- Offering electronic filing and payment
- Keeping it simple: one tax base, one tax
- Adopting self-assessment as an effective tool for tax collection
Offering electronic filing and payment
An electronic system for filing and paying taxes, if implemented well and used by most taxpayers, benefits both tax authorities and firms. For tax authorities, electronic filing lightens the workload and reduces operational costs—such as the costs of processing, storing and handling tax returns. At the same time, it increases tax compliance and saves time. For taxpayers, electronic filing saves time by reducing calculation errors on tax returns and making it easier to prepare, file and pay taxes (1). Both sides benefit from a reduction in potential incidents of corruption, which are more likely to occur with more frequent contact with tax administration staff (2).
Rolling out an electronic filing and payment system and educating taxpayers in its use are not easy tasks for a government. The necessary infrastructure must be put into place, especially where not all citizens have broadband access. Consider the example of India, where the Central Board of Direct Taxes took a series of steps to ensure a smooth process:
- Publishing detailed help manuals on the forms and how to complete them on its website.
- Providing free, downloadable software for preparing tax returns on its website.
- Organizing, in collaboration with the Institute of Chartered Accountants of India, live phone-in question-and-answer sessions with accountants.
- Distributing CDs with software and help content to accountants, trade bodies, and professional and business associations through tax offices throughout India.
- Setting up help centers at all field office headquarters.
- Organizing meetings and seminars with taxpayers and tax practitioners.
- Answering taxpayers’ queries by phone and e-mail at the call center.
India is far from the only one to undertake the challenging process of introducing an electronic option. By 2014, 84 economies had fully implemented electronic filing and payment of taxes. Sixty-four of them adopted or enhanced their systems in the past 11 years. Ten OECD high-income economies have made electronic filing and payment mandatory. And this trend is likely to continue. In the next few years many other OECD high-income economies, having introduced requirements for electronic filing and payment for larger businesses, plan to extend them to smaller ones (3).
Electronic filing and payment of taxes has made a big difference for businesses in some economies in Latin America and the Caribbean. In Jamaica for example, electronic filing was introduced several years ago, and was made mandatory for certain taxpayers during 2014. From 2015, electronic filing and payment using the online system was used by the majority of business taxpayers. Jamaica also further improved the functionality of the electronic system in late 2015. As a result Jamaica reduced compliance time by 10 hours and reduced the number of payments by 25. This brings the number of countries in Latin American and the Caribbean who have electronic filing systems (as defined by the Doing Business Methodology) to 15. The simple fact that an electronic system is available does not of itself guarantee that taxpayers will feel a reduction in compliance time. Often, taxpayers can experience issues with using electronic filing and payment systems, either due to glitches and errors in the system, or due to lack of taxpayer training and guidance. Many tax administrations tackle issues by ongoing updates to their online systems. Argentina has had electronic filing and payment for all major taxes for several years. Improvements made to the electronic system during 2015 which reduced compliance time by 46 hours for businesses during 2015.
Companies saw similar improvements in the ease of tax compliance in other regions also. In Indonesia, where the electronic filing system for health contributions was developed in 2014, and by 2015 was in use by taxpayers for filing and payment. India has further expanded mandatory use of its electronic filing system, expanding mandatory electronic filing to state insurance contributions (ESIC) and social security contributions (EFPO). India has been introducing mandatory electronic filing for various taxes on a phased basis since 2006.
Keeping it simple: one tax base, one tax
Some 235 years after Adam Smith proclaimed simplicity to be one of the pillars of the effective tax system,(4) multiple taxation—where the same tax base is subject to more than one tax treatment—appears to be making tax compliance inconvenient and cumbersome for taxpayers in many economies. Multiple taxation increases the cost of doing business for firms because it increases the number of payments they must make and frequently the compliance time as well. Different forms have to be filled out, often requiring different methods for calculating the tax. In Haiti, for example, the case study business is subject to the local tax on profit in addition to the corporate income tax. Multiple taxation also complicates tax administration for tax authorities and increases the cost of revenue administration for governments. And it risks damaging investor confidence in an economy.
Forty-nine economies have one tax per tax base for taxes measured by Doing Business (table 3). This keeps things simple. Having more types of taxes requires more interaction between businesses and tax agencies. It also complicates tax compliance.
Businesses in the Republic of Korea no longer need to do separate calculations for property taxes and city planning taxes that are levied on the same base starting from 2010. They were merged with other taxes. And thanks to an effort aimed at unifying social security laws and administration, businesses can now file and pay 4 labor taxes and contributions jointly. This freed them from the requirement to file additional returns and bear additional tax compliance costs.
In 2012, Tajikistan abolished the three contributions levied on the sales of the company—'Contribution to pension fund from sales', 'Contributions to road fund' and 'Contributions to the Educational Institutions (reconstruction, capital repair and equipment) Fund'.
In the past 12 years 53 economies eliminated and merged some taxes to simplify tax compliance and reduce costs for firms. Another way to make compliance easier when firms are subject to numerous taxes is to allow joint filing and payment of taxes levied on the same base. Firms in Colombia face 4 different taxes on salaries—but can meet these tax obligations by filing 1 form and making 1 payment for all 4 different taxes each month. In most OECD high-income economies taxes levied on the same base are paid and filed jointly, and as a result the average number of payments across all economies in this group is only 11. Compare this with the average of 26 payments across all 190 economies covered by Doing Business. Joint filing and payment of taxes is not widespread in Latin America and the Caribbean and South Asia, where the average is 30 payments and 32 payments respectively, or in Sub-Saharan Africa, where the average is 39.
Adopting self-assessment as an effective tool for tax collection
Driven by a desire to reduce administrative costs for tax authorities and aided by modern technology, most economies have adopted the principle of self-assessment. Taxpayers determine their own liability under the law and pay the correct amount. For governments, computer systems and software for self-assessment, if they function well, ensure effective quality control. Self-assessment systems generally make it possible to collect taxes earlier and reduce the likelihood of disputes over tax assessments (5). They also lessen the discretionary powers of tax officials and reduce opportunities for corruption (6). To be effective, however, self-assessment needs to be properly introduced and implemented, with transparent rules, an automated reporting process, penalties for noncompliance and risk assessment procedures for audit processes.
Economies that have introduced their tax system recently or undertaken major revision of their tax regulations have tended to adopt self-assessment principles. These include all economies in Eastern Europe and Central Asia and almost two-thirds in East Asia and the Pacific, the Middle East and North Africa, and South Asia.
1. Che Azmi, Anna, and Yusniza Kamarulzaman. 2010. “Adoption of Tax E-filing: A Conceptual Paper.” African Journal of Business Management 4 (5): 599–603.
2. James, Sebastian. 2009. A Handbook for Tax Simplification. Washington, DC: International Finance Corporation. Available at http://ssrn.com/abstract=1535499.
3. World Bank Group, Investment Climate Advisory Services, Global Tax Team.
4. Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Facsimile of the 1st ed. Amherst, NY: Prometheus Books, 1991.
5. OECD Forum on Tax Administration. 2011. Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2010). Paris: OECD.
6. Imam, Patrick A., and Davina F. Jacobs. 2007. “Effect of Corruption on Tax Revenues in the Middle East.” IMF Working Paper WP/07/270, International Monetary Fund, Washington, DC.