Impact of Vat

7/29/2019 Impact of Vat

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The impact oVAT complianceon business


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The impact o VAT compliance on business

PricewaterhouseCooper1

Value Added Tax (VAT) is now the most common orm oconsumption tax system used around the world. This analysiscovers VAT1 and equivalent sales tax systems implemented in145 dierent countries.

Although the principles o the tax are broadly the sameeverywhere, the rules can be enacted and implementeddierently in dierent countries so that the compliance burdenon business varies considerably.

This study has been undertaken to look at the dierences inthe time required or VAT compliance in dierent countries,and to demonstrate how the way in which taxes areimplemented using dierent administrative practices can havea signicant impact on the compliance cost or business.

This study uses data collected by the World Bank Group onthe ease o paying taxes in dierent economies around theworld as part o the Paying Taxes 2010 project2. It also usessupplementary data collected by PricewaterhouseCoopersLLP (PwC) specically or this study rom a representativesample o the countries which have a VAT system.

The purpose o the Paying Taxes study is to provide data to

help inorm tax policy and tax reorm. The Paying Taxes studyresults enable governments to compare their tax systems ona like-or-like basis against relevant peer groups. The wealtho data available on VAT in the study enables a comparison onhow this tax is implemented and administered.

Co - authors:

Susan SymonsLeader Total Tax Contribution

+44(0)20 7804 6744

Neville HowlettDirector External Relations, Tax

+44(0)20 7212 7964

Katia Ramirez AlcantaraTotal Tax Contribution

+44(0)20 7804 4585

Introduction

1 In this report VAT is used to reer to Value Added Tax, Goods and Services Tax, and equivalent Sales tax systems.2 Paying Taxes 2010- the global picture is a joint publication rom the World Bank Group/ International Finance Corporation and

PricewaterhouseCoopers LLP see http://www.pwc.com/gx/en/paying-taxes


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The impact o VAT compliance on bus

PricewaterhouseCoopers

VAT is the predominant orm o consumption tax system usedaround the world.

On average it takes the case study company longer to complywith VAT around the world, than to comply with corporateincome tax.

The time needed to comply with VAT varies considerablyaround the world and even between neighbouring countries.

It generally takes less time to comply with VAT in thedeveloped world than in developing countries.

VAT compliance tends to be more time-consuming incountries where indirect taxes are not administered by thesame tax authority that deals with corporate income tax.

Administrative procedures vary rom country to countrythese have a signicant impact on how long it takes to with VAT.

It takes less time to comply, on average, in countries wbusiness uses online ling and payment or VAT.

The requency with which VAT returns are required (moquarterly), and the amount o inormation requested ha

signicant impact on the time it takes to comply.

Compliance takes longer where extra documentation hbe submitted with the return.

There is a correlation between the VAT compliance burand the time delay in receiving a VAT reund. Typically, wit takes longer to receive a reund, it takes longer to co

Results in summary


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Paying Taxes 2010 the global picture

This study uses data collected by the World Bank Grouprom contributors around the world or the Paying Taxes 2010project.

Paying Taxes 2010 measures the ease o paying taxes incalendar year 2008 across 183 economies. It uses three

indicators which cover both the cost o taxes (the Total TaxRate) and the compliance burden (the time needed to complyand the number o tax payments). The data collected orthe Paying Taxes project is extensive, and includes the timerequired or VAT compliance activities.

The case study company

The Paying Taxes project uses a case study company with astandard act pattern. The case study company is a limitedliability company engaged in a taxable activity or VAT. VATis not thereore a signicant cost to the company, but is acompliance burden. The company is domestic and does notparticipate in any oreign trade (no imports or exports). A highlevel description o the case study company is provided in

Figure 1.

The use o a case study company with a standard actpattern does o course bring limitations. For example, thesize o the company (60 employees) may be consideredlarge in some countries, modest in others. However, it doesenable the collection and comparison o data rom a largenumber o countries on a like-or-like basis, and the potentialidentication o best practices.

Methodology

A limited liability taxable company

Operates in the countrys most populous city

Is 100% domestically-owned and has 5 owners

Is in its second year o operation

Purchased all the assets shown in its balance sheet andhired all its workers 2 years ago.

Has 60 employees 4 managers, 8 assistants and 48workers, all nationals

Produces fower pots and sells them at retail

Does not participate in any oreign trade (no importsor exports)

Has a turnover o 1,050 times income per capita

List shows a high level summary o acts and assumptions or the

Paying Taxes case study company.

See Paying Taxes 2010 or a complete set.

Source: Paying Taxes 2010

Figure 1

The Paying Taxes case study company


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What compliance activities are measured?

In the Paying Taxes project, expert local contributors in eachcountry are asked to estimate the time that will be neededby the case study company to prepare, le, and pay its VAT,based on a dened list o compliance activities, as set out inFigure 2.

Inevitably, as this is an estimate, there is a degree o

judgement involved. However considerable eort by theWorld Bank Group goes into checking and conrming that themethods used are consistent, including verication by severalcontributors in an economy.

VAT administration

This study also uses data on tax administration which iscollected as part o the Paying Taxes project. This is not usedin calculations or the ease o paying taxes indicators, but isused to provide insight to the results. In addition, PwC hascollected supplementary data, specically or this study, roma sample group o countries3 around the world who havea VAT.

This group o 30 countries are a 20 percent sample o thoseincluded in Paying Taxes 2010 who have a VAT, and havebeen selected to be representative across the range o resultsor the time required or VAT compliance activities.

3 These countries are: Australia, Bolivia, Chile, China, Colombia, Cote dIvoire, Czech Republic, El Salvador, Ghana, India, Indonesia, IreJamaica, Kazakhstan, Kenya, Latvia, Luxembourg, Mauritius, Mexico, Namibia, Peru, Philippines, Romania, Singapore, South Arica, TaThailand, Trinidad and Tobago, the United Kingdom and Zambia.

Preparation activities

Data gathering rom internal sources

Additional analysis o accounting inormation

Calculation o tax liability including data inputting

Preparation and maintenance o mandatory tax recori required

Complying with changes in tax rates and rules (i relein the year)

Filing activities

Completion o tax return orms, including any additiodocumentation required

Submission o orms to tax authority, which may incltime or electronic ling, waiting time at the tax authooce, etc.

Payment activities

Calculations o tax payments required includingextraction o data rom accounting records, and

maintenance o accounting systems

Analysis o orecast data and associated calculationsadvance payments are required

Making tax payments, whether online or at the taxauthority oce, which may include time or waiting inand travel

Table shows the compliance activities or VAT measured in the Pa

Taxes project.


Figure 2

VAT compliance activities measured in Paying Taxes


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In 2008, 145 o the 183 economies measured in Paying Taxes2010 used a VAT system representing nearly 80 percent othe population. Twenty o the 183 economies used a dierentconsumption tax system in 2008, and 18 economies had noconsumption tax which applied to the case study company.

Figure 3 shows the countries with a VAT, by regional oreconomic grouping. All 26 EU countries included in PayingTaxes (Malta is not included) have VAT, and o the OECD

countries, only the US has a dierent type o sales tax.

VAT is also used in the developing world. Around 80 percentor more o the economies in Arica and Latin American andthe Caribbean that were included in Paying Taxes have a VAT.

In the Middle East, only six o the 15 economies in PayingTaxes had a VAT system in 2008. One had another orm oconsumption tax and eight had no consumption tax systemsrelevant to the case study company.

VAT is the predominant orm o consumption

tax around the world

Figure 3

VAT is the predominant orm o consumption tax around the world

Chart shows the number o economies with/without a VAT system using selected regional and economic groupings.Source: Paying Taxes 2010, PwC analysis

VAT/GST Economies

Non VAT/GST Economies

Middle East Central Asia and

Eastern Europe

EU OECD Latin America and

the Caribbean

Asia Pacic Arica

60

9

1 512

11

50

40

30

20

10

0

Numbero

feconomies

6 3119 2726 22 40


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On average, in the 145 countries included in this study, ittakes the case study company 125 hours to comply withVAT. Two thirds o this time (82 hours) relates to preparationactivities, 19 percent o the time (24 hours) is spent carryingout ling activities, and the remaining 15 percent (19 hours) onpayment activities.

Figure 4 compares the time needed or compliance activitieson corporate income tax and VAT. The average time taken

or the same case study company to comply with corporateincome tax, as measured across all 183 economies in PayingTaxes 2010, is just 74 hours, which is 40 percent less timethan needed or VAT.

These are average results or all o the countries covered.The amount o time taken to comply with VAT varies greatlybetween the dierent countries.

On average, it takes longer to comply with

VAT than it takes to comply with corporateincome tax.

Figure 4

On average, it takes the company longer to comply with VATwith corporate income tax

Chart shows the global average time taken to comply with CIT and VAT

measured in Paying Taxes 2010.

Source: Paying Taxes 2010, PwC analysis

Corporate income tax VAT

140

12

120

100

80

60

40

20

0

Prepare

File

Pay

Averagetimetocomply

49

13

19

82

24

74

125


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The time needed to comply with VAT varies signicantlyaround the world (see Figure 5). It ranges rom eight hoursin Switzerland and 22 hours in Finland to 480 in Bolivia and1,374 in Brazil. The majority o countries all within a rangeo 25 to 200 hours. However, in seven countries it takes lessthan 25 hours and in a urther seven, over 300 hours.

VAT systems are used in countries across all levels odevelopment. However, in high income countries, the

time taken to comply with VAT tends to be lower. Thissuggests that the more developed countries may have morestreamlined VAT procedures. Figure 6 shows that 63 percento countries taking 25 hours or less, and 56 percent o those

taking 50 hours or less, are high income countries. In contrast65 percent o countries taking more than 150 hours, and 72percent o countries taking over 300 hours are either lowermiddle or low income countries4.

The time taken to comply varies considerably by geographicregion. It takes the least time on average (73 hours) in theEU countries and the most time in Latin America and theCaribbean (192 hours) see Figure 7.

The time needed to comply with VAT varies

considerably around the world and evenbetween neighbouring countries

4 Income levels rom the World Bank/IFC Doing Business Project.

Figure 5

The time needed to comply varies considerably around the world

35

30

25

20

15

10

5

0

Numberofeconomies

0-25

351-375

51-75

401-425

101-125

451-475

151-175

>501

201-225

251-275

301-325

26-50

376-400

76-100

426-450

126-150

476-500

176-200

226-250

276-300

326-350

Hours to comply

Chart shows the distribution o results or time taken to comply with

VAT in Paying Taxes 2010.


Hours to comply by banding

Figure 6

In high income economies it tends to take less time to comply

Chart shows time needed to comply with VAT by banding across the income

level rom the World Bank Doing Business project.

Source: Doing Business 2010, Paying Taxes 2010, PwC analysis

0-25 51-15026-50 151-300 >300

100%

24%

9%

28%23% 29%90%

80%

70%

60%

50%

20%

40%

10%

30%

0%

High income

Upper middle income

Lower middle income

Low income

%o

feconomiesbyincomelevel

63% 56% 18% 3%

13%

19%

27%42%

43%

16%

27%

32%28%


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The time needed can also vary between geographicneighbours. An interesting example o this is the European

Union (Figure 8), particularly given that there is a commonlegal ramework or VAT systems. However, there is still a widerange o results rom 22 hours in Finland to 288 in Bulgaria,refecting dierent administrative practices.

Figure 7

The time needed varies by region

Chart shows the average time needed to comply with VAT or economies in

each economic/geographic region and the world average or all economies with

a VAT.


EU Middle

East

Asia

Pacic

Global

Average

Central

Asia and

Eastern

Europe

Arica Latin

America

and the

Caribbean

250

125 130 135 192

200

150

100

50

0Averagehourstocomply

73 83 123

Figure 8

The time taken can also vary between geographic neighbou

Chart shows the time to comply with VAT or economies in the EU. Not

is not included in the Paying Taxes project.


350

300

250

200

150

100

50

0

Hour

stocomply

Finland

Portugal

Austria

France

Latvia

Ireland

Spain

Italy

Belgium

Cyprus

Germany

Netherlands

Luxembourg

Slovenia

Estonia

Greece

UnitedKingdom

Hungary

Sweden

Denmark

Lithuania

Romania

EU Economies

EU Average (73 hours)


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It takes less time on average when indirect taxes areadministered by the same tax authority

The Paying Taxes project shows that, on average, it takes lesstime to comply in countries where VAT is administered by thesame tax authority as corporate income tax. Figure 9 showsthat the average time taken to comply is 12 percent (16 hours)lower where the same tax authority administers both indirecttaxes and corporate income taxes.

It takes less time on average in countries where businessuses online fling and payment

In countries where electronic ling and payment is availableand is used, the average time taken to comply with VAT issignicantly lower. From our additional analysis o a sampleo 30 countries, the average time taken to comply with VAT is

41 hours lower where online ling and payment is used (seeFigure 10).

The requency at which VAT returns are required impacts

the time to comply

As might be expected, the number and requency o returnsalso impacts on the time taken to comply. In countries wheremonthly VAT returns are required, the time taken to comply ishigher (on average 125 hours) compared with countries wherereturns are required to be made bi-monthly or quarterly (onaverage 81 hours) (see Figure 11).

The more inormation is required in the VAT return, themore time is needed

For the 30 economies in the sample, the average time neededto comply with VAT, per return, is 12 hours. However, this alsovaries by country. For example, it takes ve hours per returnin Ireland; 18 in China; and 25 in Kenya.

Clearly, the more extensive the tax return, the longer it takesto comply. An analysis o the sample group shows that incountries where the tax return has more than 20 boxes to be

Administrative procedures vary and can

signicantly impact the compliance burden

Figure 9

It takes less time to comply on average when indirect taxes areadministered by the same tax authority as corporate income tax

Chart compares the average time to comply with all consumption taxes or all

economies in Paying Taxes 2010 where these are administered by the same or

separate tax authorities.

Source: Paying Taxes 2010, PwC analysis o non indicator data

Same Dierent

130

125

120

115

110

105Timetocomply

112 128

100

Figure 10

It takes less time on average in countries where business usesonline ling and payment

Chart compares the average time to comply with VAT or economies in the

sample group where business o the size and nature o the case study compan

le and pay VAT online.


Yes

16 economies

No

14 economies

140

130

120

110

100

9095 136

80


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completed, the average compliance time per return is overtwice as much as in countries where the return has less than20 boxes (see Figure 12).

Two countries in the EU provide a good example o theo the length and requency o returns on the complianburden. Figure 13 compares the time taken to comply iCzech Republic and Ireland. In Ireland, six returns are reach year, and each return has our boxes to be compIn the Czech Republic, monthly returns are required anhas 67 boxes to be completed. The time to comply peris three times longer in the Czech Republic than in Irela

The requirement to submit invoices or other documwith the return adds to compliance time.

Just under hal o the countries in the sample group reqbusinesses to submit invoices or additional documentawith the VAT return. The average time taken to comply these countries is double that o countries where thereis no requirement (158 hours compared with 76 hours)(see Figure 14).

Figure 11

The requency at which VAT returns are required impacts the timeto comply

Chart shows the average time needed to comply in economies in the sample

group depending on whether VAT returns are required to be made monthly, bi-

monthly or quarterly.


Monthly

23 economies

Bi-monthly/Quarterly

7 economies

140

120

100

80

60

40

125 8120

0

Figure 12

The more extensive/long the tax returns, the more time is needed

Chart shows the average time to comply per return or economies in the

sample, depending on the number o boxes in the return which need to

be completed.


0-20 boxes

12 economies

Over 20 boxes

16 economies

14

12

10

8

6

4

6 132

0

Figure 13

Comparison o hours to comply with VAT in the Czech Repuband Ireland

Chart shows the hours to comply with VAT in Czech Republic and Irela


Ireland

Total Hours

Czech Republic

180

160

140

120

100

80

30 178

60

20

40

0


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In Kenya, supporting inormation must be submitted alongwith the monthly return including an analysis o all purchaseinvoices (invoice dates, invoice numbers, supplier names

and registration numbers and the corresponding VATamounts), plus details o any zero-rated supplies (invoicedates, numbers, and the value o the supplies) and whereVAT is withheld (analysis o and including withholding taxcerticates). While ling must be online in Kenya, which cansave time, inputting data into Taxpayer Sotware (TSW) canstill be time-consuming. For our case study company, it takesa total o 300 hours to comply with VAT in Kenya (or 25 perreturn), which is signicantly longer than in other East AricanCommunity countries.

In China the control o VAT invoices is an important aspecto VAT compliance. VAT invoices on purchases have to beauthenticated by the Tax Authority beore they can be used toclaim input VAT. And the case study company has to exportdata on all the VAT invoices issued in the month rom itsinvoicing system and visit the tax oce to input this into theTax Authority system to ensure consistency o inormation.The time needed to comply in China is 216 hours, or 18 hoursper return.

Changes to the rules and regulations can increase

compliance time

Several countries in the sample group reported that extrahours were needed in 2008 to implement changes to the VATrules and regulations. For example, in the United Kingdom,an extra ve hours (or 17%) were needed to implementthe temporary VAT reduction which became eective on1 December 2008 as part o the governments scal stimulus

in response to the recession. A similar amount o extra timewas also needed when the temporary rate came to an end on31 December 2009. In view o the latest changes announcedin the new coalitions budget in June 2010, it is expectedthat additional hours will again be needed when the VAT rateincreases in January 2011.

In some countries business has to comply with more than

one consumption tax

In some countries, business has to comply with morethan one consumption tax, which o course adds to thecompliance burden. In 10 o the economies covered inPaying Taxes 2010, contributors reported that the case studycompany has to comply with more than one consumption taxAs Figure 15 shows, the time to comply is considerably higheon average in those economies.

As an example, in India there are three dierent consumptiontaxes Central sales tax and State VAT, administeredby the State Revenue Department; and CENVAT, by theFederal Revenue.

Brazil is the country where it takes the longest time to complyIt takes our case study company 1,374 hours (or one personull time or two thirds o the year) to comply with the threeconsumption taxes relevant to it which are PIS/COFINSand IPI (Federal taxes) and ICMS (State tax) see Figure 16.The State tax system (ICMS) is very complex and involves

compliance obligations in all o the 26 Brazilian states intowhich sales are made.

Figure 14

The requirement to submit invoices or other documentation withthe return adds to compliance time

Chart compares the average time to comply or economies in the sample group

where there is/is not a requirement to submit invoices or other documentation

with the VAT return.


Yes

14 economies

No

16 economies

180

160

140

120

100

80

158 76

60

20

40

0

Averagetimetocomply


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There is a correlation between the VAT compliance burden

and the time delay in receiving a tax reund

How long it takes or a taxpayer to receive a reund could beseen as a useul test o the eciency o tax authorities. This isalso important or business in view o the impact on corporateliquidity and the time value o money on delayed reundprocessing. In Paying Taxes 2010, contributors in all 183economies were asked the question In a typical situation,how long is it likely to take, in practice, or a company toreceive a VAT or withholding tax reund in your country (timerom claiming a reund to receiving the cash)? Figure 17compares the responses overall to this question with theresponses or selected regional and economic groupings.

In some regional groupings, the typical time was notablyquicker, in others slower. Sixty ve percent o respondentsin the OECD, and 63 percent in the EU, said the typical timetaken is less than three months. In the Arican Union countrieshowever, 19 percent reported a typical time o less than threemonths, and 30 percent indicated more than a year. In LatinAmerica and the Caribbean, the gures were 19 percent orless than three months and 32 percent or more than a year.

There is a correlation between the time to receive a reuand the time to comply. On average it takes twice as loor more, to comply in Arica and in Latin America and tCaribbean, where reunds are slower, than in the OECDEU countries (see Figure 18).

Figure 15

In some countries business has to comply with more than oneconsumption tax

Chart shows the average time to comply with consumption taxes or the 165

economies in Paying Taxes 2010 with a consumption tax comparing countries

with one or more than one consumption tax.


1 tax

155 economies

More than 1 tax

10 economies

250

200

150

100

50

0

114 225Averagetimetocomply Hours per yea

Preparation

Data gathering 24

Additional analysis 33Calculation o tax liability 16

Mandatory tax records/ keeping up to date 8

82

Filing

Completion o tax returns 33

Submission to tax authorities 8

41

Payment

Calculation o tax payments 1

Analysis o orecasts or advance payments 1

Making tax payments 11

13Total 1,37


Figure 16

Hours to comply with consumption taxes in Brazil


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OECD AricaEU Latin America and

the Caribbean

Figure 18Where it takes longer to get a reund it tends to take more time to comply

Chart shows the average time needed to comply

with VAT or economies in selected economic/

geographic regions.


250

200

150

100

50

0

70 13573 192Averagetimetocomply

Figure 17

How long is it likely to take in practice or a company to receive a VAT reund?

Chart shows time taken to receive a VAT or

withholding reund or all economies in Paying

Taxes 2010 and or selected regions.

Source: Paying Taxes 2010, PwC analysisLatin America and

the Caribbean

GlobalArica Union EU OECD

100%

80%

60%

40%

20%

0%

No data supplied

More than 1 year

6 to 12 months

3 to 6 months

1 to 3 months

Less than one month


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VAT is the most common orm o consumption tax systemused around the world.

Although the principles o the tax are broadly thesame everywhere, the compliance burden on businessvaries considerably.

Our study suggests that dierent administrative practices andthe way in which VAT has been implemented are key reasons

or the range in hours that it takes our case study company tocomply with VAT requirements.

More time is spent on compliance activities where VAT isadministered by a separate Tax Authority.

More time is spent where tax administration is weaker(as measured by the time it is likely to take to obtain areund).

The requency o returns and the amount o data whichhas to be submitted have an impact on how long it takesto comply.

Less time is spent where business uses online ling and

payment.

The compliance burden tends to be lower in the developedworld and higher in lower income countries.

Streamlining the compliance burden and reducing the timeneeded by business is important or the ecient working oVAT systems.

PricewaterhouseCoopers LLPSeptember 2010

Summary


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15

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xxx

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Documents

Impact of Vat