SME taxation International experience

Transcription

1 SME taxation International experience Honiara, September 2013

2 Small Business Taxation is burdensome for authorities Cost of administering small taxpayers can outweigh short term revenues raised Small taxpayers neglected or unproductively harassed Example of Vietnam is typical: Collection cost in percentage of tax revenue

3 And tax compliance costs are particularly significant for SMEs Tax complian nce costs as % of Turnover South Africa Ukraine Uzbekistan Armenia India (Bihar) Kenya Georgia Turnover (USD '000) Source: Tax Compliance Cost Surveys in Selected Countries

4 When the cost of formalization is too high Businesses stay out of the formal economy and can get a free-ride However: more risks, fewer opportunities (esp. access to finance) Serious limitations to business growth Spurs vicious cycle of squeezing the few compliers => ticket price Government is not reaching revenue potential 4

5 Alternatives to the standard regime Standard assessments Determine a standard payment for different business types Have been used in Africa, found to be inefficient (too low, rarely adjusted, regressive) Forfait Measure business inputs and assess tax based on regional and business sector characteristics Very administratively intensive. Presumptive system Assess tax based on indicators that are easy to measure and can approximate taxable income Withholding tax system Final withholding taxes avoid the need to assess individual businesses Easy to collect from large business, but not where SMEs are receiving payments from many customers or other SMEs 5

6 Some design issues 1. Simplification of gen. regime - Simplification of tax forms, filing and payment process, alignment of payments - Reduced direct tax rates - VAT simplification for SMEs 2. Special regimes a. Presumptive tax to replace income tax (+VAT) b. Single (presumptive) tax replacing all other taxes What is small? No universal definition How should the system be designed to avoid both over- and under-taxation of SMEs? What kind of safeguards are required to avoid abuse of system by larger businesses? How to align the SME regime with the standard tax regime? System must be perceived as fair and transparent How to provide incentives for keeping proper books and records? 1. Turnover based 2. 2 Indicator based 3. Combined turnover and indicator based tax 6

7 Presumptive systems are widely used outside the OECD: Region # Countries analyzed Countries operating presumptive regimes European Union 21 8 Transition countries The Americas Africa Situation in Asia: Patent system Indicator based tax Refined indicator Turnover tax system Nepal Cambodia Lao PDR Bangladesh Cambodia India Indonesia Pakistan (retail trade) Philippines Turnover tax with net elements Vietnam Standard regime, reduced rates Thailand Malaysia Standard regime Australia China Japan Korea New Zealand 7

8 Presumptive systems are heavily used in non- OECD countries Transition countries: presumptive systems, primarily based on turnover, in almost all countries Latin America: primarily turnover / gross income based regimes for micro and small businesses (in some countries limited to micro businesses; e.g. Chile) Africa: primarily turnover based presumptive systems for MSEs below the VAT threshold 8

9 Examples of turnover tax liabilities under presumptive regimes for small firms Tax liability under a turnover/gross income-based presumptive regime Kazakhstan: 3%-7% (individual) or 4%-9% (legal entities) of gross income Kenya: 3% of turnover Mexico: 2% of gross revenues Russia: 6% of turnover (single tax replacing all other taxes) South Africa: progressive scale from 1% of turnover for small SMEs to 7% of turnover for turnover in the highest bracket Tanzania: progressive scale from 1.1% of turnover for small SMEs to 3.3% of turnover in the highest bracket Zambia: 3% of turnover

10 Whatever the simplified system, a strong SME system needs two equal sides Simplicity of compliance Easy registration Easy ypayment Simple reporting Streamlined dispute resolution Information and outreach Enforcement of compliance Understanding the population by collecting information: Directly from taxpayers Indirectly from other sources Deciding who is most at risk of not complying Targeting audit at the highest risk taxpayers Applying effective penalties A balance is needed neither side will succeed on its own 10

11 Simplify entry and reporting Make it as convenient as possible for taxpayers to register Tax registration simultaneous with business registration eg, New Zealand business registration process On-line tax registration Avoid need for lining up and excessive bureaucracy Bring tax officials to business mobile registration office Consider simple incentives for registration access to services, finance or other benefits Make reporting simple and uncomplicated Self assessment Match forms to the taxpayer s capacity Ask for information that taxpayers will have easy access to Allow electronic lodgement 11

12 Make life easy for compliant taxpayers Make it easy for taxpayers to make payments Self-assessment, so taxpayers determine their own liability Avoid need to visit a tax office and line up ATM payments are an important step forward Consider mobile phone tax payments Mobile phone systems can also provide reminders of key dates Streamline dispute resolution Avoid use of the court system for small taxpayers Use alternative dispute resolution small claims tribunal, arbitration Streamline debt recovery processes 12

13 Case study: Paying taxes through mobile phone in Tanzania NMB introduce mobile phone tax payment system in Nov 2011 simplify payment reduce the need for taxpayers to queue at taxpaying points. free service to all NMB mobile customers reduce the risk of carrying money to banks and reduce cost of doing business by serving time that would be spent in banks. improved tax collection TRA bill Payment Dial *150*66# to Start NMB Mobile service Enter your secret PIN then ok to accept Select (5)for Bill payments from NMB mobile menu Select (4)for TRA Select service number you want to pay eg select (1) for Property Tax Please Enter TRA bill number Enter the amount of the bill Confirm the transaction by ypressing 0 and send

14 Increasing compliance among SMEs tailoring the approach Have decided not to comply Use the full force of the law Don t want to comply but will if we pay attention Deter by detection Tries to but don t always succeed Assist to comply Willing to do the right thing Strategies should aim to create pressure downwards Attitude to compliance Compliance strategies t 14

15 Focus compliance enforcement on those reluctant or lazy When Chile surveyed taxpayers attitude towards tax compliance they found that: Only a small proportion deliberately l do not comply A large proportion are lazy need help and encouragement and threat of enforcement About a quarter will reliably comply 15

16 How to target those who are reluctant to comply? Taxpayers much more likely to comply when they know they re being watched. Important that MSEs understand that there is a risk of being audited! But tax authority audit resources are scare So develop an efficient, well targeted compliance strategy. Collect information to assist audit selection Make audit more effective by using 3 rd party information 16

17 Reluctant compliers comply when they know there s a threat of detection IRS: Tax Year 2001 Individual Income Tax Underreporting Gap : Misreporting of Income and Offsets by Visibility Categories 17

18 An SME audit system has three parts Collecting taxpayer characteristics for risk profiling Information collected from taxpayer returns Direct information on the taxpayer s income/turnover Indirect information that can help verify the taxpayer s declaration of income Collecting third party information for use in audit Cross-matched data from banks, government agencies, business registries Information o from other taxpayers suppliers, s, customers s Cash register information Designing a risk-based audit system Using all information to create benchmarks for typical taxpayers Drawing on benchmarks to create audit criteria Concentrating audit on taxpayers most at risk of non-compliance 18

19 Risk Profiling To detect non-compliance, we need to understand the taxpayer population Need to build a picture of a typical taxpayer in each sector Collect information from taxpayers that can help verify turnover Using this benchmark, can identify outliers those who need further investigation What type of information? Easy to verify and record. Hard to falsify. Shows a sufficient and stable correlation to actual income. For SMEs in a presumptive system, for example: Floor space Electricity consumption Number of employees 19

20 Collecting and using indicators Argentina Monotributo Gross turnover Floor space Electricity consumption over past 12 months Argentian simplified business tax provides a simple tax for small businesses Taxpayers assigned to different rate classes via basic characteristics Turnover Floor space Electricity consumption Rent Simple to comply with Difficult to falsify Unit price for sales Rental cost of business premises 20

21 Conclusions on indicators for risk profiling Simple indicators for key SME sectors are important for profiling simplified system taxpayers Include them in the SME tax return sacrifice some additional compliance costs in order to gain essential information Analyse the information to create an SME profile Use this information to pick out unusual taxpayers for more attention. 21

22 Risk-based audit selection RBA allows audit resources to be targeted t where revenue most at risk Concentrates audit on those most at risk of non-compliance Refine SME risk profile by assigning weights to each risk criterion Develop software that will assess which taxpayers are highest risk and assign them to audit Refine criteria and weights on the basis of audit results 22

23 Many different criteria can be used as risk- based audit criteria 23

24 Conclusions risk-based audit Begin identifying risk criteria for small business taxpayers in each sector. Develop simple software for audit selection Train auditors on risk-based audit approaches Set up a pilot for a specific sector or region Assess audit results and refine criteria 24

25 Third party information Information from independent sources can be used to verify taxpayer returns Information can come from many sources: Banks and other financial institutions Government agencies, eg business registration authority Other taxpayers, eg through requiring reporting on certain transactions Cash registers can be more reliable than taxpayer s accounts Key cash economy sectors often targeted eg construction Information needs to be cross-matched and non-compliant SMEs identified Requires strong IT capacity and good taxpayer ID system Legal rights to collect information need to be place Banking secrecy Reporting requirements from other taxpayers Easy means of reporting to the tax authority are required 25

26 How other countries make use of 3 rd party data UK: HMRC cross-matches extensive information from public and private sources to verify income Canada: All government construction contracts and goods and services procurement reported to Revenue Canada Australia: Bank account,,government agency etc information is available to ATO Chile: On-line accounting system for business including invoice cross-matching (requires complex IT) Philippines, Sweden: Require use of licensed cash registers to provide verifiable information about transactions by a business. Philippines: simple system using cash register receipts Sweden: complex system using electronic cash register system reporting direct to tax authority via the internet 26

27 Conclusions Reducing compliance costs is important for small businesses in the tax net Simplified systems can promote voluntary compliance Presumptive systems are used in many countries but involve trade-offs between simplicity and equity, accuracy of assessment Simplified systems also open scope for evasion A range of compliance monitoring i also required Good information on the sector is important for compliance enforcement 27