Business Tax: Less Is More For Governments, Report Finds

by Mike Godfrey, Tax-News.com, Washington

18 November 2008

A recent report has concluded that high corporate income tax rates do not always lead to higher overall revenues, and that, when considering rates, the focus should be on the total taxes raised, not just the corporate income tax rate.

The annual ‘paying taxes 2009’ report from the World Bank, International Finance Corporation and PricewaterhouseCoopers, finds that tax rates are lowest in the Middle East and North Africa and highest in Sub-Saharan Africa, where companies on average pay over 60% of profits as tax.

The report suggests that governments and industry can achieve a "win-win" situation by working together to help simplify tax systems and improve revenue collection. This is especially true in developing countries where much of the economy operates informally and tax evasion is a major problem.

On average in the 175 economies studied, businesses submit 35 pages of tax returns a year in order to comply with regulations. But there is significant variation between countries - in Cameroon, the average annual tax return for businesses is 172 pages, while in Austria it is 17. It takes on average 332 hours per year for businesses to comply with all tax requirements. But this time ranges from 2,600 hours in Brazil to just 68 hours in Switzerland.

Although corporate income taxes are often under the spotlight as a major tax, the findings suggest that on average corporation tax accounts for only 36% of the total tax take, 11% of the number of payments made, and 25% of the compliance time represented by a company’s total tax rate. The report suggests that governments should focus on easing the more time consuming taxes, in particular employment and property taxes. Employment taxes are particularly prevalent in the European Union and account for 65% of the total tax take.

“Straightforward tax administration and a simpler tax collection process are fundamental to an effective tax system. There are benefits both for governments, by increasing tax revenues, and for business, by making it easier to comply,” according to Caralee McLiesh, co-founder of World Bank Group Doing Business Project.

The Maldives was deemed the easiest place for companies to pay taxes. Middle Eastern countries also performed particularly well with Qatar, UAE, Saudi Arabia, Oman and Kuwait achieving second, fourth, seventh, eighth and ninth, respectively. Hong Kong and China shared third place.

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