UN - DESA REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA ME Pecho Project for Strengthening Capacity of National Tax Administrations of Developing Countries EN Committee of Experts on International Cooperation in Tax Matters Geneve, 21 – 25 October 2013

2 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 1 Tax Transaction Costs The Cost of Taxation Tax liability Market distortions Tax Transaction Costs Administrative Costs Administrative Costs Compliance Costs Compliance Costs Internal Costs External Cost

3 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 1 Compliance Costs and Tax (Non) Compliance The taxpayers' attitude towards compliance may be influenced by factors such as the business a taxpayer is running, the industry where he/she operates, the perception of the fairness of the tax system, sociological and psychological factors and how easy for them is to comply. Tax (Non) Compliance Economic Factors Non Economic Factors

4 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 1 Compliance Costs: How big are they? Source: Different Studies from 1989 to 2011

5 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 1 In the case of Latin America the average hours intended to comply with the tax system has reduced from 415 to 382 hours (-6%) between 2006 and However the average of the OECD countries has reduced from 235 to 186 hours (-20%). Source: Paying Taxes 2013 Compliance Costs: How big are they?

6 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 1 Compliance Costs, Productivity and Informality Source: Martin Chrisnery and Joan Oriol Prats, The Fiscal Institutions of Tomorrow IADB, (2012) High levels of informality are most of the time associated with the complexity of the institutions and the costs of transactions. On taxation side, the response of most Latin American countries have been the implementation of simplified tax regimes PRODUCTIVITY TIME TO COMPLY 0.29 INFORMALITY

7 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 2 Methodology

8 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 2 Methodology Tax Transaction Cost Compliance Cost EXTERNAL INTERNAL Administrative Cost General Overview of the Methodology A A B B TAXPAYERTAX ADMINISTRATION PERCEPTION SURVEY BUDGET Time to Comply ( hours - year) x Remuneration/Salary ($) + Other fixed costs External Tax Advisor +

9 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 2 Methodology Time to comply should consider all the transactions performed during the entire life cycle of the taxpayer. A widely used tool to accomplish this goal is the value chain mapping process. The objective is to determine the taxpayer's life cycle, determining in each of the macro processes, major transactions that generate indirect costs to he/she.

10 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 2 Methodology Activity-based Costing for Administrative Costs

11 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Principals macro indicators by Country Costa RicaUruguay Population4,652,4593,286,314 GDP – 2012 (Millons US$) 44,72650,590 Inflation rate4.6%9.1% Tax burden as % of GDP (Central Government only) 13.2%19.2% SMEs registered at NTA336,946235,711 Simplified tax regimes Simplified VAT and CIT Simplified VAT and CIT, Monotributo Number Tax Officials9711,413

12 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 UruguayCosta Rica Tax regimesSimplified VAT and CIT; MonotributoSimplified VAT and CIT Number of Payments / Year124 VAT Threshold (US$)Annual sales below US$ 40,000Annual purchases below US$ 100,000 CIT Threshold (US$)Annual sales around US$ 480,000Annual purchases below US$ 100,000 Monotributo Threshold (US$)Annual sales around US$ 20, Simplified Tax Regimes Key Findings SMEs are defined in both countries in terms of annual sales or purchases and the number of employees. Compared with the total number of taxpayers (registered at the NTA and active), SMEs represent 65.8% in Costa Rica and 70.3% in Uruguay. Limited use of the simplified tax regimes: 9.5% of total SMEs in Costa Rica and 11.9% in Uruguay.

13 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Tax Transaction Cost % GDP Source: Pilot Reports Compliance Cost % GDP Administrative Cost % GDP Costa Rica Uruguay Costa Rica Uruguay Costa Rica Uruguay + Compliance Cost is higher than Administrative Cost. In relative terms, Costa Rica has more Compliance Cost that Uruguay, but on average terms a SMEs in Uruguay face a higher cost than a SMEs in Costa Rica. Costa RicaUruguay Time to Comply (Hours per Year) Average Compliance Cost (US$ ) 2,1562,808 Total SME´s (2012 )346,446236,017 Compliance Cost (thousands US$) 746,937662,735 GDP – 2012 (Millons US$) 44,72650,590

14 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Time to comply: Hours per year by macro processes Costa RicaUruguay Taxpayer life cycleHours /Year Registration, Orientation and Assistance 4370 Accounting, Filling returns and payments Attending tax inspections and enforced collection 310 Refunds and Appeals 611 TOTAL

15 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Compliance Cost by SMEs Size and Tax Regime Compliance costs are higher in the micro and small enterprises which confirm regressivity of the Compliance Costs. The result is consistent with other references outside the region Taxpayers in the simplified regime have lower compliance costs than the general system, but the NTA must evaluate the cost benefit of the regime. Costa RicaUruguay Size (based on Employese)% GDP% Turnover% GDP% Turnover Micro Small Medium Costa RicaUruguay Tax Regime% GDP General Simplified 0.08

16 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Source: CIAT Brazil 2006 to 2010 = 0.87 Simplified tax regimes – Revenues as % GDP

17 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries  Tax Advisors are widely used in both countries.  They are present in SMEs operating in the general or the simplified tax regimes.  SMEs hire accounting services or special services to attend requirements from NTAs 3 Key Findings Use of External Tax Advisor (Tax Intermediary)

18 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries 3 Key Findings Costa RicaUruguay Registration, Orientation and Assistance Accounting, Filling returns and payments Attending tax inspections and enforced collection Refunds and Appeals Administrative Cost by Tax Process (% GDP)

19 REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA Project for Strengthening Capacity of National Tax Administrations of Developing Countries Compliance Costs borne by SMEs in Costa Rica and Uruguay are still high. Our results show the regressivity of the cost of compliance in both countries. Effectiveness of the simplified tax regimes to reduce cost of compliance. However limited use of them by SMEs in both countries. Net impact of simplified tax regimes (taking into account the revenues collected) is lower in Uruguay. An important percentage of SMEs do hire tax intermediaries in both countries. 4 Summing Up

UN - DESA REDUCING THE TAX TRANSACTION COSTS IN LATIN AMERICA ME Pecho Project for Strengthening Capacity of National Tax Administrations of Developing Countries EN Committee of Experts on International Cooperation in Tax Matters Geneve, 21 – 25 October 2013