Variable or Fixed? Do the Math...

The Starting a Business indicator includes a measure for the cost of starting a business. One of the costs Doing Business measures is the registration costs. Whereas one may think that the process of company registration itself can (or should) be similar in countries, the cost of this procedure can be as different as night and day.

During a recent trip to Guyana, I found out that entrepreneurs there are hopeful, as they may have a simpler task the next time they visit the Deeds Registry (see picture) to register their company. The Minister of Finance recently stated in his speech on the Budget for 2008 that a restructuring was planned which would remove part of the variable element of the registration fees and therefore reduce the cost of registering a company or increasing share capital. Other countries have also done this. In 2007, Sri Lanka introduced a flat registration fee. Egypt also included a flat fee system for the registration of property, which led to an approximate 28% increase in revenue.

So what is a variable registration fee? In essence it means that you pay higher fees the higher your registered capital (and vice-versa). Close to 50 economies in the Doing Business report still have them. Variable fees have been used as a source of revenue for many governments. However, the majority of countries have introduced flat registration fees, which as the name states are a flat fee regardless of the capital of the company.

Complicated variable fees for company registration can have unintended consequences. For one, there is the incentive for the entrepreneur to register his or her company with the lowest possible capital amount (and hence pay less!). This could potentially mean that the revenue generated by the use of a variable fee is in reality not that much greater. Second, the complexity of some of these fee calculations may lead to less transparent payment practices. Ideally, an entrepreneur would pay a flat registration fee that would cover only the cost of the administrative transaction.

It is not only the poorer countries that could make their registration costs simpler. I leave you with an example from an OECD country. The standardized company used in the Doing Business methodology has a capital amount of 219,760 in local currency. Below is the country’s registration fee calculated by capital amount:

If the company’s capital does not exceed 3,005.06 €: 6.01 €.

2nd Scale - Quantity exceeding 3,005.06 € up to 30,050.61 €: 0.10 %;

3rd Scale - Quantity exceeding 30,050.61 € up to 90,151.82 €: 0.08 %;

4th Scale - Quantity exceeding 90,151.82 € up to 240,404.84 €: 0.06 %;

5th Scale- Quantity exceeding 240,404.84 € up to 601,012.10 €: 0.038 %;

6th Scale - Quantity exceeding 601,012.10 € up to 1,202,024.21 €: 0.02 %;

7th Scale - Quantity exceeding 1,202,024.21 € up to 6,010,121.04 €: 0.009 %;

8th Scale- Quantity exceeding 6,010,121.04 €: 0.005 %.

The total amount will not surpass 2,181.67 €.

You do the math!