- Offering electronic filing and payment
- Keeping it simple: one tax base, one tax
- Adopting self-assessment as an effective tool for tax collection
- Effective tax administration through risk-based audits
Properly developed, effective taxation systems are crucial for a well-functioning society. In most economies, taxes are the main source of revenue to fund public spending on education, health care, public transport, infrastructure and social programs, among others. A good tax system should ensure that taxes are proportionate and certain (not arbitrary) and that the method of paying taxes is convenient to taxpayers. This includes offering to taxpayers electronic systems for filing and paying taxes, merging taxes with the same tax base, allowing for self-assessment and having a clear and efficient processes for refunding VAT cash refunds and undergoing tax audits.
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 For example, the cost of paper filing and reporting for personal income tax in the US (including cost of filling numerous reporting forms and tax returns) can potentially reach up to 1.2% of GDP for US.2 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.3
Many economies have restructured their tax administrations to introduce a functionally-based tax agency, often a crucial step in the introduction of a centralized online filing and payment portal for the major taxes. Other economies have focused easing the administrative element of tax compliance through investment in new tax software, real-time reporting and data analytics, together with the provision of a wide range of taxpayer service programs.
By 2019, 112 economies had fully implemented electronic filing and payment of taxes. 69 of them adopted their systems over the past 16 years. All 23 economies in Europe and Central Asia have electronic filing and payment, followed by OECD high-income economies, where 34 economies out of 35 have such systems in place. The expansion of electronic filing and payment systems 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.4
The ability to file and pay taxes electronically has had a positive impact on firms in several economies in Latin America and the Caribbean. In Uruguay, for example, the government adopted the Financial Inclusion Act on May 9, 2014, which included the compulsory electronic payment of national taxes in an effort to gradually increase both the economy’s level of digitalization and the use of banking services. Most taxpayers were filing and paying their taxes online by early 2016, when the government added new features to the online platform. Many procedures that previously were done in person at the tax office—such as registration, credit certificate applications, payments and accountant certificate submissions—are done electronically. A majority of taxpayers can now access the online portal, and, with the system’s improved features, the time to comply with the three major taxes measured by Doing Business has decreased by 108 hours.
East Asia and the Pacific was the second most proactive regions introducing such systems. China has implemented business tax reforms consistently over the years, with notable results. In Doing Business 2006, for example, businesses in Shanghai spent 832 hours per year on average to prepare, file and pay taxes, and they had to make 37 payments. By Doing Business 2021, these metrics have been reduced to just 110 hours per year and 6.5 payments.5 China began its tax modernization program—which involved redefining tax shares between the various tax authorities and transitioning from turnover taxes to value added taxes—in the early 1990s. Since then, China has implemented numerous improvements to its tax system, including the introduction of a taxpayer services hotline (2005), the formation of a specialized Taxpayer Services Department and online filing and payment for the major taxes (2008), and a campaign to improve cooperation between the State Taxation Administration and local tax bureaus, provide electronic notices to taxpayers and reduce the number of tax filings for certain taxpayers (2013). In 2014 China integrated taxpayer services functions through a mobile tax application and launched official accounts on the two main Chinese social media platforms (WeChat and Weibo). In 2015, the Internet+ Taxation Initiative unlocked the potential of big data for taxpayer services, such as data sharing among government bodies, online training and e-invoices. Finally, the State Taxation Administration launched the Golden Tax III system in 2017, which facilitated e-filing of different stamp duty taxes. China implemented a series of measures in the past two years, which simplified corporate income tax, labor taxes, value added tax declarations and e-delivery of invoices. In the recent years, China further reduced the filing requirements for small and thin enterprises to further ease the administrative burden for these firms.
The existence of an electronic system does not of itself guarantee that taxpayers will see 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 a lack of taxpayer training and guidance. Many tax administrations tackle such issues by updating their online systems continually.
Keeping it simple: one tax base, one tax
More than two centuries after Adam Smith proclaimed simplicity to be one of the pillars of an effective tax system, multiple taxation—where the same tax base is subject to more than one tax treatment—continues to make tax compliance inconvenient and cumbersome for taxpayers.6 Multiple taxation increases the cost of doing business for firms because it increases the number of payments they must make and, frequently, compliance time. Various forms have to be filled out, often requiring diverse methods for tax calculation. Multiple taxation also complicates tax administration for tax authorities and increases the cost of revenue administration for governments. Furthermore, multiple taxation can reduce investor confidence in an economy.
Forty-nine economies measured by Doing Business have one tax per tax base. One tax keeps things simple. Having more types of taxes requires more interaction between businesses and tax agencies and can complicate tax compliance.
Starting from 2010, firms in the Republic of Korea were no longer required to do separate calculations for property taxes and city planning taxes levied on the same base (the taxes were merged with other taxes). Furthermore, following an effort to unify social security laws and administration, today businesses can file and pay four labor taxes and contributions jointly. They are, in effect, freed from a need to file additional returns and bear additional tax compliance costs.
Goods and Services Tax (GST) was launched in India on July 1, 2017, after almost 20 years of discussions between the central and state governments. Under the slogan “one nation, one tax”, the single GST integrated 17 central and state taxes and levies, including central excise duty, services tax, additional customs duty and state VAT into one tax. This is expected to significantly modernize and improve transparency for India and ensure low cost of compliance. The integration of the several indirect taxes has reduced the number of tax payments and is expected to also reduce the time taken for preparation of tax return, filing and payment. Additionally, the unified tax regime has also eliminated the need for inter-state check points at border between states and reduced inter-state travel time of cargo trucks.
In the past 16 years, 68 economies eliminated or 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. For example, firms in Colombia face four different taxes on salaries—but can meet these tax obligations by filing only one form and making one payment for all four 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 that group is only 11. Compare this with an average of 22 payments across all 191 economies measured by Doing Business.
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 liability under the law and pay the correct amount. For governments, computer systems and software for self-assessment, when well functional, ensure effective quality control. Self-assessment systems generally make it possible to collect taxes earlier and reduce the likelihood of disputes over tax assessments.7 They also lessen the discretionary power of tax officials and reduce opportunities for corruption.8 On other hand, the empirical study by Yuswar shows that the tax compliance behavior is facilitated by self-assessment system implementation 9. 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. Along with these measures, the transparency on public funds use as well as the control for corruption are important factors in fostering the tax moral and increasing tax compliance10.
Economies that have introduced their tax system recently or undertaken major revision of tax regulations have tended to adopt self-assessment principles. These include all economies in Europe and Central Asia and almost two-thirds of economies in East Asia and the Pacific, the Middle East and North Africa and South Asia.
Effective tax administration through risk-based tax audits
Several studies show that tax administration and tax policy affect the level of informality and productivity in an economy. A higher tax burden contributes to the prevalence of informality. Informal firms are the ones that avoid paying a full amount of tax due. Through tax evasion, informal firms enjoy a relative cost advantage over their tax-compliant competitors. This amounts to a potentially large subsidy, allowing informal firms to stay in business despite low productivity and increasing their weight in the economy at the expense of more productive firms.11 IMF empirical analysis using firm-level data for manufacturing in emerging markets confirms that firms that report only 30% of their sales are less productive than 100% compliant firms.12
Efficient tax administration can mitigate the effects of a high tax burden and help to reduce the level of informality in an economy. Several measures can be adopted to strengthen the tax administration. However, perhaps the most important of these is the adoption of risk-based tax audits. Tax audits, which are essential for reliable tax reporting can be counterproductive if utilized excessively. The study based on tax returns of more than 500,000 Italian taxpayers that examined the effects of audits on taxpayers showed negative impact on subsequent tax compliance by audited taxpayers. Instead, tax audits are considered to be more effective when they are risk-based and when tax auditors are well trained.13 The risk-based audit system in Thailand, for example, does not flag returns for an audit where there is an error in the tax return or an underpayment of tax liability due.
In 2017, the Mauritius Revenue Authority issued a new Guideline for VAT repayment claims based on the level of company risk. Under the new Guideline, low-risk companies can be deemed eligible for a fast-track refund process without any additional review or audit and the repayment of the refund is made in five calendar days. Firms assessed to the second level of risk—which include those with a simple claim for a VAT cash refund like the Doing Business case study—are also refunded quickly (within 15 calendar days). These claims would be subject only to a desk review of the documents without any interaction with the taxpayer. For those cases assessed as high-risk, the tax authority conducts an audit before approving or rejecting the repayment claim.
In 2018, Côte d'Ivoire introduced an electronic case management system for processing value added tax cash refunds. In 2019, Georgia adopted a risk-based engine for selecting companies for VAT audit. Under the new risk-based engine, only taxpayers assigned with highest risk level were audited in 2019 when requesting a VAT refund electronically. For several years, the Kenya Revenue Authority worked on introducing a risk-based automated tax system for selecting companies for a tax audit. As a result, in 2019, this system led to a reduction in practice in the share of companies exposed to corporate income tax audit.
1Alghamdi A., Rahim M. (2016) Development of a Measurement Scale for User Satisfaction with E-tax Systems in Australia. In: Hameurlain A. et al. (eds) Transactions on Large-Scale Data- and Knowledge-Centered Systems XXVII. Lecture Notes in Computer Science, vol 9860. Springer, Berlin, Heidelberg.
2Youssef Benzarti, 2017, How taxing is tax filing? using revealed preferences to estimate compliance costs. NBER, Working Paper 23903. Accessed at: http://www.nber.org/papers/w23903.pdf
3 Fasmi, Lasnofa, (2012). The Influence of Modernization of Tax Administration System to Compliance Level of Taxable Entrepreneur in Tax Service Office (KPP) Pratama Padang, Dis-sertation, Economic Faculty, Andalas University.
4 OECD (2016), Rethinking Tax Services: The Changing Role of Tax Service Providers in SME Tax Compliance, OECD Publishing, Paris.
5 The tax returns for land use tax and real estate tax have been merged effective October 2019. Since there are two filings of each tax during the year, April and October, the number of payments has been pro-rated for the October filing resulting with a reduction of 0.5 payment to reflect the reform.
6 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.
7 OECD (2017), Tax Administration 2017: Comparative Information on OECD and Other Advanced and Emerging Economies, OECD Publishing, Paris.
8 Alon, Anna dan Amy M. Hegeman, (2013). The Impact of Corruption on Firm Tax Compliance in Transition Economies: Whom Do You Trust? Journal Bussiness Ethics, 116, 479 - 494.
9 Sabaruddin Yuswar Z. Basri, Susi Dwimulyani, 2018, ‘Factors affecting individual taxpayer compliance with practice self-assessment system as intervening variable’, Journal of Entrepreneurship, Business and Economics 6(1), 116–143.
10 Wadesango, N., Mutema A, Mhaka C, Wadesango VO, 2018, ‘Tax compliance of small and medium enterprises through the self-assessment system: issues and challenges’, Academy of Accounting and Financial Studies Journal, Vol. 22, issue 3.
11 Gabriel Ulyssea. 2018. Firms, Informality, and Development: Theory and Evidence from Brazil. American Economic Review 108:8, 2015-2047.
12 Fiscal Monitor, Achieving More with Less, April 2017, International Monetary Fund.
13 Karla Johnstone, Audrey Gramling, Larry E. Rittenberg, 2013, Auditing: A Risk-Based Approach to Conducting a Quality Audit’, Cengage Learning.