Struggling Brazilian entrepreneurs won’t be pleased. A plan to increase the scope of a small business tax has been scaled back by senators fearing the potential loss of revenue.
Senators last week voted on a plan to amend Simples, a special small business tax regime (which has been in existence in various forms since 1996). It included a plan to increase the annual revenue threshold under which firms can benefit from the tax, to 7.2 million reals ($2.2m) from its current 3.6 million.
However senators instead voted to increase the threshold by smaller amount, to 4.6 million reals after concern that offering too generous tax cuts could rob the fiscus of much needed revenue. Brazil has been in a recession since the beginning of last year.
The latest amendments were to come into effect in the middle of next year, but have been pushed back to 2018, by the Senate.
Some concessions were made - the number of tax brackets in the regime will be reduced from 20 to six, a threshold for one-man enterprises known as Microemprendedor Individual will be raised from 60,000 reals to 82,000 reals and those in the regime will be able to pay off tax debt with reduced penalties, over 120 months, from the present 60 months.
However Afif Domingos, the president of Brazil's small business agency Sebrae, is livid that the initial plan to raise the threshold to a higher 7.2 million reals was not granted and that the tax has been delayed until 2018.
While an earlier study (see this post) by the Getulio Vargas Foundation found that a 4.2% growth in small business revenues would be sufficient to offset the loss through the lower tax rates offered by the tax form, small firms are no longer growing.
Figures released earlier this month by Brazil’s statistics agency IBGE show that the number of registered firms with up to nine employees fell by 6.3% in 2014 over 2013. The participation of the informal sector - which had been shrinking since 2003 - is now expanding, according to a measure tracked by the Getulio Vargas Foundation and others.
Rules expanded regime
The climb down by law makers comes after President Dilma Rousseff in August 2014 signed new rules for Simples into law, greatly expanding the categories of business types that can benefit from the tax form. About 10.9 million businesses are now subscribed to the Simples tax system.
The receiver said earlier this month that the 2014 amendments had greatly expanded the number of businesses under the small business tax regime – by almost 1.4 million additional firms up to the end of May this year – and contributed significantly to the 7.4% fall in tax collected in the period January to May this year over the same period last year.
In August last year a report by the receiver said Brazil’s 3.6 million reals tax threshold was the second highest among emerging economies (Mexico, Chile, South Africa and Argentina), after India and a number of developed countries (Japan, Canada and Italy). The limit is more than double that applied in Mexico and three times that used in Chile.
It said compared to other countries Brazil offered currently one of the best tax regimes for small firms, when one considered the incentives and favourable tax treatment the state offered.
It noted that the tax relief offered so far had meant that between 2009 and 2013 the receiver in effect had collected just 47c in the dollar for all those firms that had been taxed under the Simples tax regime, compared to if they had fallen outside the system.
The receiver estimated that the amendments would cost the federal government an estimated 11.4 billion reals in tax forfeited a year. Last week the receiver estimated that the amendments now passed by the Senate will result in a 3.3 billion reals tax loss. Sebrae reckons the loss will come to just 800 million reals.
Not the threshold
For Silas Santiago (pictured above), the chairman of the executive committee that oversees Simples, the problem is not the threshold itself, as 90% of firms benefiting from Simples fall below an annual turnover of 1.2 million reals. The problem rather he says, is reducing the cost of compliance by making it easier and faster to register a business.
In addition those that have benefited most from the Simples rules which came into effect in 2014 have been lawyers, insurance brokers and medical consultants - hardly the kind of businesses renowned for sparking entrepreneurial growth in a country.
Better would be to boost measures to promote more high-growth entrepreneurs (as it has far too few of them - see this post) and do more generally to remove the onerous red tape that Brazil is notoriously for.
Timm is a South African who writes on small business in emerging economies. He lived in São Paulo from in 2014 and 2015 Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a