RNSF - Management Information Tool

At macro-economic level the very first concern of the States and of the financial institutions providing aid and counselling to the governments of developing countries was about taxation: if it was true that the informal economy did represent such a share of GDP, then it should be transformed into governments’ resources and revenues, all the more so as the provision of support to these firms transform them into formal activities that become liable to the payment of taxes.

Although this issue does not provide much room for intervention from the projects in the field, it is an important one to address because development actors must take a position in this regard: are the informal activities able to pay taxes, willing to do so and having to do it?

Although the willingness to tax the poor may be found paradoxical and counter-productive in countries where tax evasion is likely to be more important from formal actors, the huge numbers of informal operators allow considering the broadening of a very narrow tax base. Doing so, governments are focussing their action towards the upper tier of the informal economy - that is the informal micro enterprises - rather than the lower tier or the income-generating activities.

However the basic principle to be attained should be that whatever resources accrued to the State through taxation of the poor they should be offset by the resources the State redistribute to the poor in various manner.

Early research by the ILO in Africa and Latin America have shown that if they were compelled to pay the various taxes to which the formal sector is submitted, many of the informal activities would not be able to survive (Maldonado, 1999). On the other hand, informal entrepreneurs pay for the VAT on their purchases as if they were final consumers even if they don’t claim for VAT from their clients. Moreover, they are often submitted to the payment of briberies that surveys have shown to be at least equivalent and often higher than the payment of the taxes that they should have paid. And finally, they don’t consider themselves as beneficiaries of the public services that taxes are supposed to provide to the population (electricity, water, sanitation, security, education, health, etc.), given their poor accessibility.

As a precondition of formalisation, the design of a tax that would fit the realities experienced by the informal operators has been attempted in several countries in Africa and Latin America.

In Burkina Faso, the contribution of the informal sector (become contribution of micro-enterprises: CME, in 2014) is a unique tax (called synthetic or presumptive tax in other countries) – paid quarterly - by the operators whose annual turnover is less than 15 million FCFA, the amount of which is fixed according to several criteria (geographical location, category of activity). However, the impact is low and the cost of collection is high.

Some good practices can be presented for Argentina and Brazil where fiscal taxes were combined with social contributions.

In Argentina the “Monotax” system was implemented in 1998 to replace the income tax, the VAT and the social contributions (including for pensions) by a unique monthly lump tax, the amount of which is fixed according to the level of annual turnover, the consumption of electricity or the surface of the workshop (the one of the three criteria that determines the highest payment). Globally, the total amount of taxes due is reduced as compared to what the micro-entrepreneur would have had to pay otherwise. 70% of the receipts go to the social security and 30% to the local governments. Table 1 below shows the amounts to be paid according to the criteria and the branches of activity.

Table 1: Tax for sales activities, locations, services and other activities, 2010-2012[PB-LK1] 

The ‘SIMPLES’ programme in Brazil is similar, seeking to promote “inclusive” development (Van Elk and de Kok, 2014 et Fajnzylber, P., W. F. Maloney and G.V. Montes-Rojas, 2011). It was launched in 1996 with an intensive campaign of information: it targets micro-enterprises with no more than 5 paid employees (excluding services for health, education, finance and real estate). It can be considered as a measure for reducing the costs of formalising.

It consists in the simplification of the fiscal system by replacing the whole set of taxes and social contributions with a unique monthly contribution. Furthermore, social contributions are no longer based upon salaries, but on a fixed share of total receipts (or turnover), hence an incentive for the entrepreneur to hire employees and/or register his (her) informal employees.

Originally the global tax had been fixed at 5% of the receipts; it has then differentiated between micro and small enterprises.

Depending on the criterion for the definition of informality, the increase in the level of formality ranged from 4% (definition by the payment of taxes and social contributions) to 12% (definition by the holding of a license). The positive effect was twice more important for micro-enterprises employing wage earners as compared with those not employing any. Obtaining a license has a positive impact on employment levels and the reduction of social contributions, and especially the decoupling of the social contributions from the wage bill plays an important role in the process of formalisation and of job creation.

Generally, these programmes exempt the beneficiaries from all taxation that would be due for prior activities.

Many governments and international institutions, such as the World Bank, often continue to apprehend the question of the informal economy through the only glasses of tax evasion and the shadow economy: the share of GDP or the amount of loss in taxes is deducted through macro-modelling (Schneider’s estimates are very often taken as references for the size of the informal economy, what they are not, see Charmes, 2016). The miss to win for VAT is stressed. As a consequence, some countries such as Algeria in its Complementary Financial Law 2015, have tested what is called “voluntary tax compliance”, which is temporary and subjects the amounts deposited with banks to a flat rate tax of 7%, a mechanism recommended by the Financial Action Task Force (FATF) to facilitate “the regularisation of the situation of a taxpayer in respect of funds or other assets that would not have been previously or had been incorrectly declared, but originate from legitimate and lawful sources”. The informal operators are consecutively allowed to operate transactions within the formal sector or with the State.

Another efficient method that was introduced in Brazil, Sao Paulo, in 2007 and revealed to be successful consists in taking the consumers’ viewpoint into account by organising lotteries on purchases’ receipts: it encourages clients to ask for proof of their purchase and it put pressure on businesses to register. Although sometimes accused of “crowding out of tax morale” and having negative long-term welfare effects (Fabbri and Wilks, 2016), such programs have also been used in Argentina, Chile, Costa Rica, as well as in China (‘fapiao’), Greece, Slovakia and Portugal.

The generalisation of electronic payments pursues similar objectives.

The concern for taxation of the informal activities leads to the issue of social protection. As a matter of fact, it is not by accident that the two good practices in this domain have jointly dealt with the payment of social contributions. Even before that the ILO comes with its watchwords of social protection for all and of formalising the informal economy, the taxation of the informal sector had also in mind to ensure that the informal operators have access to health coverage and old-age pensions through the official system of social security to which they had to contribute.

It is also one of the main leverages by which public policies are trying to apply the ILC 204 recommendation on the transition from the informal to the formal economy. The recovery of social contributions is the way and means by which the State asserts its pre-eminence, more efficiently than taxation because the outcomes of social protection are more immediately visible than the outcomes of taxation as the public expenditures are rarely sufficiently efficient and well-implemented to reach the targeted populations.

Conclusions

Taxing the informal economy is not synonymous of taxing the poor. And it is not for the State a pure matter of re-invigorating declining revenues. It is also a matter of renewing and renovating the Social Contract that has been put to the test by longing years of inefficient policies addressing poverty in the face of unjust enrichment, corruption, cronyism and mismanagement. This is why it is of primary importance to link taxation to social contributions and to the access to effective social benefits.

To this aim the simplification of procedures, the inclusion of all due obligations into a unique tax that opens access to social protection and more generally all services provided by the State could be a powerful instrument for reintegrating vulnerable and marginal (marginal not by the number but by the concern they represent for the State) populations at the centre of policies concerns, if only they are followed by clear reallocation of resources in their favour. Universalisation of health coverage and of social protection floors, enshrined in the SDGs, offers a unique opportunity for the States to re-build trust among their vulnerable populations and paradoxically the payment of tax can be the occasion for manifesting the re-birth of citizenship within an approach of wider and more efficient solidarity.

References

• Fabbri Marco and Wilks Daniela C. (2016), Tax Lotteries: the Crowding-out of Tax Morale and Long-run Welfare Effects, Erasmus School of Law, Rotterdam University, 18p.
• Fajnzylber, P., W. F. Maloney and G.V. Montes-Rojas (2011), “Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program”, Journal of Development Economics 94(2).
• Maldonado Carlos (1999), Le secteur informel en Afrique face aux contraintes légales et administratives, BIT, Genève.
• Van Elk Koos and Jan de Kok (2014), Enterprise Formalization : Fact or Fiction ? A quest for case studies, ILO, GIZ.

 [PB-LK1]Format for table