This week Brazil’s small business agency Sebrae celebrates over five years of an initiative which aims to help those that run one-man micro enterprises become tax compliant. So how successful has it been?
A week-long series of events (Semana do Microempreendedor Individual) aims to promote these micro entrepreneurs to register for tax and gain training. The initiative ends this Saturday.
The idea behind Microempreendedor Individual is to get more informal workers into the tax system. Since the initiative began in 2009 over 4.8 million individuals have formalised in one of the 480 activities allowed under the formation, says Sebrae. Those with annual sales of up to 60,000 reals ($20,000) and with no more than one employee qualify.
Sebrae says most of these micro-entrepreneurs are concentrated in the commerce and services sectors, and include clothing retailers, hairdressers, beauticians, selling alcohol, snack bars and bricklayers. About half work from their homes.
The tax rate for the form of business is low - once registered entrepreneurs pay a monthly tax constituting just 5% of the minimum wage plus a further one to six reals depending on the sector they operate in. In one year the tax, which can be paid via a web portal, adds up to about 540 reals ($177) per individual.
It doesn't sound like a lot. But the Brazil's tax authority will be able to collect up to 2.6 billion reals in one year from these individuals - invaluable as the government prepares to implement austerity measures.
Most of the individuals have registered to be able to access social benefits such as child support, workmen’s compensation and a retirement fund, which Sebrae in a 2013 report noted has been partly responsible for drawing these micro entrepreneurs to register for tax.
There are other benefits too. The first Brazilian to register as a micro entrepreneur individual - on July 1, 2009 - was Adalberto Oliveira dos Santos, 36 the owner of a jewellery store at a fair in Brasilia (told in the booklet "Sebrae 40 anos"). Registering helped him to boost his earnings because he is now able to secure more stock thanks to the 30-day credit he qualifies for from buyers.
He is not alone. The agency says two thirds of those that register report a subsequent increase in sales after formalising and 80% are able to source materials from buyers more easily.
Has it reduced the informal sector?
Brazil's rate of informal employment began to recede at the beginning of this century, notes the International Labour Organisation (ILO) in a report last year. It fell from 41.7% in 2001 to 30.2% in 2011.
The ILO however attributes the decline in informal employment to better policies which encouraged a more conducive business environment for micro firms (including lower taxation under a 2006 tax, Simples Nacional). These measures formed part of a broader policy framework favouring economic growth, income distribution and job creation, it argues.
Draw them in
The South Africa government is aiming more support and finance at entrepreneurs in townships (areas mainly on the outskirts of cities where black people were confined during apartheid) - see this post. It may be able to learn from Brazil's experience with this tax initiative.
One challenge is how to get more micro firms in the informal sector (which Statistics SA revealed in August last year contribute 16% of all employment in the country) to register for tax.
A micro business tax initiated in 2009 by the SA Revenue Service (Sars) has had little success. In the 2013 tax year less than 10,000 were registered for the tax.
A tax committee, headed by Judge Dennis Davis, last year made several proposals to improve the uptake (see this earlier post). In his budget speech in February the Minister of Finance Nhlanhla Nene announced lower tax rates for firms registered under the tax form, effective from this tax year.
But other hurdles remain. The main one is that unlike tax paid on profit, the tax under this initiative is charged on turnover, meaning one has to pay tax even when one doesn't make a profit.
This is in line with the Brazilian tax initiative, except that registering for tax in South Africa doesn't help one access social benefits like it does in the former.
Crucially too, most informal businesses trade with customers directly, rather than with other businesses. This means there's little reason to register to professionalise the business.
Township entrepreneurs then don't have much incentive to register for tax. Unless it comes with the promise of access better markets - such as supplying big companies and the government. Packaged with financial incentives and business training this may just entice those in the informal sector to formalise.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a