Has tax initiative helped formalise firms?

Has tax initiative helped formalise firms?

This week Brazil’s small business agency Sebrae celebrates over five years of an initiative that 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 encourage 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 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.

Social benefits

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 jewelry store at a fair in Brasilia (told in the booklet “Sebrae 40 anos”). Registering helped him 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 who register report a subsequent increase in sales after formalizing and 80% can 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 that 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 favoring economic growth, income distribution, and job creation, it argues.

Draw them in

The South African 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 contributed 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 professionalize the business.

Township entrepreneurs then don’t have much incentive to register for tax. Unless it comes with the promise of access to 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 formalize.

As a result of efforts to combine Brazilian small businesses into the formal economic system, a main transformation is underway. Since the primary washout in 2009, the small business panorama has progressed, with new challenges and opportunities.

The pass to legalize businesses has multiplied tax collections, however, it’s no longer just about numbers. The real development is empowering small enterprise proprietors, who now have greater financial flexibility and get the right of entry to to assets they didn’t have before.

The benefits enlarge past the personal quarter. The broader economy benefits from a greater inclusive economic system wherein small businesses support an advantage from the economic hobby. This shift additionally ends in a rethinking of the role of small enterprises in innovation and entrepreneurship.

Given the latest traits, it’s clear that small agencies want ongoing guidance and flexibility to fulfill their evolving desires. For example, virtual structures have become an essential tool, supplying new ways to reach customers and manipulate business. This virtual transformation can in addition lessen limitations to entry and allow small businesses to thrive.

In the heart of Brazil’s bustling economic fabric, a significant yet often understated revolution has been taking place. The country’s initiative to bring micro-entrepreneurs into the tax fold has not just been about enhancing fiscal compliance; it’s been a story of empowerment and economic integration. Over the past five years, this initiative has seen millions of individuals, from clothing retailers to local hairdressers, transitioning from informal ventures to recognized entities within the economy. This shift has far-reaching implications, not just for the entrepreneurs but for the Brazilian economy at large.

The essence of this transformation lies in providing these micro-entrepreneurs with a sense of legitimacy and access to benefits that were previously out of reach. The low tax rates, coupled with the ability to tap into social benefits like retirement funds, have been a game-changer. It’s more than just about paying taxes; it’s about being part of a system that acknowledges and supports one’s contribution to the economy. For many, this step towards formalization has translated into tangible benefits such as increased sales and easier access to materials, thanks to the newfound credibility in the eyes of suppliers and customers alike.

The ripple effects of this initiative extend beyond individual entrepreneurs. By fostering a more inclusive economic environment, Brazil is nurturing a culture of entrepreneurship that values innovation and resilience. The digital era has further amplified these opportunities, with digital platforms offering new avenues for business operations and customer engagement. This digital leap, in tandem with the ongoing support from initiatives, underscores the evolving landscape of small businesses in Brazil. It’s a testament to the power of policy in catalyzing economic transformation, making it a beacon for countries aiming to bridge the gap between informal and formal sectors.

As we look towards the future, the journey of these micro-entrepreneurs offers valuable insights into the potential of small businesses as engines of economic growth and innovation. Their journey from the peripheries into the mainstream economy exemplifies the transformative power of embracing change and the importance of continued support and adaptation to the evolving needs of the business landscape.