DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

FIGURE 8.3Profit taxes lowest, but overall tax burden still high in Eastern Europe & Central AsiaTotal tax rate (% of profit)42 Doing Business 200960Other taxesLabor taxes and contributionsProfit taxes40What are the reform trends?Revenue authorities around the worldare making great efforts to streamlineadministrative processes and modernizepayment systems. In the past 4 years20Doing Business has recorded 126 reformsaimed 0 at reducing tax rates or the time orcost toMiddlecomplyEastwithEasttaxAsialaws.SouthThe & North trend across & Pacificall regions Asia hasAfricabeen to lower the total tax rate paid bySource: Doing Business database.businesses. In 2004 the average total taxrate was 50.6% of commercial profits. By2007 it had fallen to 49.3%. Meanwhile,FIGURE the time 8.4 to comply with tax laws droppedMost by 16 time hours in a Latin year America on average. & CaribbeanAbout 50% of economies have implementedreforms making tax payments it easier to#Number ofpay taxes OECDin the past 4 years.13Amongregions, Eastern Europe and Central AsiaMiddle Easthas had the most reforms, followed23byAfrica East (figure Asia 8.5). South Asia has 25 hadthe fewest.tax revenue by lowering rates and persuadingmore businesses to comply withthe more favorable rules.Look at the Russian Federation’slarge tax cuts in 2001. Corporate tax ratesfell from 25% to 24%, and a simplified taxscheme lowered rates for small business.Yet tax revenue increased—by an annualaverageEasternof 14% overLatinthe nextSub-Saharan3 years. Onestudy Europe shows & that America the new revenue Africa wasCentral & Caribbeandue to greater compliance. 5Source: Doing Business database.OECDhighincomeAsiaGoing electronicIntroducing electronic filing has beena popular and effective way to make iteasier to pay taxes. Businesses can enterfinancial information online and file itwith one click—with no calculations andno interaction with tax officials. Errorshigh income 183 Time (hours per year)can be identified instantly, and returns& North Africa processed216quickly. In Hong Kong (China)businesses file an electronic corporate& Pacific 252tax return and pay corporate income taxSouth Asia 32293annually. Complying with tax requirementstakes just 80 hours a year. SixtyCutting Sub-Saharan ratesAfrica 38312ReducingEastern Europecorporate income tax rates has economies—from Azerbaijan to Colombiaand Lesotho—have made e-filingbeen & Central the Asia46388most popular reform feature(figureLatin America& Caribbean8.6). More than 60 economies possible, 35 and the list is growing. 394have done this. Countries can increase These reforms can ease the adminis-FIGURE 8.2Rankings on paying taxes are based on3 subindicatorsNumber of hoursFirm tax liabilitytrative per year burden to prepare, of paying as taxes. % of profits But before it canfile returnstake time for them to make a all real taxes difference.In Argentina and Tunisia it tookborneand pay taxesalmost 3 years 33.3% before smaller 33.3% firms feltthe impact. The Time reason is Total that small firmstax rateoften lack the software needed for electronicfiling and payments. Moreover,33.3%taxpayers often Payments distrust online systemswhen it comes to dealing with sensitivefinancial Number information. of tax payments per yearBusinesses in Azerbaijan are benefitingfrom an ambitious tax modern-Note: See Data notes for details.ization reform started by the government3 years ago. Electronic paymentand filing systems have been in placesince March 2007. The goal is to have100% online filing. Tax authorities havebeen actively promoting online filingamong businesses paying value addedtax. The efforts have had results: 95% ofthese businesses are using the service,completing more than 200,000 onlinetransactions in the first 3 months of 2008alone—and saving an average 577 hoursa year. Online filing is also available forcorporate income tax.Reforms introducing electronicpayment and filing systems often needto provide public education and training.FIGURE 8.5A third of reforms in Eastern Europe & Central AsiaNumber of reforms easing payment of taxesby Doing Business report yearDB2006 DB2007 DB2008 DB2009Eastern Europe& Central Asia(28 economies)Sub-SaharanAfrica(46 economies)OECDhigh income(24 economies)Latin America& Caribbean(32 economies)Middle East &North Africa(19 economies)East Asia& Pacific(24 economies)71217182244FIGURE 8.6Top 5 reform features in paying taxesReforms including feature since DB2006 (%)Reduced profit tax22%Simplified process of paying taxes19%Revised tax code17%Eliminated taxes14%Reduced labor taxes or contributionsNote: A reform may include several reform features.Source: Doing Business database.71%South Asia(8 economies)6Note: A reform is counted as 1 reform per reforming economy per year.Source: Doing Business database.(c) The International Bank for Reconstruction and Development / The World Bank