In OECD countries, it takes a company 159 hours on average to do the taxes. This number is more than doubled in Latin America with 330 hours. This equals 41 8-hour working days! Especially in Brazil, the complexity of the tax system leads to excessive amounts of time, up to 1,958 hours a year (248 8-hour working days)!
When these absolute numbers are translated into business profits before taxes, the average of this burden for Latin America is 46.7% in comparison to 39.8% for OECD countries. These World Bank findings are worrisome but effective in sparking further analysis into their origins.
What causes this excess?
Tax Types, Exemptions and distortionary Taxes
Most importantly, the tax systems of Latin American countries are highly complex with different taxes and tax rates at the national, provincial and municipal levels as well as numerous additional exemptions and provisions. In Argentina for example, there are 163 different types of taxes and this number is directly proportional to the number of hours a citizen loses per year to meet their tax obligations. Moreover, specifically Brazil and Argentina are suffering from distortionary taxes such as gross income, export duties and the check tax which in Argentina, equal almost 11% of the GDP as compared to Chile, where distortionary taxes only equal 0.6% of the GDP.
“Argentina and Brazil seem to be the most complex in the region from the point of view of the tax administration, since you have many taxes and different quotas at the state level. In Chile, for example, the main taxes are collected nationwide. And Uruguay is very simple because it has a centralized system, which greatly simplifies the tax administration”, PwC Argentina’s Tax and Legal Director Juan Manuel Magadán said.
Looking at the other Latin American countries, the numbers become somewhat more favorable, albeit still high. Chile and Uruguay are below Argentina requiring 296 and 163 hours per year. In Colombia, Peru or Mexico the procedures and the payment of taxes takes 255, 260 and 240 hours. However, Venezuela, Ecuador and Bolivia lose 792, 664, and 1025 hours per year for taxes. In Paraguay, 378 annual hours are dedicated to the payment of taxes.
What increases the complexity of paying taxes are the additional reports that need to be submitted to the tax and financial authorities. What is concerning is not only the amount of forms and declarations that must be filled to pay the taxes but also the issue with computer systems needed to produce and submit the reports. Those systems and their respective requirements are very different in each country and require special attention and guidance. Sometime, official deadlines do not correspond with the complexity of the technological infrastructure. In Argentina, the tax authority AFIP`s technology suffers from two shortcomings: it is made available very close to expiration, which generates large bottlenecks, and on the other hand, the experience of recent years is that it contains errors that make the work of the accountant very difficult.
Are those complexities set in stone?
Of course they are not. In fact, in many Latin American countries the majority of tax revenues in collected through very few major taxes. For example, in Argentina, out of the 163 taxes only 10 collect the lion`s share of tax income. Also, countries like Brazil realize the danger of high doing business costs and try to reform their tax system by replacing the mayor taxes with one common VAT.
Until such reforms are decided on and implemented, companies are advised to work with experts on local taxes, regulations and IT environments to optimize their tax and compliance hours.
These regulatory changes could affect your business with view to customizing or support of your ERP/SAP system. Please contact us to learn about possible necessary reactions to the changes – we are happy to assist you!