Paying Taxes in Different Countries - Term Paper Example

? Paying Taxes in Different Countries Any business operates within a set of internal and external environments. While internal environments are mostly within complete control of an entrepreneur, external environments such as political stability, government intervention, local laws and stipulations, and tax rates are beyond the control of an individual entrepreneur. An entrepreneur has to undertake a careful analysis of all these external environmental factors before they decide on setting up a business enterprise as these factors have a vital impact on the financial health and stability of any enterprise. One of the most pertinent and relevant external factor is the stipulations related to taxes that an enterprise is obliged to pay to the government of a country. This project intends to do a comparative study of the rates and procedures prevalent in China, USA, Russia, Germany and Hungary and draw suitable conclusions from it. China The first criterion that needs to be investigated is the number of heads under which a corporate entity needs to pay tax and the number of times taxes need to be paid during a financial year. Also relevant is the number of agencies that are involved in the entire procedure of payment of taxes. It hardly needs to be highlighted that complexity of the entire process is directly proportional to number of agencies involved and a business needs to create as many reserves as the number of times it is obliged to pay taxes during an accounting year. China scores highly in this regard as it has a score of 7 as compared to 24.5 of countries belonging to East Asia and Pacific region (geographical neighbors of China) and 14.2 in OECD countries that are highly industrialized and boast of a healthy Human Development Index (International Finance Corporation: The World Bank, 2010). However, this advantage is perhaps squandered away in the excessive time that it takes in China to prepare tax returns and file those. It takes a colossal 398 hours every year to complete these formalities in China as compared to the comparatively faster procedures in other countries. While it takes only 218.2 hours every year to complete these formalities in countries belonging to East Asia and Pacific region it takes only 199.3 hours in OECD countries. That works out to nearly 200 hours per year extra that has to be spent by a business organization simply to comply with taxation formalities in that country. Considering 8 hours as a working day, it translates into 25 more working days that have to be spent every year only to adhere to taxation procedures. This is something every business organization will ponder seriously, since manpower spent on such legal requirements does neither add to productivity nor output but adds to the remuneration bill nonetheless (International Finance Corporation: The World Bank, 2010). Any business entity needs to pay more than one form of tax such as direct taxes on corporate profits, compulsory contribution to various social security funds and other taxes as Value Added Tax, Urban Maintenance Tax and Education Surcharge etc. So, instead of analyzing each tax head individually it would be better to compare the total tax burden in a fiscal year on a corporate entity as a percentage of profit in different countries as that would provide a more comprehensive picture. While China levies a total tax of 63.5% on profit, her East Asian and Pacific Rim neighbors impose only 35.4% and OECD countries a slightly higher rate of 43% (International Finance Corporation: The World Bank, 2010). So, purely from the tax perspective, China does not present a lucrative proposition. But taxes surely are not the only criterion that needs to be judged while taking a business decision and an entrepreneur needs to carefully evaluate all relevant aspects before finalizing on a venue. United States of America United States lags behind China with regard to the number of tax payments and the number of agencies involved in the entire process as it returns a score of 11 as compared to China. However, what it loses on this count it surely more than makes it up in requiring only 187 hours per year to complete all formalities related to corporate taxation. USA scores higher on these two counts as compared to OECD countries as they need on an average 14.2 payments per year and 199.3 hours to complete the required formalities. The total tax rate as a percentage to profit is however higher at 46.8% in USA as compared to the prevailing rate of 43% in OECD countries. However, it is far more hospitable than China in these two criterions (International Finance Corporation: The World Bank, 2010). Russian Federation Russian Federation matches shoulder to shoulder with United Sates as it also returns a score of 11 with regard to the number of tax payments and tax collection agencies assigned to do that job. But, it requires a huge amount of manpower to complete the taxation formalities in Russian federation as 320 hours per year need to be spent on adhering to related stipulations. This surely is a big discouraging factor to entrepreneurs. The total tax rate calculated as a percentage of profit is, however, almost at par with United States as it stands at 46.5%. So, by and large, with the exception of manpower needed to complete taxation formalities, there is not much difference from the strict perspective of taxation in doing business in United States or Russian Federation (International Finance Corporation: The World Bank, 2010). Germany The score regarding the number of times a German business firm pays taxes during a fiscal year and the number of authorities it has to deal with in completing tax related formalities is 16 which is higher than not only the corresponding score in United States and Russian Federation but also higher than the combined score of 14.2 of OECD countries. It thus seems that Germany has comparatively more bureaucratic complicacies than other developed countries. No entrepreneur loves to tackle bureaucracy as it goes strictly by rules without any concern for exigencies or exceptional situations that is so very common in the world of business and commerce. It is almost a corollary that the number of hours required to file tax return is 215 hours which is decidedly higher than the corresponding time required in either United States or OECD countries. Further, the taxation rate as a percentage of profit is also higher at 48.2% which is a good 5% higher than the rates prevalent in OECD countries and 1.5% higher than that levied in United States. Though it might seem at first glance that a difference of only 1.5% would not matter that much but for corporate entities that earn substantial profits that would translate into considerably large volumes of cash outflow (International Finance Corporation: The World Bank, 2010). Hungary Hungary, though a small European country, has a prosperous economy and quite obviously presents a lucrative market for entrepreneurs to explore. But entrepreneurs are as a rule rather wary about interacting with bureaucratic establishment and are also loath to high rates of taxation and complexities of tax related formalities. The score regarding frequency of filing taxes and the number of different agencies a business has to encounter while fulfilling its taxation liabilities is 14 in Hungary and the good part is this score is slightly less than that of OECD countries. But it requires on an average 277 hours every year for completing taxation formalities in Hungary and this is 78 hours more than the time required for finishing these formalities in other OECD countries. OECD countries can be considered a good benchmark since with the sole exception of Chile all other member countries are highly developed and have very good Human Development Indices. Therefore, Hungary would do well to reduce complexity in its tax filing and assessing procedures if it wishes to attract entrepreneurs from all over the world. The rate of taxation measured as a percentage of profit is also exceptionally high in Hungary. Taxes are levied at an astounding rate of 53.3% on profits earned by businesses and this is 10% more than OECD countries. To put matters in proper perspective, only China levies more taxes among the five countries that we are discussing about. Hence, for an entrepreneur wishing to explore newer markets, Hungary might not seem to be that attractive a destination (International Finance Corporation: The World Bank, 2010). Conclusion From what has been discussed above it transpires while China stands at one end of the spectrum while OECD countries stand at the opposite end of the spectrum that deals with taxation rates and formalities connected with filing of taxes. Thus, one might be tempted to draw an immediate conclusion that, entrepreneurs from all across the world would flock to OECD countries to do business and no one would even think of opening a business in China. However, the reality is quite different as China remains one of the hottest destinations of mega businesses of the world. This is so because an entrepreneur looks at many other issues over and above the taxation environment in an economy before making a decision whether or not to open a new business venture in a country. The most important criterion for choosing an economy is the size of the market it offers and the economic stability of the country. China has the largest population in the world and that sure is a guarantee that it would be the largest market any country can offer. Moreover, Chinese economy is one of fastest growing economies of the world with a burgeoning middle class that has more disposable income and matching aspirations to taste and experience all that the developed economies of the western hemisphere have on offer. During 1997-2001 domestic grew at a sluggish rate of only 8.7% annually which was way behind the rate at which GDP and investment grew during the same period. This signified that Chinese consumers were still a wary lot and considered thrift as a virtue. However, the scenario changed drastically after 2002 when Chinese government took steps encourage consumer spending and increase average per capita income in the vast Chinese countryside. During the first half of 2007, domestic consumption rose by 15.4% of what it was during the same period a fiscal year earlier and the increase has remained unabated ever since (Jingmei, 2007). Also, China offers one of the cheapest well trained manpower in the world and this also happens to be one of the main attractions for companies all over the world shifting their bases to this country. The benefits of an ever increasing consumer group that has enough money to spend and availability of abundant employable manpower is far too strong in comparison to the high tax rates and cumbersome taxation formalities. Works Cited International Finance Corporation: The World Bank. "Ease of Doing Business in China." 2010. Doing Business: Measuring Business Regulations. 21 January 2011 . —. "Ease of doing business in Germany." 2010. Doing Business: Measuring Business Regulations. 22 January 2011 . —. "Ease of doing business in Hungary." 2010. Doing Business: Measuring Business Regulations. 22 January 2011 . —. "Ease of Doing Business in Russian Federation." 2010. Doing Business: Measuring Business Regulations. 22 January 2011 . —. "Ease of Doing Business in United States." 2010. Doing Business: Measuring Business Regulations. 22 January 2011 . Jingmei, Qi. "Economy still flying high and looking good." 27 July 2007. China Daily. 22 January 2011 . Read More