local_atm Paying Taxes

This topic records the taxes and mandatory contributions that a medium-size company must pay or withhold in a given year, as well as measures the administrative burden in paying taxes and contributions. In Doing Business 2017, the indicator’s methodology was expanded to include a new measure of complying with postfiling procedures. The most recent round of data collection for the project was completed on June 1, 2016 covering for the Paying Taxes indicator calendar year 2015 (January 1, 2015 – December 31, 2015).

This year the scope of data collection has been expanded to better understand the overall tax environment in an economy. The questionnaire was expanded to include new questions on three post-filing processes: VAT refund, tax audit and administrative tax appeal. The data shows where postfiling processes and practices work efficiently and what drives the differences in the overall tax compliance cost across economies. The data on the structure of a first level administrative appeal process is not included in the distance to frontier score of paying taxes.

The new section covers both the legal framework and the administrative burden on businesses to comply with postfiling processes.  See the methodology for more information.

What is Measured?

Figure 1 - What are the time, total tax rate and number of payments necessary for a local medium-size company to pay all taxes?

Doing Business records the taxes and mandatory contributions that a medium-size company must pay in a given year, as well as measures of the administrative burden of paying taxes and contributions and complying with postfiling procedures (figure 1). The project was developed and implemented in cooperation with PwC (1). Taxes and contributions measured include the profit or corporate income tax, social contributions and labor taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees. 

The ranking of economies on the ease of paying taxes is determined by sorting their distance to frontier scores for paying taxes. These scores are the simple average of the distance to frontier scores for each of the component indicators (figure 2), with a threshold and a nonlinear transformation applied to one of the component indicators, the total tax rate (2). 

The threshold is defined as the total tax rate at the 15th percentile of the overall distribution for all years included in the analysis up to and including Doing Business 2015, which is 26.1%. All economies with a total tax rate below this threshold receive the same score as the economy at the threshold. The threshold is not based on any economic theory of an “optimal tax rate” that minimizes distortions or maximizes efficiency in an economy’s overall tax system. Instead, it is mainly empirical in nature, set at the lower end of the distribution of tax rates levied on medium-size enterprises in the manufacturing sector as observed through the paying taxes indicators.

Figure 2 - Paying taxes: tax compliance for a local manufacturing company

This reduces the bias in the total tax rate indicator toward economies that do not need to levy significant taxes on companies like the Doing Business standardized case study company because they raise public revenue in other ways—for example, through taxes on foreign companies, through taxes on sectors other than manufacturing or from natural resources (all of which are outside the scope of the methodology).

Doing Business measures all taxes and contributions that are government mandated (at any level—federal, state or local) and that apply to the standardized business and have an impact in its financial statements. In doing so, Doing Business goes beyond the traditional definition of a tax. As defined for the purposes of government national accounts, taxes include only compulsory, unrequited payments to general government. Doing Business departs from this definition because it measures imposed charges that affect business accounts, not government accounts. One main difference relates to labor contributions. The Doing Business measure includes government-mandated contributions paid by the employer to a requited private pension fund or workers’ insurance fund. It includes, for example, Australia’s compulsory superannuation guarantee and workers’ compensation insurance. For the purpose of calculating the total tax rate, only taxes borne are included. For example, value added taxes (VAT) are generally excluded (provided that they are not irrecoverable) because they do not affect the accounting profits of the business—that is, they are not reflected in the income statement. They are, however, included for the purpose of the compliance measures (time and payments), as they add to the burden of complying with the tax system.

See the methodology for more information.


1- PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL) or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

2- The nonlinear distance to frontier for the total tax rate is equal to the distance to frontier for the total tax rate to the power of 0.8.