Tax Administration for Taxpayers

Tax Administration Efficiency

For tax administration, efficiency is usually measured by the ratio of the amount of taxes collected to tax authorities’ operating and capital costs.

Efficiency is growing when tax collection increases, while associated government expenses remain constant or decrease. Deliberately or not, the analysis of tax administration efficiency excludes costs to taxpayers. These costs may be significantly higher than those of the tax authorities.

The reason is simple. Tax authorities impose several requirements on taxpayers:

• Mandatory registration.
• Preparation and submission of tax returns, other documents, and data.
• Interaction with tax officials during routine communication, audits, etc.

Tax Administration Costs of Taxpayers

To comply with the law, taxpayers must hire additional personnel, buy new hardware and software or update existing systems, change processes, spend time of top managers, and other resources. These administrative costs do not create new assets and do not bring in new customers and revenue. On the contrary, they reduce profits and operating efficiency and diminish the ability to invest in business development and capitalization.

Additional Accounting Staff

The lion’s share of the tax compliance costs is driven by hiring additional full-time personnel or contractors, or by paying for the outsourcing and outstaffing services. Let us roughly estimate these costs for taxpayers in Kazakhstan.

As of October 1, 2022, the population of Kazakhstan was about 19.7 million people^[1]. As of December 1, 2022, the number of operating legal entities was 392,347. The number of sole proprietors in Q3 2022 was 1,572,700^[2]. Suppose that each legal entity must allocate 0.5 of the accountant’s annual FTE (full-time equivalent) salary for tax administration, and 0.1 of the full rate for a sole proprietor. The average salary for an accountant in Kazakhstan is roughly $3,700 per year, excluding overhead expenses^[3].

According to our conservative estimate, taxpayers must spend approximately 1.3 billion USD annually on tax compliance ((392,347 * 0.5 * 3,700) + (1,572,700 * 0.1 * 3,700)), excluding overhead expenses.

Implementing Electronic Cash Registers in Retail

Depending on government requirements and possible monopolization in the supplier market, a retail taxpayer’s capital expenditures on fiscal cash registers can range from $200 to $400 per unit. Operating costs for maintenance, consumables, etc. will be approximately $100-$300 per year.

According to the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan, about 709,000 fiscal cash registers were registered in the country as of January 2021^[4]. That means taxpayers’ one-time costs could be approximately $140–280 million, with recurring annual costs of about $70–210 million.

Updating Tax Reports and Accounting Systems

After introducing electronic tax invoices, taxpayers must update accounting systems and transfer fiscal data to tax authorities. Accountants can do it manually, but that increases the burden on employees, slows down processes, and multiplies errors along with the resulting fines and penalties. But the modernization of accounting systems entails additional costs for taxpayers, which also amount to tens and hundreds of millions of dollars.

The extra costs related to tax compliance entail not only global initiatives but also small operational changes in tax reporting. For example, adding just one new field to a tax return results in the need for software customization and updates, which also cost taxpayers a hefty sum.

For example, the US market for tax filing software and service providers is about $14 billion annually^[5]. These organizations create many jobs and also pay taxes, but their profits are unproductive costs imposed on other taxpayers.

Assessing the Risks and Usefulness of Tax Reforms

Political risks may follow incoherent tax administration and tax authorities’ reluctance to account for the financial burden that falls on taxpayers’ shoulders when implementing the latest reforms. An organized business community can be a powerful force and could oppose tax initiatives that create significant additional costs. It is well known that protests against the fiscal cash registers in the Kyrgyz Republic led to negative consequences for the country’s leadership^[6].

For this reason, tax authorities should develop methods for assessing taxpayers’ costs and determining how they are affected by proposed tax reforms. The final decisions should consider these assessments.

That means the basic formula for calculating tax administration efficiency should be changed to the ratio of the amount of tax collected to the administrative costs incurred by tax authorities and taxpayers. If introducing an innovation will decrease the overall efficiency of tax administration, then it probably makes sense to not introduce it.

Methods to Reduce Tax Administration Costs for Taxpayers

To reduce the cost of tax compliance for taxpayers, authorities may introduce the following initiatives:

• Consolidate financial and tax accounting.
  • In many countries, financial and tax accounting are maintained separately, which significantly complicates the work of accountants and tax inspectors during audits.
• Simplify the tax code.
  • Usually, only professionals can understand this document. It is written in complex language and contains many exceptions and disclaimers. Often, the tax code contains ambiguous wording that allows for different interpretations. In these cases, taxpayers need the help of professional consultants, which entails additional costs.
• Simplify, consolidate, and reduce tax reporting.
  • Tax returns have been developing for several decades, but they may still require information that the tax authorities already have. In combination with other reporting forms, the taxpayer must repeatedly fill in similar fields and data blocks that are often not needed by inspectors.
  • Tax departments rarely communicate with each other. Instead of arranging for internal data exchange and simplifying the reporting process for the taxpayer, they establish new reporting forms, which often duplicate one another.
• Eliminate tax returns and reduce reporting requirements under current tax regimes.
  • Return-free regimes can be implemented only by simplifying the tax code and detailing all processes. Otherwise, tax authorities cannot calculate the tax base and tax payables.
• Eliminate field tax audits. Move to remote monitoring through electronic document interchange.
  • It should be a gradual transition toward demanding documents from the primary sources where they are stored (government bodies, archives, banks), and not from taxpayers.

Implementing these initiatives significantly simplifies life for taxpayers, cut administrative costs, and can boost tax revenue collection for the state.

[1] Population of the Republic of Kazakhstan as of October 1, 2022. Bureau of National Statistics of Kazakhstan. URL: https://new.stat.gov.kz/ru/industries/social-statistics/demography/

[2] Socio-economic development of the Republic of Kazakhstan. January-November 2022. Bureau of National Statistics of the Republic of Kazakhstan. URL: https://new.stat.gov.kz/upload/iblock/295/hijk033jg70kyucs6bjcrw5p4f6e7svo/%D0%96-01-01-%D0%9C%2011%202022%20(%D1%80%D1%83%D1%81).docx

[3] Survey of salary statistics for the profession “Accountant in Kazakhstan”. Trud.com website. At the exchange rate of 461.42 tenge per 1 USD as of January 31, 2023. URL: https://kz.trud.com/salary/304584/3454.html

[4] State Revenue Committee. Implemented projects. Fiscal cash registers. URL: https://www.gov.kz/memleket/entities/kgd/projects/details/2021?lang=ru

[5] Tax Preparation Services in the US – Market Size 2004–2029. IBISWorld. URL: https://www.ibisworld.com/industry-statistics/market-size/tax-preparation-services-united-states/

[6] Rally against compulsory installation of cash registers takes place in Bishkek. 24.kg. URL: https://24.kg/english/236717_Rally_against_compulsory_installation_of_cash_registers_takes_place_in_Bishkek/