Creating

PAYING TAXES 47
Second, the complexity of tax compliance matters
too. Norway collects 60% of companies’ gross profit
using 3 taxes filed electronically. In contrast, it takes 14
taxes and 62 interactions with the tax authorities to collect
46% of gross profit in the Philippines. Firms in 90%
of surveyed countries rank tax administration among
the top 5 obstacles to doing business. In several—
including Bangladesh, Cambodia, the Kyrgyz Republic,
Russia and Uzbekistan—working with the tax bureaucracy
is considered a bigger problem than tax rates. 5
Finally, businesses care about what they get for
their taxes. Finland has higher business taxes, at 52% of
gross profit, than Mexico, at 31%. But firms there have
fewer complaints about the tax burden. That businesses
rate Finland among the top 10 countries on quality of
infrastructure and social services could have something
to do with it.
Rich countries tend to have lower business taxes and
make them less complex (figure 8.2). Simple, moderate
taxes and fast, cheap administration mean less hassle for
business—as well as higher revenues. In contrast, poor
countries tend to use business as a collection point,
charging higher business taxes. Such burdensome taxes
create incentives for evasion. In the United States business
taxes add up to 21% of gross profit. So if a company
started with $100 in gross profit, evading 20% of
its tax bill would raise gross profit after tax from $79 to
$83—equivalent to increasing gross profit by 5%. But in
Mauritania profit would jump 63% (figure 8.3).
Who is reforming?
In 2004, 28 countries made major changes to their tax
systems. Following a long-term trend, most countries
cut corporate tax rates. Several focused on increasing
compliance and the tax base, thereby boosting revenues
while cutting or maintaining rates.
In 1994 Estonia radically reformed its tax law, levying
a 26% flat tax on corporate and personal income.
Its success sparked a rush by other Eastern European
countries to do the same. In 2004 Romania and Georgia
became the latest. Romania introduced a 16% flat tax
and cut payroll taxes—though at 49.5%, they are still
high. Georgia’s new tax code levies a 20% income tax
on businesses and a 12% flat tax (down from 20%) on
personal income. In addition, social taxes were cut from
33% to 20% and the number of taxes from 21 to 9, and
invoices and receipts were simplified.
Serbia and Montenegro followed another trend,
joining the 90% of countries with a VAT. The advantages
are clear: a VAT avoids cascading taxes, where taxes are
paid on taxes. And a VAT is partially self-enforcing—because
companies receive tax credits for a VAT paid on
their purchases, they will want to trade with other companies
registered for the VAT.
Corporate income tax cuts swept through other
Eastern European countries, sealing the region’s rank
as the top tax reformer (table 8.1). Western European
countries also joined the trend, partly in response to
competition from new EU members. Although such cuts
were the most common reform, they have a relatively
small impact: globally, income taxes account for only
about a quarter of business taxes (figure 8.4).