Author (s):
The World Bank (in cooperation with DFID)
Date:
December 2007
Publication (if applicable):
N/A
Abstract (if Available):
Small businesses are a unique phenomenon for the tax system: besides wage earners, who generally are only subject to income tax withholding, they form the bulk of taxpayers in the tax net. At the same time, however, small businesses are the major contributors to the informal economy operating outside the tax net. This is not an antagonism. In many developing and transition countries, micro and small enterprises (MSEs) are the most rapidly growing business segment. Compliance risks and attitudes in the small business segment of the taxpayer population are fundamentally different from large taxpayer compliance behavior. In case of larger businesses, the core risk for the tax system is the recourse to tax avoidance strategies. Large businesses (and wealthy individuals) have access to sophisticated tax advice to develop strategies for the reduction of their tax liabilities, e.g. through the use of transfer pricing techniques. Smaller businesses are more likely to engage in tax evasion practices and either operate completely outside the tax net or hide a certain part of their business transactions from the tax inspector. The risk of detection of such tax evasion practices can be rather modest in countries with weak tax administration enforcement capacity or a high level of corruption in the tax administration.
The toolkit specifically discusses strategies and options to facilitate small business compliance with the tax system.
