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Measuring Tax Transaction Costs in Small and Medium Enterprises

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Measuring Tax Transaction Costs in Small and Medium Enterprises 13-61437 MEASURING TAX TRANSACTION COSTS IN SMALL AND MEDIUM ENTERPRISES ENTERPRISES MEDIUM AND SMALL IN COSTS TRANSACTION TAX MEASURING UNITED NATIONS MEASURING TAX TRANSACTION COSTS IN SMALL AND MEDIUM ENTERPRISES asdf United Nations New York, 2014 CIAT Copyright © United Nations 2014 All rights reserved Preface A favourable business climate is an important factor in a country’s eco- nomic prosperity: making things easier for companies to meet their obligations, including their tax obligations, promotes competitiveness and contributes to growth. If an entrepreneur has to comply with numerous bureaucratic procedures to register as a taxpayer, as well as declare and pay the vari- ous taxes established in the tax regulations, those circumstances may entail redundancies, delays and additional costs, and trigger unnec- essarily high transaction costs. In addition to paying taxes, business owners incur an opportunity cost for the time spent on complying with administrative procedures. This may also lead to the emergence of intermediaries who handle the paperwork, thus making it more costly to open and run a business. The complicated procedures and excessive costs may force some business people to give up and abandon their efforts; others choose to continue without subjecting themselves to all the required obligations. Indeed, many end up operating their business in the informal sector. In the event, such businesses, in trying to pass unno- ticed by the authorities, significantly constrain their own potential for growth and job creation. Informality not only creates uncertainty for businesses and workers, but it also deprives them of access to govern- ment support and to the financial sector in general. Strategies to simplify and lower administrative barriers should, therefore, be properly devised, taking into account the various indirect costs or tax transaction costs (TTCs) that are prompted by tax compliance. TTCs are the total amount of money spent by society to comply with the tax system. Their main components are the costs borne by taxpayers when complying with their obligations (known as compliance costs) and the costs faced by the tax administration for ensuring compliance by taxpayers (or administrative costs). In addition to the tax liability itself and the losses caused by market distortions, TTCs are another economic cost of taxation. It is worth noting that compliance costs (CC) may comprise not only iii Methodology for measuring tax transaction costs internal costs but also external costs. Internal costs are those associ- ated with the time needed to prepare tax data, filing returns or other attendant requirements of national tax administrations (NTAs), the cost of accounting software used to prepare such information, staff remuneration, training expenses, and so on. External costs are usually associated with the fees paid for external tax advisers. A detailed quantitative assessment of TTCs allows an accu- rate and timely evaluation of measures that may be included in a pos- sible reform. There are several studies that show a negative correlation between compliance costs and the willingness to pay taxes, thus high- lighting the role of CCs in determining taxpayer behaviour. Factors such as the ease with which taxpayers could comply, as well as the probability of being audited or the size of the penalty, may play a role. In short, identifying, measuring and reducing the main components of TTCs could improve a country’s business environ- ment, thereby facilitating tax compliance in the formal sector of the economy and consequently promoting competition, productivity and competitiveness. The purpose of this publication is to provide tax administra- tions with a methodology that allows them to identify and measure TTCs for taxpayers and tax institutions, thereby supporting possible administrative reforms and improving tax procedures with a view to fostering greater tax compliance. Alexander Trepelkov Márcio Verdi Director Executive Secretary Financing for Development Office Inter-American Center of Tax UN-DESA Administrations iv Acknowledgements We would like to express our deepest appreciation to all the experts, officials and organizations involved in implementing the project jointly undertaken by the Financing for Development Office (FfDO) of the United Nations Department of Economic and Social Affairs and the Inter-American Center of Tax Administrations (CIAT), which resulted in this publication. We would like to thank the regional consultants who worked on developing a methodology to measure tax transaction costs (TTCs) in small and medium enterprises and pilot testing it, as well as on the drafting of this publication, namely: Mr. Byron Vásconez (Leader), Mr. Eduardo Ibarra and Mr. Marcel Ramírez La Torre. We also wish to thank Mr. Carlos Vargas Duran, Director General, Directorate General for Taxation (DGT), Costa Rica, and Mr. Pablo Ferreri, Director General, General Tax Directorate (DGI), Uruguay, as well as Ms. Julieta Abarca Robles, Director, Tax Integrated Management Area, DGT, and Mr. Gustavo González Amilivia, Economic Studies Director, DGI, who wholeheartedly supported the project and facilitated the pilot implementation of the methodology in their countries. We are also grateful to the officials in DGT and DGI who provided technical support to that end, namely: Ms. Wendy De Sagarra Berrocal, Mr. Danilo E. Murillo Barrios and Mr. Adrián Perez Edwards, DGT, and Ms. Laura Arzuaga Gilboy, Ms. Carmen Colaneri, Mr. Alejandro Grilli, Mr. Daniel Laffitte, Mr. Mauricio Palumbo, Ms. María del Pilar Torrado, Ms. Cecilia Robano, Mr. Joaquín Serra and Ms. Susana Vega, DGI, who formed the local support teams in Costa Rica and Uruguay. We wish to acknowledge the contribution of the officials from national tax authorities in other Latin American countries and other participants, who provided comments and inputs during the workshops organized in the context of the project, namely: Mr. Mario Moreira (National Tax Service, Bolivia); Mr. Silas Santiago (Federal Revenues, Brazil) and Mr. Marcelo Brito Maia (SEBRAE, Brazil); v Methodology for measuring tax transaction costs Ms. Pamela Castellón (Internal Revenue Service, Chile); Ms. Carolina Pérez and Ms. Carmen Sancho (General Directorate of Internal Taxes, Dominican Republic); Mr. Guillermo Belmonte, Mr. Andrés Ortiz and Mr. Mauricio Sarabia (Internal Revenue Service, Ecuador); Ms. Rhina García de Navarro (General Directorate of Internal Taxes, El Salvador); Ms. Marina Adelaida Castillo and Mr. Giovanni René Lara Dominguez (Superintendency of Tax Administration, Guatemala); Ms. Graciamaría Oyuela (Executive Revenue Directorate, Honduras); Mr. Jorge Hernandez Ponciano (Tax Administration Service, Mexico); Mr. Manuel S. Hernández (General Directorate of Revenues, Nicaragua); Ms. Nivia de Barria, Mr. John Calvo and Ms. Lisbeth de Matos (General Directorate of Revenues, Panama); Mr. Pedro Galeano (State Undersecretariat of Taxation, Paraguay); Ms. Roxana Pantigozo (Customs and Tax Administration National Superintendency, Peru); and Ms. Ana Cebreiro Gomez (International Finance Corporation (IFC), World Bank Group). Finally, we would also like to acknowledge the valu- able assistance of other United Nations and CIAT staff and consult- ants who provided support within their respective roles, namely: Mr. Ricardo Martner, Mr. Jürgen Gafke, Ms. Irving Ojeda Alvarez, Ms. Leah McDavid, Ms. Mary Nolan, Ms. María Goenaga Ruiz de Zuazu, Mr. Gaspar Eliecer Maldonado, Mr. Julio López, Ms. Zoraya Miranda, Ms. Rita Solis, Mr. Raúl Zambrano, Mr. Oscar Camacho and Mr. Andrew Crawley. Alexander Trepelkov Márcio Verdi Dominika Halka Socorro Velázquez Harry Tonino Miguel Pecho vi Introduction This publication is a result of a project, undertaken jointly by the Financing for Development Office (FfDO) of the United Nations Department of Economic and Social Affairs and the Inter-American Center of Tax Administrations (CIAT), aimed at strengthening the capacity of national tax administrations (NTAs) in developing coun- tries in Latin America to measure tax transaction costs (TTCs). The ultimate goal of this project was to support the development of an empirical methodology to assess TTCs, which could assist in identify- ing possible reforms aimed at reducing these costs. The project was funded through the United Nations Development Account. The work was coordinated by a small team comprising both United Nations and CIAT officials, under the respec- tive supervision of Mr. Alexander Trepelkov, Director, FfDO, and Mr. Márcio Verdi, Executive Secretary, CIAT. Within the FfDO, the work was carried out by Ms. Dominika Halka, Chief of Unit, and Mr. Harry Tonino, Economic Affairs Officer, Capacity Development Unit. Within CIAT, the work was managed by Mr. Socorro Velázquez, Planning and Institutional Development Director, and Mr. Miguel Pecho, Tax Studies and Research Director. A Steering Committee was set up to provide technical guidance and monitor activities throughout the project, which com- prised the above-mentioned United Nations and CIAT officials, as well as Mr. Ricardo Martner, Fiscal Area Coordinator, Economic Development Division, Economic Commission for Latin America and the Caribbean (ECLAC), and Mr. Jürgen Gafke, Senior Finance Officer, Capacity Development Office, Department of Economic and Social Affairs, United Nations. The project was implemented with the support of three regional consultants, namely: Mr. Byron Vásconez (Leader), Mr. Eduardo Ibarra and Mr. Marcel Ramírez La Torre.
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