FOCUS: CORPORATE TAX
South America has surpassed Africa as the region of the world with the highest total tax rate, at 55.4%, according to “Paying Taxes 2015,” a report from the World Bank and PwC.
By replacing cascading sales taxes with a value-added tax (VAT), Africa has succeeded in lowering its total tax rate to 46.6% from a peak of 72.2% in 2005.
“The cascading sales taxes once prevalent in Africa were levied at each stage of the supply chain, whereas the VAT is only borne by the end-consumer,” says Andrew Packman, partner at PwC in London and leader of the firm’s Tax Transparency and Total Tax Contribution program. “The old tax system, which was poorly designed and not supportive of economic growth, has been gradually replaced by successive African governments,” Packman says.
South America, by contrast, is the only region to show a significant increase in its total tax rate in the latest survey, which covered 2013. The average for South America was distorted, however, by Argentina, which adopted a new turnover tax on gross income in Buenos Aires.
“It is dangerous to make generalizations about continents,” Packman says, “but looking at data over the long term, governments in Africa have been more successful in making their tax systems less burdensome to deal with.”
South America has the most time-consuming tax system worldwide. It takes 620 hours for the average company in the region to meet its tax obligations. The global average for the 189 economies surveyed is 264 hours, down four hours in the latest survey.
Worldwide, the total amount the average company paid in taxes and the number of tax payments it made also declined, as they have for every year in the past 10 years that the survey has been conducted. Taxes measured include the corporate income tax, social contributions and labor taxes paid by the employer, property taxes, dividend tax, capital gains tax, financial transactions tax, waste-collection taxes, vehicle and road taxes, and other small taxes or fees. The average tax rate was 40.9%, down 1.3 percentage points from a year earlier.
Meanwhile, the total time it takes a medium-size company to deal with its tax submissions has fallen by about 10 days over the decade the study has been published, thanks mainly to electronic filing. The Middle East is the easiest region in which to pay taxes, and it has the lowest tax rate, at 24%.
Central Asia and Eastern Europe are making the fastest progress on tax reforms, owing to improving administrative systems, the study says. Africa is also continuing with reforms, it says.
“Taxes provide the sustainable funding needed for social programs and to promote economic growth,” says Augusto Lopez-Claros, director of the global indicators and analysis group in the World Bank’s development economics department. “Policymakers need to find the right balance between raising revenue and ensuring that tax rates and the burden of compliance do not deter participation or discourage business activity.”