A Brazilian government programme that aims to get the self-employed to formalise, could leave an over $150-billion hole in the fiscus over the next 40 years, says a new study.
The study was released earlier this month by Ipea, a Brazilian state research institute.
The government’s Microempreendedor Individual (Individual micro entrepreneurs) programme, which has been in operation since 2009 allows one or two-man firms to register as a simplified company type.
The idea is to help more of the millions of those who operate in the informal sector as street traders and other types of informal work to get into the tax system. The main draw card is that registration allows them and one other person they employ, to be covered by the government’s social security system.
Self-employed persons with an income of less than 81,000 reals per year can qualify. As a social security payment they need contribute only five percent of the minimum salary, which in 2018 will be 954 reals
By December last year about 7.7 million beneficiaries had signed up to the tax type.
But the study's author Rogerio Nagamine Costanzi points out that the tax amounts to a poorly aligned government subsidy.
Participants contribute next to nothing (just five percent of future benefits), yet upon retirement are able to draw on thousands of reals in benefits.
This estimates the author is expected to leave an accumulated 464.7 billion to 608 billion reals ($150bn to $192bn) deficit between 2015 and 2060.
Costaniz gives the example of a woman who after completing 15 years under the tax form retires at 60 years old. She has an average life expectancy of an additional almost 24 years. While she had put in 6,900 reals in contributions, she will get 135,600 reals of benefits.
The country already has one of the most generous pension systems in the world, but unsustainable benefits have seen government debt explode in recent years. A top minister this week said the state's plan to reform pensions will be put to Congress next month.
In addition the Ipea study points out that most of the beneficiaries of the Microempreender Individual tax are not from the lowest tax brackets – the average monthly income of such taxpayers (2,532 reals in 2014) is above the average monthly income for the labour population (1,453 reals).
Furthermore, 16.2% of MEI beneficiaries have completed college, above the average for the private sector of 14.8% or those that are not subscribed in the programme (10.2%).
It suggests says Costanzi that many persons using it are perhaps not the wholly self-employed workers that the programme aims to benefit.
It’s not the first study to show up the ability of the tax type to reduce informality in Brazil.
Second study to suggest losses
A study released in February last year by Rudi Rocha, Gabriel Ulyssea and Laísa Rachter also indicates that the programme led to net losses in tax revenues and had few benefit to lowering informality in Brazil (see also this earlier post).
The study found that the main restriction to formalisation are not entry costs, but the costs of remaining formal.
“In terms of cost-effectiveness, the formalisation effects from the tax reduction are too modest to generate a net gain in terms of tax revenues and our back of the envelope calculation suggests a net monthly loss in tax revenues,” said the authors.
Brazil's rate of informal employment began to recede at the beginning of this century, notes the International Labour Organisation (ILO) in a 2014 report. 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
It's then difficult to say that offering better retirement benefits for self-employed has increased formalisation. Brazil then, should focus more on lowering its gargantuan bureaucracy that holds back business (the World Bank ranks it 125 out of 190 countries for ease of doing business).
Reducing the number of forms, licenses and processing times may make entrepreneurs more confident to register for tax. This could prove vital, as the country recovers from one of its worst ever recessions.
Timm is a South African who writes on small business. Download the Ipea's study here. Follow Small Business Insight on Twitter at @Smallbinsight.
The number of registered businesses in Brazil leapt from 2.5 million to 11.6 million between 2007 and 2016 following the introduction of a special small business tax regime, charges the country's small business agency Sebrae.
Sebrae this week shared the results of a study that revealed that in December 2007 Brazil had 22.7 million business owners, 2.5 million (11%) of which were in the formal sector. By the end of last year the percentage of registered firms stood at 50% of the 26.1 million firms in the country.
Sebrae expects the number of small businesses to continue to climb and estimates that there will be 17.7 million registered firms by 2022 - or 63% of the expected 28 million firms.
The number of registered firms include a special category for one-man micro entrepreneurs (referred to as microempreendedores individuais) introduced in 2009 which account for the majority of these entities (see this post), to registered small and micro firms.
However the agency attributes much of the radical increase in formalisation to the onset of the small business tax regime Simples Nacional in 2007.
Sebrae President Guilherme Afif Domingos pointed out that the increase in formalisation has also had a direct impact on tax collections.
The federal tax contribution from the Simples Nacional tax regime has almost doubled between 2007 and 2016 – from 4.2% of all taxes, to 7.9%. In 2008 the tax collection from Simples stood at $41bn and this climbed to $73bn by 2016.
“I don’t know any other segment of the economy that has seen its participation in tax collection double. When Simples was created many people alleged that the government would lose a lot of tax. Today we have the proof that the more we simplify and reduce the tax burden the more formalisation and tax collection grows.”
Earlier this year Sebrae released figures that reveal how the Simples tax regime has helped to double the survival of firms subscribed to the tax form (see this post).
As the country begins to slowly emerge from an over two-year recession the agency is fighting to ensure that tax breaks remain in place for small businesses.
Yet the real work will be to simplify with more haste the country's byzantine bureaucracy, of which Brazil has barely begun to do (see this post). A bigger effort is needed.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Small businesses in India are in a state of confusion following the implementation on Saturday (July 1) of a groundbreaking new Goods and Services Tax (GST).
The tax form is intended to bring together and simplify the multitude of taxes that each of the country’s 29 states charge consumers and producers, and in so doing lower India's cost of doing business, but the structure is complicated – it includes four tax bands.
Businesses must file 37 forms a year (three monthly and one annually - see here) - though firms with sales of less than two million rupees ($30,800) are exempt from charging GST.
Despite media reports of some small businesses shutting shop temporarily, the finance ministry said the first two days after the rollout of GST had passed “without any major problems being reported”.
In addition India’s revenue secretary Hasmukh Adhia (pictured above) said today that in the case of retailers, such firms will have to just file one return form as the two other forms will be auto populated.
Adhia explained last week that the multiple rates were decided upon because India has a mix of rich and poor. "In our country, where there are different strata of society to be looked after, it's not possible to have an ideal GST," he said.
Since the launch of the GST portal on June 25, 223,000 firms have joined the tax system.
Previously India taxed producers rather than both producers and sellers. Tax applied only to firms with sales of 15 million rupees. With the GST threshold set at 2 million rupees millions of firms will fall into the tax net for the first time.
An agent from Crisil SME Ratings in May said the lower tax burden under GST will reduce the cost of raw materials and logistics, while increasing for those in the services sector.
But the tax is bad news for small firms hesitating to shift into the formal economy. (India has cancelled the registration of more than 100,000 companies which were "in violation of laws", Prime Minister Narendra Modi said on Saturday)
In addition India's Financial Express says India’s top rate of 28% makes it the country with highest GST rate going past Argentina that levies 27% tax on goods and services.
Ultimately GST is likely to reduce red tape and improve India's competitiveness, while increasing the tax base needed for India to fund the rollout out things such as better education and more infrastructure.
While some small business associations have called for subsidies to allow small firms to weather the changes, Indian authorities should rather look to help move more Indian SMEs onto the internet and provide better tax help. In the end there's no gain without pain.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Small and micro enterprises that opt for a special tax dispensation in Brazil are more than twice as likely to survive their first two years than that don’t opt for the dispensation, a new study reveals.
The study, by Brazil’s small business agency Sebrae, reveals that 83% of small and micro firms that started in 2012 and subscribed to Simples tax, survived in their first two years in business – compared to 38% of those that paid ordinary business tax (by presumed profit or real profit).
As of the middle of last year about 10.9 million businesses were now subscribed to Simples, which was introduced in 2006 (although it had been running in another form since 1996) and offers various lower tax rates according to a firm’s turnover.
It also reduces the tax burden that firms face (which can takes firms an average of 2,083 hours a year according to the World Bank) as it brings together eight tax types. Firms only need complete one tax form a month, instead of eight for those outside of Simples.
Currently the government provides a long list of those kinds of firms that can take advantage of the tax form. Sebrae is fighting to expand the tax types to more forms of small businesses.
The research also revealed that between 2012 and 2016 the number of firms opting for Simples has grown by 64% - from 7.1 million to 11.6 million.
The growth has mostly been driven by the registration of those signing up for Microempreendedor Individual, a registration form for two-man firms, which alone grew 150% during this period.
Brazil is slowly recovering from its worst ever recession, which has dragged on since 2015. Last year senators scaled back a plan by Sebrae to increase the threshold under which firms can benefit from Simples (see this earlier post).
Sebrae had wanted senators to vote 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.
The latest amendments were to come into effect in the middle of this year, but have been pushed back to 2018, by the Senate.
'Biggest programme in world'
On Tuesday Sebrae president Guilherme Afif Domingos (pictured above) told a senate committee that Simples has helped incentivise businesses to register and has generated employment.
In addition he said over the last 10 years Simples has grown 10 times faster than the growth in all federal taxes collected.
“It can be considered as the biggest programme in the world for the social and economic inclusion,” he said, adding that in the last 10 years small and micro firms have created 10.7 million jobs while large and medium-sized firms have closed over a million jobs.
Simples is a laudable effort. Yet it perhaps demonstrates more than ever the gargantuan tax system that continues to bedevil entrepreneurs who operate there. Much more work lies ahead for Brazil in reducing the weight of centuries of unnecessary bureaucracy.
Timm is a South African who writes on small business in emerging economies. For more view this Sebrae presentation (in Portuguese). Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a