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ARMENIA REGULATORY SIMPLIFICATION-DOING BUSINESS REFORM PROJECT
THE COSTS OF TAX COMPLIANCE IN ARMENIA
Yerevan,2011
Not for quotation or distribution
About the Project
World Bank Group has allocated funding to carry out the Armenia Regulatory Simplification-Doing Business Reform project. The goal of the project is to improve the business environment in Armenia through reduction of the administrative burden and regulatory barriers in the selected areas, including Paying Taxes.
Tax Compliance Cost Survey
The survey was conducted by IFC (World Bank Group) upon request from the Government of Armenia (Ministry of Economy, State Revenue Committee)
Survey objectives:
To assess costs of paying taxes
To identify most costly and complex procedures and taxes
To prepare recommendations to simplify taxation and procedures of paying taxes
2
Survey details
Target population: Private businesses active during reference period (excluding political parties, religious, professional associations, NGO’s, state non commercial organizations )
Reference period: 2009
Sample size: 750 companies and 250 sole proprietors
Methodology: face to face interviews
Coverage: All regions of Armenia
Respondents: CEO, finance directors and chief accountants
3
Comparison of indicators for paying taxes Doing business 2011
Indicators Armenia** Eastern Europe&Central Asia
OECD average
Payments *(number per year)
50 46.3 12.8
Time (hour per year)
581 336.3 194.1
Total tax rate(% profit)
40.7 43.4 44.5
* Social security payment-12 ** Manufacturing company in Yerevan• Corporate income tax – 13 Turnover -780mln AMD• Value added tax- 12 Number of employees - 60• Land tax – 4• Property tax on building- 4• Vehicle tax -4• Environmental pollution charge for vehicles-1
4
Criteria for sample design
Upon request from the IFC the list of 750 enterprises and 250 sole proprietors was provided by SRC according to the following criteria:
By turnover size /million AMD/ (0-5, 5-29.99,30-58.35, more than 58.35). Taxpayers registered in the large taxpayers unit, were considered as separate group.
By type of activity (production,trade, service and other activities, dominated by the construction companies)
By region (All regions)
According to the above mentioned criteria, the share of enterprises and sole proprietors in the sample, corresponds to real structure of 2009 active business in the Republic of Armenia.
5
Other details
Survey Company
Armenian Marketing Association
Structure of the questionnaire
- 7 sections (Accounting practice, submission of reports, payments, inspections, consultations,VAT refund, etc.)
- 92 questions
The questionnaire was prepared by the international and local experts of the IFC.
6
Survey represents opinions of 750 private enterprises* of Armenia
By company income (AMD): By sector:
The weighted sample reflects the structure of Armenian’s economy
By region:
21.0% Produc-
tion
20.6% Trade
44.6% Service
13.8% Other
* Based on official data of SRC 7
24.4%
36.5%13.1%
24.2%
1.7%UP to 5 million
5-29.99 million
30-58.35 million
More than 58.35 million
More than 58.35 million (Large taxpayers)
56.3%
14.6%
21.4%
6.0%1.7%Yerevan
North (Shirak, Lori, Tavush)
Central (Aragatzotn, Ararat, Armavir, Gegharkunik, Ko-tayk)
South (Syunik, Vayoth Dzor)
Large taxpayers
Survey represents opinions of 250 sole proprietors* of Armenia
By sole proprietors’
Income (AMD):
By sector:
The weighted sample reflects the structure of Armenian’s economy
By region:
9.6% - Production
60.0% - Trade
26.8% - Service
3.6% - Other
20.4%
44.2%
20.5%
14.9% Up to 1 million
1 - 2 million2 - 5 millionMore than 5 million
57.1%
13.4%
23.6%
5.9%
Yerevan
North (Shirak, Lori, Tavush)
Central (Aragatzotn, Ararat, Armavir, Gegharkunik, Kotayk)
South (Syunik, Vayoth Dzor)
* Based on official data of SRC 8
What do tax compliance costs embrace?
Tax compliance costs – are NOT the actual amounts of taxes paid, but costs comprised of:
Time spent by accountants (or sole proprietors) and other staff on tax accounting, preparing all tax reports, visits to tax and local authorities, time related to inspections
Procurement and update of software for tax accounting, cost of tax related workshops and trainings, as well as printed or electronic tax related media
Payments for purchasing all necessary tax reporting templates, etc.
Payments for outsourced tax consulting services
9
Time spent on complying with taxes per average enterprise depending on turnover
(hours per year)
10
UP to 5 mil-lion
5-29.99 mil-lion
30-58.35 mil-lion
More than 58.35 million
More than 58.35 million (Large tax-
payers)
Average for all enter-
prises
DB case turnover
2011 (780 mil-lion)
221291
444
669
1145
400
581
Annual turnover of enterprises, AMD
Ho
urs
per
yea
r
* There was LESS of a distinction between different sectors, but trade sector had highest time burden and services had lowest.
Tax Compliance Costs incurred by an average Enterprise in 2009
In person-hours:
Total time spent on tax compliance of all staff
In money:
Time cost X labor costs (salary and wages)
400 person-hours (50 business days), which is
AMD 495 014* (~$1,363**)
11
* Calculations based on reported time and salary costs of survey respondents. ** Average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.
Annual cost of tax compliance per an average enterprise depending on annual turnover
12
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 million
More than 58.35 million (Large
taxpayers)
Average for all enterprises
296,151 290,309
613,653
844,420
1,848,832
495,014
Annual turnover of enterprises, AMD
AM
D p
er y
ear
Time spent on complying with taxes per average sole proprietor depending on annual turnover
13
up to 1,000, 000 1,000,001 – 2,000,000
2,000,001 – 5,000,000
more than 5,000,000
Average among all SPs
82
108 100
218
118
Annual turnover of sole proprietors, AMD
Ho
urs
per
yea
r
Tax Compliance Costs incurred by an average Sole proprietor in 2009
In person-hours:
Total time spent on tax compliance of all staff
In money:
Time cost X labor costs (salary and wages) and/or average salary in the economy in 2009*
118 person-hours (15 business days), which is
AMD 77 477 (~$213**)
14
*average salary in the economy was used only to calculate the costs of working time of sole proprietors **average exchange rate in 2009 was 363.28 AMD. Source: Armenian social-economic situation in 2009.
Annual cost of tax compliance per average sole proprietor depending on annual turnover
15
up to 1,000, 000 1,000,001 – 2,000,000
2,000,001 – 5,000,000
more than 5,000,000
Average among all SPs
53,873
81,84874,233
101,232
77,477
Annual turnover of sole proprietors, AMD
AM
D p
er y
ear
Smallest enterprises carry the heaviest burden in complying with taxes
Relative costs (cost/turnover) of tax compliance per average enterprise depending on annual turnover
16
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 million
More than 58.35 million (Large
taxpayers)
17.5%
2.4%1.3%
0.4%
0.2%
Average total - 5.4%
Annual turnover of companies, AMD
Smallest sole proprietors carry the heaviest burden in complying with taxes
Relative costs (cost/turnover) of tax compliance per average sole proprietor depending on annual turnover
17
up to 1,000, 000 1,000,001 – 2,000,000
2,000,001 – 5,000,000
more than 5,000,000
Average among all SPs
8.6%
5.0%
2.2%1.1%
0.0%
Average total - 4.6%
Annual turnover of sole proprietors, AMD
Total tax compliance costs incurred by all active private businesses
Direct costs (labor costs and additional cost) incurred by all Enterprises and Sole Proprietors on complying with taxes in 2009 amounted to:
AMD 10.3 bln, (USD 28.4 mln)which is about
0.3% of Armenia’s GDP in 2009
Enterprises spent: AMD 9.0 bln
(USD 24.8mln)
Sole Proprietors spent: AMD 1.3 bln
(USD 3.6mln)
18
Structure of Tax Compliance Work (Enterprises)
* Time spent for filling these books among companies that filled these books is 256 hours (56% of all companies) ** Calculated among companies that were inspected (44%)*** Calculated among companies that submitted additional info (19%)**** There are not enough answers for VAT refund. This is not included in the table.
19
TIME (hours) COST (AMD)
Tax accounting and filling all forms of all taxes that company paid , researching and studying tax legislation 199 209,667
Filling book of registration of revenues and filing book of shipment of inventory holdings (among all enterprises) * 149 143,676
Submitting tax reports to tax authority and local authority and payment of taxes in 2009 48 52,232
All inspections including unofficial visits and filing appeals** 32 35,185
Prepare all additional information requested by the SRC request*** 5 4,800
Structure of Tax Compliance Work (Sole Proprietors)
* Time spent for filling these books among sole proprietors that filled these books is 103 hours( 36%)** Calculated among sole proprietors who were inspected in 2009 (34%)*** Calculated among sole proprietors who submitted additional information in 2009 (8 %)
20
TIME (hours) COST (AMD)
Tax accounting and filling all forms all taxes that IE paid including annual declaration on personal income tax and social payments , researching and studying tax legislation 41 26,643
Time spent on filling book of registration and shipment * 38 22,191
Submitting tax reports to tax authority and local authority and payment of taxes
36 21,152
All inspections including unofficial visits and filing appeals** (58.8%)
6 2,961
Prepare all additional information requested by the SRC request ***(8.2%)
3 915
Time spent on tax accounting and filling reporting forms of all taxes by enterprises
21
Local duties and fees
Payment for use of natural recourses and/or pollution of environment
Property and/or land taxes
Fixed tax
Social payment
Personal income tax
Profit tax
VAT
Total time on tax accounting and filling all forms for all taxes
1
4
5
11
19
25
51
55
117
Hours per year
Taxe
s
Time spent on accounting and filling reporting forms of all taxes by sole proprietors
22
State duties
Local duties and fees
Payment for use natural resources and pollution of environment
Property and/or land taxes
Social payment
Fixed tax
Personal income tax
VAT
Total time on tax accounting and filling forms for all taxes
0.2
0.3
2.3
2.6
7.1
7.5
10.0
14.6
23.5
Hours per year
Taxe
s
Time spent on filling book of registration of revenues and book of shipment of inventory holdings by enterprises*
23
UP to 5
milli
on
5-29
.99
milli
on
30-5
8.35
milli
on
More
than
58.
35 m
illion
More
than
58.
35 m
illion (L
arge
taxp
ayer
s)
Avera
ge fo
r all e
nterp
rises
151 154231
407
786
256
Annual turnover of enterprises, AMD
Ho
urs
pe
r y
ea
r
* Calculated among enterprises who fill these books (56%).
Time spent on filling books of registration of revenues and book of shipment of inventory holdings by
sole proprietors*
24
up to 1,000, 000 1,000,001 – 2,000,000
2,000,001 – 5,000,000
more than 5,000,000
Average among all SPs
78
94
59
185
103
Annual turnover of sole proprietors, AMD
Ho
urs
per
yea
r
* Calculated among sole proprietors, who fill these books (36 %)
Visits to supervisory bodies – submission of reports and for other reasons
25
Submission of reports Tax Authority Local Authority
Percent of enterprises who made visits (%)94.2 51.9
Number of visits among those who made any visits 10 5
Total time on visiting in 2009 (hours) 15 5
Enterprises
Other Reasons Tax Authority Local Authority
Percent of enterprises who made visits (%) 99.7 12.6
Number of visits among those who made any visits 7 4
Total time on visiting in 2009 (hours) 9 4
Face to face visits are also opportunities for conclusion between taxpayers and tax officials
Visits to supervisory bodies – submission of reports and for other reasons
26
Submission of reports Tax Authority Local Authority
Percent of sole proprietors who made visits (%)92 30
Number of visits among those who made any visits 6 2
Total time on visiting in 2009 (hours) 9 2
Sole Proprietors
Other Reasons Tax Authority Local Authority
Percent of sole proprietors who made visits (%) 44 8
Number of visits among those who made any visits 5 5
Total time on visiting in 2009 (hours) 8 6
Inspections of enterprises
27
44% of enterprises had any inspections in 2009
37%
15%
6%
10%
Percent of enterprises had inspections
Inspections of sole proprietors
28
34% of sole proprietors had any inspections in 2009
30%
5%2%
10%
Percent of sole proprietors had inspections
Cost of Outsourcing vs. Internal tax compliance work (enterprises)
2.1% of enterprises outsourced tax compliance related work partly, 4.9% of enterprises outsourced all tax compliance related work
29
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 million
Average for all enterprises
67,738
209,072
334,200
668,022
362,691296,151 290,309
613,653
844,420
495,014
Outsource for Tax Compliance work
Internal Tax Compliance work
Annual turnover of enterprises, AMD
AM
D p
er y
ear
Accounting software is not commonly used at small and medium enterprises
30
UP to 5 million 5-29.99 million 30-58.35 million More than 58.35 million
More than 58.35 million (Large
taxpayers)
Average for all enterprises
55% 52%
34%
18%8%
41%
26% 24%
34%
20%13%
25%19%
24% 32%
62%
79%
34%
Manually PC using non specialized software PC using specialized software
Annual turnover of enterprises, AMD
Most of sole proprietors did not use accounting software
31
up to 1,000, 000 1,000,001 – 2,000,000
2,000,001 – 5,000,000
More than 5,000,000 Average among all SPs
99.2% 95.6%85.8%
76.6%
91.4%
.0% 1.7%
10.6%15.1%
5.2%.8%
2.7%3.6%
8.3% 3.4%
Manually PC using non specialized software PC using specialized software
Annual turnover of enterprises
Using computers and Internet for business purposes
46.7%
16.8%13.5%
23.0%
Enterprises
73.2% of enterprises who used computers had internet connection
7.9% 8.5%1.6%
82.6%Sole proprietors
70.8% of sole proprietors who used computers had internet connection
32
Ways of submitting tax reports
33
The most popular answer among those who submitted tax reports on paper in person is – “it was the most reliable way”
52%
27%
20%0%
Personally
Both personallyand via post
Via post
Electronically74%
19%
7% 0%Personally
Both personallyand via post
Via post
Electronically
Enterprises Sole proprietors
Call-center of the Tax authority
34
29%
85%
71%
15%
Enterprises
YesNo
53.2%
94.3%
46.8%
5.7%
Sole proprietors
YesNo
Center of Accounting Services
35
Share of enterprises who was aware about
the Center of Ac-counting Services
Share of enterprises who used Cente of
Accounting service?
41.5%
87.4%
58.5%
12.6%
Enterprises
Yes
No
62.7%
94.4%
37.3%
5.6%
Sole proprietors
YesNo
General data regarding respondents’ answers on question regarding underreported turnover and unofficial salaries.
36
Turnover Salary
Percent of respondents who indicated figures from “1” to “100” 30 30
Percent of respondents who indicated “0” (zero) 31 31
Percent of respondents who refused to answer 6 6
Percent of respondents who did not know 33 33
Enterprises
Turnover Salary
Percent of respondents who indicated figures from “1” to “100” 30 30
Percent of respondents who indicated “0” (zero) 37 37
Percent of respondents who refused to answer 4 4
Percent of respondents who did not know 29 29
Sole Proprietors
Tax evasion
* The share of underreported turnover/salary was calculated as a mean among companies/individual entrepreneurs who indicated the share of underreported turnover/salary including “zero” answers (indicated figures from “0” to 100”).
37
EnterprisesTurnover (%) Salary (%)
Officially reported84 84
Underreported 16 16
Sole Proprietors Turnover (%) Salary (%)
Officially reported85 88
Underreported 15 12
Share of officially reported and underreported turnover /salary*
Tax evasion
The main popular ways of tax evasion for enterprises and sole proprietors*
No way
Fraudulent abuse of tax privileges
Overstate of costs
Use fiction firm
Payment of unofficial salary
Declare only part of the revenue
2.5%
4.8%
9.5%
15.0%
16.5%
51.7%
Sole proprietors
No way
Fraudulent abuse of tax privileges
Use fiction firm
Overstate of costs
Payment of unofficial salary
Declare only part of the revenue
1.5%
5.1%
7.4%
7.6%
26.0%
52.4%
Enterprises
* The share of respondents who reported at least one way of tax evasion
38
Tax evasion
Allows evading of taxes*
* The share of respondents who reported at least one reason
39
Nothing
Small amount of penalties
Incompetence of control au-thorities
Bad control system
Possibility of conclusion unof-ficial agreement with control
authorities
Fallibility of legislation
.6%
2.6%
7.7%
8.1%
25.7%
55.2%
Enterprises
Nothing
Incompetence of control au-thorities
Small amount of penalties
Bad control system
Possibility of conclusion unofficial agreement with
control authorities
Fallibility of legislation
2.3%
3.6%
6.3%
10.3%
20.9%
56.6%
Sole proprietors
Recent Reforms
During 2010 and 2011, the Government of Armenia implemented a number of reforms aimed at simplifying and improving tax administration and taxpayer services. Some of the reforms were implemented based on IFC recommendations that had resulted from initial survey findings. These reforms include:
The Profit Tax advance payments will be made on a quarterly basis instead of the monthly as previously, thus the number of tax payments will be reduced by 8, i.e. from 13 to 5;
Employers will submit a quarterly report on Social Security payments instead of the monthly as previously, thus the number of reports will be reduced by 8, i.e. 4 instead of 12;
Taxpayers will file Excise Tax calculations quarterly (before it was monthly), i.e. 4 instead of 12;
40
Recent Reforms
VAT payers have a right to issue electronic tax invoices. In addition, it is defined that those VAT payers who issue only electronic tax invoices are exempted from filling in the Book of Shipment;
Adoption of the new Law on Patent fee, according to which IEs also may choose the Patent fee taxation regime, and the Patent fee taxation regime threshold was increased from AMD 2,5 million (USD 6750) to AMD 6,0 million. (USD 16210);
Approval of the procedure of calculation, set off and/or payment of fines by the GoA for delays in paying back of overpayments or amounts other than overpayments;
Approval of criteria for considering tax payer as a risky taxpayer in relation to offsetting or refunding VAT and Excise Tax without study or inspection;
41
Recent Reforms
Approval of the procedure on providing commenatry related to implementation of the tax legislation;
Publication of the Guidelines on Tax Inspections in several areas (construction, transportation, health, education, tourism, fixed payments, maintaining books of shipment of inventory holding and registration of revenues, real estate transactions, and use of cash registers);
Establishment of the Interdepartmental Board of Appeal and the procedure of discussing decisions of appeal (both tax and customs) committees of the SRC.
42
Recent Reforms
Regulatory and administrative measures to improve taxpayer service (e.g. to exclude cases when taxpayers are required to submit documents or data not envisaged in the tax legislation and procedures, to promote the submission of tax reports (calculations, statements, data) by taxpayers via postal services and especially electronically (by encouraging them through trainings and explanatory activities), to exclude unnecessary contacts with taxpayers visiting the tax officials, to invite taxpayers to the tax authority exclusively within the scope of jurisdictions provided by the Law on Inspections and tax legislation);
Launch of three special taxpayer service centers (two in Yerevan and one in Vanadzor), which are designed to minimize taxpayers’ contacts with tax officers. It is anticipated that in 2011, three additional service centers will be established;
Introduction of 27 types of tax reports out of around 40 that can be submitted electronically starting Jan. 1, 2011.
43
Top 5 of short term recommendations
1. Simplification of tax accounting, including special simplified accounting schemes for SME’s;
2. Elimination of requirements for maintaining special tax books (registration of revenues and of shipments);
3. Improvement of services for taxpayers;
4. Eliminate practice of requesting additional information/data/advance payments to submit reports;
5. Introduction of advance ruling practice.
44
[A1]change
Top 5 of midterm recommendations
1. Appeal system further improvement: creating a tax Ombudsman’s office;
2. RBA needs to be implemented;
3. Streamlining VAT invoices system;
4. Improvement of e-filing system and promotion of online banking;
5. Improvement of VAT refund system.
45
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