ranked 120th, India 156th, Indonesia 160th, Japan 122nd, and Australia 39th. Hong Kong came in fourth, and Singapore was fifth.
Central America and the Caribbean. The overall tax rate of the region was 42.9%, up slightly from 42.8% in 2012. The reason for the increase was a 15.3 percentage point increase in the Puerto Rican tax rate.
Although electronic filing and payment is used by less than half the region, time to comply (211 hours per year in 2013) was the third-lowest of all regions. Compared with 2012, the time to comply dropped by six hours, mainly because of improvements made in Guatemala and Costa Rica. The Bahamas had the fifth-easiest tax system to comply with in the world (58 hours per year).
In the overall rankings, The Bahamas was 31st, Puerto Rico was 133rd, and Panama was 166th.
Central Asia and Eastern Europe. The region, which includes Russia, Turkey, and Israel, is reforming administrative tax systems quickly and improving the ease of paying taxes faster than anywhere else in the world. The overall tax rate dropped to 34.7% in 2013, down from 39.5% the previous year. Macedonia’s 7.4% tax rate was the lowest in the world.
The time to comply was 245 hours per year, 11 hours less than in 2012. Increased use and enhancement of electronic filing systems reduced the time to comply in Belarus by 136 hours. Similar improvements also resulted in significant time savings in Armenia and Ukraine.
In the overall rankings, Russia came in 49th, Turkey was 56th, and Belarus was 60th.
Europe. Tax rates and time to comply have improved slightly in the region, which includes the 28 members of the European Union, and Iceland, Norway, San Marino, and Switzerland. The overall tax rate was 41% in 2013, compared with 41.1% the previous year. Labour taxes made up 64% of the region’s overall tax rate.
Time to comply was 176 hours per year, down three hours from 2012, and the second-best across all regions. San Marino and Luxembourg were among the five countries with the easiest tax filing and payment systems in the world.
In the overall rankings, Norway was 15th, the UK 16th, Germany 68th, and France 95th.
Middle East. The region makes paying taxes easier than any other region in the world. Half of the 10 countries with the lowest tax rates and the easiest tax filing and payment systems worldwide are in the Middle East.
Qatar had the fourth-lowest tax rate in the world (11.3% in 2013) and Saudi Arabia the fifth-lowest (14.5% in 2013). Nowhere in the world is it easier to file and pay taxes than in the United Arab Emirates (12 hours per year in 2013) and in Qatar (41 hours per year in 2013).
About 59% of the region’s overall tax rate represents labour taxes.
North America. The total tax rate for the region decreased by 2.5 percentage points to 38.9% in 2013. This was largely due to the decrease in the US tax rate, which was based on the tax rates in Los Angeles and New York (in 2012 it was just New York). Corporate income taxes contributed nearly half to the region’s overall tax rate, labour taxes another 41%.
The average time to comply remained unchanged from 2012.
Canada was ranked ninth among the 10 countries in the world with the lowest tax rates and the easiest tax filing and payment systems. The US came in 47th, and Mexico was 105th.
South America. No other region made it harder to pay taxes. In 2013, it was also the only region in the world that showed increases in the tax rate and the time to file and pay taxes.
The region’s overall tax rate was up 2.7 percentage points from 2012, mainly because of changes in Argentina, the country with the second-highest tax rate in the world (137.3% in 2013). Bolivia had the fourth-highest tax rate in the world (83.7%).
The time to comply increased by two hours from 2012, even though the region already had the most cumbersome tax system. In Brazil, it took 2,600 hours per year to comply in 2013, the most worldwide. Bolivia was second with 1,025 hours per year.
Bolivia and Venezuela ranked the lowest overall. Brazil came in 177th, and Uruguay was 140th.
Related CGMA Magazine content:
“What Keeps Heads of Tax in Europe Up at Night?:” Paying taxes has become very convenient for companies in Europe, but the euro-zone debt crisis and increased public scrutiny of corporate tax havens have brought about changes that keep many tax executives up at night.
“Corporate Tax Burden Shifting to Indirect Taxes”: Corporate tax rates have decreased worldwide since 2006 to help countries attract investment, but indirect taxes are on the rise. So are tax audits and penalties as a source of revenue. Find out the six tax trends companies are likely to encounter worldwide.
“Ten Data-Based Tips to Better Manage Indirect Taxes”: Governments worldwide are increasingly using technology to ensure multinational companies pay rising indirect taxes. Tax executives at leading-edge global companies offer data-based tools that can help manage compliance.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.
South American and African countries made up the economies with the highest tax rates and the most cumbersome tax filing and payment systems:
185. Central African Republic
182. Republic of Congo
180. The Gambia
Several countries in the Middle East and Southeast Asia ranked among the economies with the lowest tax rates and the tax filing and payment systems with the fewest hassles:
1. (tie) Qatar
1. (tie) United Arab Emirates
3. Saudi Arabia
4. Hong Kong