Cover7x10.indd 1 Simplification Tax for Handbook A INVESTMENT CLIMATE ADVISORY SERVICES ADVISORY CLIMATE INVESTMENT Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Investment Climate Advisory Services I World BankGroup Investment ClimateAdvisory ServicesIWorld Funded through FIAS,themulti-donorinvestment climateadvisoryservice A Handbook for Tax Tax for A Handbook Simplification 11/17/09 4:39:22 PM A Handbook for Tax Simplification Investment Climate Advisory Services of the World Bank Group Funded through FIAS, the multi-donor investment climate advisory service FIAS-HTS_00i-xii_fm.indd 1 11/18/09 11:41:10 AM ©2009 The World Bank Group 1818 H Street, NW, Washington D.C., 20433 All rights reserved Manufactured in the United States of America First Printing: November 2009 This information, while based on sources that the World Bank Group considers to be reliable, is not guaranteed as to accuracy and does not purport to be complete. The findings, interpretations, and conclusions expressed in this work are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments of the countries which they represent. The information in this work is not intended to serve as legal advice. The World Bank Group does not guarantee the accuracy of the data included in this work and accepts no responsibility for any consequences of the use of such data. The denominations and geographical names in this publication are used solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the International Finance Corporation, the World Bank, or other affiliates concerning the legal status of any country, territory, city, area, or its authorities, or concerning the delimitation of its boundaries or national affiliation. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; online at: www.copyright.com. About the Investment Climate Advisory Services of the World Bank Group The Investment Climate Advisory Services of the World Bank Group helps governments implement reforms to improve their business environment, and encourage and retain investment, thus fostering competitive markets, growth and job creation. Funding is provided by the World Bank Group (IFC, MIGA, and the World Bank) and over fifteen donor partners working through the multi-donor FIAS platform. FIAS-HTS_00i-xii_fm.indd 2 11/18/09 11:41:10 AM Acknowledgments The publication of this handbook was made possible due to the generous support of the UK Department for International Development (DFID) under the partnership program between DFID and the Investment Climate Advisory Services of the World Bank Group. The primary author of this handbook is Sebastian S. James from the Investment Climate Department of the World Bank Group. The book was co-authored by Arindam Das-Gupta, Max Everest-Phillips, and François Vaillancourt (University of Montreal). This project was supervised by Richard Stern, Global Product Specialist (Business Taxation), Investment Climate Department. The final version of the hand- book benefited from the contributions of Kobina Daniel, Geoffrey Walton, Jacqueline Coolidge, Laurent Corthay, Komal Mohindra, Jan Loeprick, Rajul Awasthi, Aminur Rahman, Stefan Van Parys, Umar Shavurov, and Shaela Rahman from the World Bank Group; Geerten Michielse, Professor in Tax Law at the Utrecht School of Law and Husam Al-Sharjabi (Apex Consulting). iii FIAS-HTS_00i-xii_fm.indd 3 11/17/09 4:52:15 PM List of Abbreviations AETR average effective tax rate AFC Alliance for Change ATIS automated tax information system BIR Board of Inland Revenue BPR business process reengineering CARD Computer-aided Administration of the Registration Department CATA Commonwealth Association of Tax Administrators CCAs Compliance Cost Assessments CCRs Compliance Cost Reviews CDs compact discs CEMAC Communaute Economique et Monetaire de l’Afrique Centrale CFA Franc des Colonies CIC Corporate Investment Committee CIT corporate income tax CMI Census of Manufacturing Industries CRA Canada Revenue Agency DAC Development Assistance Committee DBI doing business indicator DFID Department for International Development ECLS electronic letter creation system ECR electronic cash register EPZs export processing zones EU European Union FAD Fiscal Affairs Department FDI foreign direct investment FIAS Foreign Investment Advisory Service FTZs free trade zones iv FIAS-HTS_00i-xii_fm.indd 4 11/17/09 4:52:16 PM List of Abbreviations v GDP gross domestic product GST goods and services tax HMRC HM Revenue and Customs HSN harmonized system of nomenclature HST harmonized sales tax (Canada) ICSs investment climate surveys ID identification IFC International Finance Corporation IFS Institute for Fiscal Studies IGR general revenue tax IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions IRS Internal Revenue Service IT information technology ITAA Income Tax Assessment Act ITC investment tax credit ITD International Tax Dialogue ITD income tax department LTUs large taxpayer units MDAs ministries, departments, and agencies MECF marginal efficiency cost of funds MENA Middle East and North Africa METR marginal effective tax rate MISs management information systems MoE Ministry of Education MoF Ministry of Finance MSE micro and small enterprise MTI Ministry of Trade and Industry NRA National Revenue Authority NTA National Tax Association OECD Organisation for Economic Co-operation and Development PAN permanent account number PAYE pay-as-you-earn PPS prescribed payment system PSI preshipment inspection PWC PricewaterhouseCoopers FIAS-HTS_00i-xii_fm.indd 5 11/17/09 4:52:16 PM vi A Handbook for Tax Simplification R&D research and development RCE relative cost effectiveness ROI return on investment SADC Southern African Development Community SAIs Supreme Audit Institutions SARS South African Revenue Service SAT Guatemala Tax Administration SCM standard cost model SEC Securities and Exchange Commission SEZs special economic zones SME small and medium enterprise SMEDA small and medium enterprise development authority (Pakistan) TA tax administration TAA Tax Administration Act TAS Taxpayer Advocate Service TCMP Taxpayer Compliance Monitoring Program TD tax determination TI Transparency International TIC Tanzania Investment Centre TIN taxpayer identification number UMEOA West African Economic and Monetary Union URA Uganda Revenue Authority VAT value-added tax VFM value-for-money WAEMU West African Economic and Monetary Union WBES World Business Environment Survey WWW World Wide Web FIAS-HTS_00i-xii_fm.indd 6 11/17/09 4:52:17 PM Table of Contents Reading Guide ...............................................ix Introduction.................................................xi Chapter 1: Why Simplify Taxes?...................................1 Chapter 2: The Political Economy of Tax Simplification . 11 Chapter 3: Measuring the Burden of Business Taxes . 29 Chapter 4: Simplifying Tax Policy . 61 Chapter 5: Tax Administration Simplification (Reorienting the Tax Authority)...................................75 Chapter 6: Tax Administration Simplification (Ensuring Compliance and Accountability) . .111 Chapter 7: Fiscal Incentives and Investments .......................145 Chapter 8: Corruption and Tax Simplification . 171 Chapter 9: Simplifying Subnational Taxes . .191 Chapter 10: Taxpayer Education and Assistance.....................213 References .................................................225 vii FIAS-HTS_00i-xii_fm.indd 7 11/17/09 4:52:17 PM Reading Guide Topic Chapter What are popular tools for measuring and evaluating tax reforms ? 3 How do we measure the tax-compliance costs borne by businesses? 3 How are cost-of-compliance surveys conducted? 3 How are Doing Business surveys useful for measuring the business tax burden? 3 How do we calculate effective tax rates to measure the tax burden on businesses? 3 Why do we need an average effective tax rate (AETR) and in what cases is it useful? 3 What is METR and how is it useful to measure the tax burden on investment? 3 What is the role of Tax and Book Accounting in tax simplification? 4 How can we deal with the issue of proliferation of taxes? 4 How do we go about eliminating, consolidating, and retaining taxes and how does the tax guillotine help? 4 How do we tackle the issue of complicated tax codes and how does simplified tax law drafting help? 4 Why do regulations sometimes require taxes and what happens when they are overused? 4 How do we deal with the proliferation of sub-national taxes? 4, 9 How could we use process maps to simplify tax procedures? 5 What are the simplified means of filing tax returns? 5 How can we use information technology to simplify taxes? 5 What are the simplified options to pay taxes? 5 How do we simplify the tax administration architecture and improve their effectiveness? 5 viii FIAS-HTS_00i-xii_fm.indd 8 11/17/09 4:52:18 PM Reading