Businesses looking to expand their operations internationally have a host of hurdles to overcome. Will their products be able to compete with their foreign competitors? Will language and cultural barriers inhibit sales? Will growth rates take a nose dive? While the prospect of setting up shop in a far flung country is exciting, that excitement can turn to horror when taxes enter the conversation. Not only will the hopeful business operator pay a chunk out of profits, but having to navigate regulatory paperwork to actually pay can take away from the bottom line as well.
The World Bank's "Doing Business" report aims to shed light on taxes that a medium sized business would have to pay when operating in economies across the globe. In all, 183 economies were reviewed. The report focuses on the number of tax payments a business is required to make, the number of hours per year it takes to handle those taxes, and the overall tax rate that a business has to pay.
Number of Tax Payments
The more often a company has to fill out reams of paperwork, the less often it's able to focus on actually doing work.
Economies ranked by the number of required tax payments per year:
1. Hong Kong (3 a year)
2. Maldives* (3)
3. Qatar (3)
4. Georgia (4)
5. Norway (4)
179. Venezuela (70)
180. Sri Lanka (71)
181. Jamaica (72)
182. Romania (113)
183. Ukraine (135)
*While the Maldives seems to blow the competition out of the water, its position at the top spot is misleading. This chain of islands off the coast of India derives most of its revenue from hotels and tourism, so the major indicators found in the Doing Business report don't exist. This is also the case in the other rankings.
Number of Hours to Prepare, File and Pay Taxes
The more complex tax filing becomes, the more hours it takes businesses to go through the process. More hours means more employees devoted to compliance, which means less money spent on running the business.
Economies ranked by hours required to prepare, file and pay taxes:
1. Maldives* (0 hours a year)
2. United Arab Emirates (12)
3. Bahrain (36)
4. Qatar (36)
5. The Bahamas (58)
179. Venezuela (864)
180. Nigeria (938)
181. Vietnam (941)
182. Bolivia (1,080)
183. Brazil (2,600)
The United Arab Emirates, a high income economy in the Middle East, only has one primary burden: the monthly filing of social security taxes.
Those familiar with the rapid modernization and growth of the BRICS countries - Brazil, Russia, India, China, South Africa - might be surprised to see Brazil ranked where it is. Calculating its state tax on goods and services, called ICMS, is estimated to take 1,374 hours a year, with Social Security contributions (490 hours), and corporate income tax (736 hours) rounding out the large administrative burden.
Total Tax Rates
Businesses want to receive the highest benefit for the least amount of tax. They want good schools, low crime and solid infrastructure.
Economies ranked by total tax rate (includes corporate income tax, social security contributions):
179. Sri Lanka (105.2%)
180. Argentina (108.2%)
181. Comoros (217.9%)
182. The Gambia (283.5%)
183. Democratic Republic of the Congo (339.7%)
The total tax rate is different than the corporate tax rate, and is designed to show the overall tax burden by showing the actual taxes paid compared to a business' net profit before taxes. This is why the data shows taxes above 100%.
As with Brazil's ranking in the number of tax administration hours, Argentina's placement is somewhat surprising. While Argentina has a low corporate income tax (2.8%), its labor tax is on the upper end and it has a large tax categorized as non-labor and non-profit related. This includes a turnover tax of 53% to the city of Buenos Aires. The Democratic Republic of the Congo has an even higher "other" tax, amounting to 272%
SEE: Types Of Taxes
Overall Tax Burden
The overall tax burden takes into account both the tax rates levied on business profits as well as the administrative burden of paying those taxes; specifically, the number of hours that businesses have to devote to complying with regulations and the number of times they have to file over the course of the year. The number is calculated as a simple average of the three main components.
Economies ranked by overall tax burden, with additional corruption rankings:
1. Maldives* (134 out of 183)
2. United Arab Emirates (28)
3. Qatar (22)
4. Bahrain (46)
5. Oman (50)
179. Venezuela (172)
180. Nigeria (143)
181. Vietnam (112)
182. Bolivia (118)
183. Brazil (73)
Once again, the Maldives may be considered an outlier based on its reliance on tourism for funding. The other four countries in the top five have either no or low profit tax, with labor-related taxes of less than 20%. They are found in the Middle East, and all produce oil. Unlike some countries that face the resource curse, they have focused on developing businesses outside of oil, such as finance. Transparency International183, an organization that tracks corruption, considers the four to be within the top 50 least corrupt countries.
While there seems to be a correlation between the perception of corruption and tax burden, the two don't necessarily go hand in hand.
Brazil has come under increasing scrutiny as of late because of the expenses associated with its social welfare programs, though its leadership has insisted that slower growth was deliberately engineered to cool down the economy. That a new phrase, "Brazil cost," has been recently coined is not a good sign. The phrase specifically points to the growing percentage of GDP coming from taxes, which in turn fund social programs that may become increasingly unaffordable in the long-term.
The Bottom Line
Taxes and the administrative burden that they place upon businesses are important subjects. By taxing businesses, countries are able to pay for development projects and infrastructure, as well as social services such as education and healthcare. Countries have to balance the need for tax revenue with the intrusion that paying taxes can cause; the more difficult the process and higher the rate, the more likely it is that businesses will not comply. Making the filing process easier (and electronic) and reducing the number of different taxes that have to be paid are two big steps that can make an economy both business friendly and well-funded.