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

74 Doing Business 2009Tax paymentsThe tax payments indicator reflects thetotal number of taxes and contributionspaid, the method of payment, the frequencyof payment and the number ofagencies involved for this standardizedcase during the second year of operation.It includes consumption taxes paid bythe company, such as sales tax or valueadded tax. These taxes are traditionallycollected from the consumer on behalfof the tax agencies. Although they donot affect the income statements of thecompany, they add to the administrativeburden of complying with the tax systemand so are included in the tax paymentsmeasure.The number of payments takes intoaccount electronic filing. Where full electronicfiling and payment is allowed andit is used by the majority of medium-sizebusinesses, the tax is counted as paidonce a year even if payments are morefrequent. For taxes paid through thirdparties, such as tax on interest withheldat source by a financial institution or fueltax paid by the fuel distributor, only onepayment is included even if paymentsare more frequent. These are taxes withheldor paid at source where no filing isrequired of the company.Where 2 or more taxes or contributionsare filed for and paid jointly usingthe same form, each of these joint paymentsis counted once. For example, ifmandatory health insurance contributionsand mandatory pension contributionsare filed for and paid together,only one of these contributions would beincluded in the number of payments.TimeTime is recorded in hours per year. Theindicator measures the time taken toprepare, file and pay 3 major types oftaxes and contributions: the corporateincome tax, value added or sales tax andlabor taxes, including payroll taxes andsocial contributions. Preparation timeincludes the time to collect all informationnecessary to compute the tax payable.If separate accounting books mustbe kept for tax purposes—or separatecalculations made—the time associatedwith these processes is included. Thisextra time is included only if the regularaccounting work is not enough to fulfillthe tax accounting requirements. Filingtime includes the time to complete allnecessary tax return forms and makeall necessary calculations. Payment timeconsiders the hours needed to make thepayment online or at the tax authorities.Where taxes and contributions are paidin person, the time includes delays whilewaiting.Total tax rateThe total tax rate measures the amountof taxes and mandatory contributionsborne by the business in the second yearof operation, expressed as a share ofcommercial profit. Doing Business 2009reports the total tax rate for fiscal 2007.The total amount of taxes borne is thesum of all the different taxes and contributionspayable after accounting forallowable deductions and exemptions.The taxes withheld (such as personalincome tax) or collected by the companyand remitted to the tax authorities (suchas value added tax, sales tax or goodsand service tax) but not borne by thecompany are excluded. The taxes includedcan be divided into 5 categories:profit or corporate income tax, socialcontributions and labor taxes paid by theemployer (in respect of which all mandatorycontributions are included, even ifpaid to a private entity such as a requitedpension fund), property taxes, turnovertaxes and other small taxes (such as municipalfees and vehicle and fuel taxes).The total tax rate is designed to providea comprehensive measure of the costof all the taxes a business bears. It differsfrom the statutory tax rate, which merelyprovides the factor to be applied to thetax base. In computing the total tax rate,the actual tax payable is divided by commercialprofit. Data for Sweden illustratethis (table 12.9).Commercial profit is essentially netprofit before all taxes borne. It differsfrom the conventional profit before tax,reported in financial statements. In computingprofit before tax, many of thetaxes borne by a firm are deductible.In computing commercial profit, thesetaxes are not deductible. Commercialprofit therefore presents a clear pictureof the actual profit of a business beforeany of the taxes it bears in the course ofthe fiscal year.Commercial profit is computed assales minus cost of goods sold, minusgross salaries, minus administrative expenses,minus other expenses, minusprovisions, plus capital gains (from theproperty sale) minus interest expense,plus interest income and minus com-Table 12.9Computing the total tax rate for SwedenStatutory rate(r)Statutory tax base(b)Actual tax payable(a)a = r x bCommercial profit 1(c)Type of tax (tax base) SKr SKr SKrTotal tax rate(t)t = a/cCorporate income tax (taxable income) 28% 10,352,253 2,898,631 17,619,223 16.50%Real estate tax (land and buildings) 0.38% 26,103,545 97,888 17,619,223 0.60%Payroll tax (taxable wages) 32.28% 19,880,222 6,417,336 17,619,223 36.40%Fuel tax (fuel price) SKr 3.665 per liter 53,505 liters 196,095 17,619,223 1.10%TOTAL 9,609,950 54.50%1. Profit before all taxes borne.Source: Doing Business database.(c) The International Bank for Reconstruction and Development / The World Bank