Special Taxation Regimes for Taxpayers with Lower Capacity E-Book

Centro Interamericano de Administraciones Tributarias CIAT

• Herausgeber: Centro Interamericano de Administraciones Tributarias
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 215

Veröffentlichungsjahr: 2024

Beschreibung

This study comprehensively and meticulously addresses the taxation of special regimes for taxpayers with lower contributory capacity in Latin American countries. It encompasses both the theoretical aspects of their design (objectives, characteristics, subjects, scope, tax calculation – presumptive technique -, general features such as uniqueness or multiplicity, substituted taxes and social security resources, and trends in their application) and a practical analysis of these regimes (collecting experiences from their application in recent decades, conducting a critical analysis of best practices, and identifying unintended side effects).

Leseprobe

Special Taxation Regimes for Taxpayers with Lower Capacity: Theory and Strategies in Tax Policy and Administration in Latin America

© 2024, Inter-American Center o Tax Administrations – (CIAT)

ISBN: 978-9962-722-60-1

Copyright

The opinions expressed, and the arguments used in this publication do not necessarily represent the official viewpoint of the Inter-American Center of Tax Administrations (CIAT), its executive board, or the countries it represents. www.ciat.org

CONTENT

GLOSSARY

PROLOGUE

TITLE I.  THEORY OF SPECIAL REGIMES

Chapter I. SELF-EMPLOYED TAXPAYERS

Objectives

1. Simplification

2. Formality

3. Social inclusion

4. Supplier control

Chapter II.  MICRO AND SMALL ENTERPRISES

Objectives

1. Promotion

2. Simplification of formal obligations

3. Tax burden reduction

3.a. Presumptive simplified regimes

3.b. Preferential Regimes

3.b.1. Reduction of the tax rate on Corporate Income Tax and Social Security Contributions

3.b.2. Tax benefits

Chapter III. ESSENTIAL ASPECTS

1. Subjects

2. Parameters

a) Gross income

b) Net income

c) Purchase level

d) Economic activity

e) Assets or capital

f) Self-management or persons involved in the activity

g) Street vending or permitted economic units

h) Maximum unit selling price

i) Rental value of the premises

j) Electricity consumption

k) Surface area affected by the activity

3. Tax calculation (Presumptive technique)

a) Percentage over gross receipts or purchases

b) Fixed fee

c) Presumptive income

d) Presumptive value added

e) Substitution of the taxable person

f) Assets

g) Physical magnitudes

h) Agreement between the tax administration and taxpayers

i) Presumptive techniques applied

Chapter IV.  GENERAL CHARACTERISTICS

1. Current regimes

2. Number of regimes (Unit or multiplicity)

3. Benefits granted

a) Simplification of formal obligations

b) Reduction of the tax burden

c) Inclusion of social security resources

d) Substitution of local taxes

4. Preferential regimes: benefits granted

5. Trends in simplified schemes

TITLE II.  TAX POLICY AND ADMINISTRATION STRATEGIES

Chapter I. BEST PRACTICES

1. Simplicity in assessment and control.

2. Perception of risk and perception of benefit

3. Formalisation

4. Number of regimes (uniqueness or multiplicity)

5. Very small and small individual contributors

6. Micro and small enterprises: comprehensive policies

7. Economic activities

8. Emigration to a higher regime

9. Management of tax administration

10. Specific control unit

11. Issuance of electronic tax receipts

Chapter II.  UNWANTED EFFECTS

1. Fiscal dwarfism

2. Gross income fraud

3. Billing fraud

4. Symbolic fixed fee

5. Disguised dependency relationship

6. The politicization of special regimes

7. Wrong design of the special regime

8. Other undesirable effects

Chapter III. SUMMARY

A. Best practices

B. Undesired effects

C. General summary

REFERENCES

GLOSSARY

ECLAC

Economic Commission for Latin America (UN)

CPP

Employer’s Social Security Contribution (Brazil)

IMEBA

Tax on the Transfer of Agricultural Goods (Uruguay)

INSS

National Institute of Social Security (Brazil)

PIT

Personal Income Tax

CIT

Corporate Income Tax

IT

Income Tax

MEI

Micro Individual Entrepreneur (Brazil)

MIDES

Ministry of Social Development (Uruguay)

NRUS

New Single Simplified Regime (Peru)

OECD

Organization for Economic Cooperation and Development

ILO

International Labor Organization

UN

United Nations

RER

Special Income Regime (Peru)

RESIMPLE

Simplified Regime for Small Companies

RIMPE

Simplified Regime for Popular and Entrepreneurial Businesses (Ecuador)

RMT

MSE Tax Regime (Peru)

RRSS

Social Security Resources

RST

Simplified Tax Regime

RTS

Simplified Taxation Regime

PROLOGUE

This study focuses on the taxation of special regimes for taxpayers with lower tax capacity in Latin American countries.

It can be argued that, given the economic and social context, these countries were compelled to be creative and innovative in their tax policy regarding so-called small taxpayers.

The region is characterized by a predominantly low-income taxpayer base, with large sectors involved in the so-called informal economy, resulting in a high level of informality.

That context also provided an opportunity for larger taxpayers in the economic chain (industry, commerce, services) to take advantage of this situation and engage, either wholly or partially, in the so-called underground economy to maximize their income, thereby eroding tax revenues.

Tax administrations with limited capacity in terms of both human and material resources, especially technological resources, focused their target on taxpayers with higher tax capacity, where the additional potential tax to be collected through a tax audit was greater.

This adverse cost-benefit relationship led to this sector of taxpayers often being isolated from controls, creating what I have termed “the fiscal island of informality,” which in many cases became a space distant from taxation.

This led to two distinct universes within the tax system: one comprised the sector that complied with its obligations, while the other consisted of a sector where there was a tacit fiscal tolerance of underground activity.

Gradually, it became evident that these small taxpayers were supplied by a chain of suppliers or service providers with higher tax capacity. Due to the absence of logical conflicts of interest in the tax system (for example, in VAT the computation of input tax credit, in income tax the deduction of costs), and not being required to issue invoices or tax receipts, they also took advantage to develop all or part of their activities without registering, generating a significant level of evasion in the general tax regime.

In this context, dense economic trade knots were created, with transactions not only involving goods lacking fiscal records but also originating from smuggling and illicit activities.

Another factor driving fiscal misconduct was the loss of fiscal discipline due to the social contagion resulting from non-compliance and the lack of effective action by tax administrations.

Initially, tax experts from central countries and international organizations did not give the theoretical and pragmatic importance that the issue deserved, as they did not share the same economic and social context and therefore the underlying problem.

The present topic was tangentially analyzed, and most of the time, authors were limited to studying only the special regime applied in the country under analysis, without leveraging the extensive regional experience. This occurred due to the lack of comparative studies that could point out the strengths and weaknesses of these regimes.

Subsequently, a new approach emerged, credited to two tax experts, Richard Miller Bird y Milka Casanegra de Jantscher (1992)1, With an essentially pragmatic vision, they departed from the traditional theory of developed countries and proposed heterodox but efficient courses of action for both tax policy and administration in emerging countries.

They argued that both taxation and policy were the art of the possible, and that was what tax policy makers in emerging countries should focus on. They emphasized that public finance texts overlooked the fundamental role played by tax administration in restoring macroeconomic balance and promoting equity and efficiency.

Hence, their work filled a gap in the theory by linking tax policy with tax administration reform, aiming to find new methods that lead to improving taxpayer compliance.

Among the tax topics that inexplicably had not been addressed by doctrine, despite their relevance, they pointed out, among others, the regimes for small taxpayers.

In their work, they argued that “in developing countries, tax administration is tax policy,” meaning that, in Latin American countries, the definition of a successful tax policy must consider the actual capacity of the tax administration.

Otherwise, the inefficient implementation of that policy in practice will not only result in the failure to achieve the objectives of tax policy but also, in many situations, the opposite effect of what is intended.

In this line of thought, Shome (2000)2 argued that “...the mark of an advanced tax system is seen, on one hand, in the degree to which there is maximum correspondence between tax administration and the original policy objective, and on the other hand, in the extent to which the feasibility of implementation is considered when conceiving a tax.”

During the 1970s and 1980s, tax legislation generally applied a sales threshold as a parameter for exempting small taxpayers from VAT and a minimum exemption threshold in the Income Tax.

Obviously, the lack of invoicing or under-invoicing improperly allowed many taxpayers with considerable tax capacity to qualify for exemption, thereby extending non-compliance to significant sectors of economic agents.

For small taxpayers, whether they were eligible for exemption or the general regime, their “comfort zone” was informality, where they obviously had the greatest economic benefit.

It was in this context that what I term “first-generation regimes” began to be promoted, which were simplified regimes specifically for VAT, achieved through the application of various presumptive techniques.

The lack of success of these schemes ultimately stemmed from flaws in their design and the pursuit of misguided objectives.

After decades, and understanding the causes of their weaknesses, second-generation regimes began to be implemented, which included an integration of the substituted taxes, with the essential objective being simplification.

As a culmination of this evolution, what I’ve labeled as “third generation” regimes emerged. These regimes integrate social security resources (pension or health) with the aim of achieving social inclusion and promoting formal employment for micro and small businesses.

Regarding the taxpayers of these regimes, there was also an evolution. Initially, the focus was on single taxpayers (individuals), and in a second stage, attention was also directed towards micro and small businesses.

It is worth noting that the strategies for individual small taxpayers differ from those for micro and small businesses, as they have different objectives that must be taken into consideration by tax policy makers.

This has led to the application of new tax strategies according to the taxpayer, and as a result, the formulation of new regimes.

An aspect of fiscal sociology to consider is that small taxpayers, due to their high quantitative representation, organized themselves and became a significant political consideration for governments. This limited the adjustment of regimes by government authorities.

All this copious practice with dissimilar results allows for generating a critical analysis of both best practices and the unintended effects that their application has led to in the tax systems of countries in the region.

The central point is that tax policy makers, often under considerable pressure and facing logical urgencies due to tight deadlines, must develop proposals without having access to a comprehensive analysis of the issues involved, in order to make the best decisions possible.

Therefore, this study aims to provide a comprehensive contribution based on the experience of the last 50 years of its application in the countries of the area, highlighting from its main characteristics to the strategies that have been implemented and their results.

The objective of this research is not only to target tax policy makers and tax administration managers but also academics and research centers. The aim is to provide them with more elements for the evaluation of special regimes, further enriching the debate they often entail.

The current document methodologically consists of two sections. The first section covers the theory of these regimes, including their essential aspects such as objectives, characteristics, taxpayers, object, tax calculation (presumptive technique), general characteristics like unity or multiplicity, substituted taxes and social security resources, and trends in their application.

While the second section has an eminently pragmatic objective regarding the application of these regimes in recent decades, consisting of conducting a critical analysis of best practices, as well as the unintended side effects they have brought to the Latin American tax system.

1Bird, Richar Miller and Jantscher Milka Casanegra de (1992) “Improving Tax Administration in Developing Countries”, FMI.

https://www.elibrary.imf.org/display/book/9781557753175/9781557753175.xml

“La Administración Tributaria en los países del CIAT”, Bird Richard and Casanegra de Jantscher, Instituto de Estudios Fiscales (1992), Madrid.

2“La tributación en América Latina: tendencias estructurales e impacto en la administración, La política fiscal en América Latina: una selección de temas y experiencias de fines y comienzos de siglo”, Shome, P. (2000): “Seminar and Conference Series”, Nº 3, LC/L.1456-P, Santiago de Chile, The Economic Commission for Latin America and the Caribbean (ECLAC). “Taxation in Latin America: Structural Trends and Impact of Administration”, 1999, IMF, Washington.

In taxation, there is an extensive body of doctrine or tax literature regarding the so-called classic or orthodox taxes.

From professors at leading universities to taxation experts and even international research centers, a solid theory has been developed regarding Taxes on Income, Taxes on Wealth, Taxes on general consumption, and Taxes on specific goods and services.

However, because special regimes for small taxpayers are frequently applied in peripheral countries (with Latin America3 and Sub-saharian4 Africa being notable examples), they have not received the same level of theoretical interest from central countries. Apart from some generic research on their application by certain international organizations, there hasn’t been as much focus on their theoretical study.

This theoretical void has resulted in the establishment of regimes in countries without prior consideration through comparative benchmarking evaluations to utilize best practices and mitigate unintended consequences. Consequently, in many instances, regretfully, failed experiences have been replicated, leading to predictable negative outcomes.

The denomination of these regimes, both in doctrine and legislation, varies, making it necessary to clarify the correct terminology to avoid misunderstandings.

Originally in Latin America and the Caribbean, they were generally referred to as “Simplified Taxation Regimes,” regardless of the designation given by each particular legislation.

Currently, the designation “SIMPLE Regime” is prevailing in some countries, while in others, they have a specific denomination given by the legislator, often based on the acronym of its official name.

In the international concert, these have also been referred to as “Preferred Tax Regimes” (ILO), “Tax Regime for Minor Taxpayers” (IMF)5, “Presumptive Tax Regime”6 and “Régimes D´Imposition Forfaitaire”7, etc., to differentiate them from the General Tax Regime (“Régime Réel D’imposition”, “Standard Tax System”).

Considering the tax nature of the various special regimes existing for this sector of taxpayers, a definition and classification thereof shall be formalized.

“The Special Tax Regime for taxpayers with lower contributory capacity is considered as tax treatments, and where applicable, social security resources, which provide certain benefits within the tax system to enhance their tax compliance.”

As subspecies within these regimes, the following can be highlighted: a) Presumptive Simplified Regimes, b) Simplified Regimes of Formal Obligations, and c) Preferred Regimes.

The Presumptive Simplified Regimes are those that, by applying a presumptive tax technique, determine the resulting tax, which replaces the taxes and, where applicable, the social security resources provided by the legislation.

Indeed, in addition to simplifying formal obligations, Presumptive Simplified Regimes aim to reduce the tax burden on taxpayers with lower contributory capacity.

On the other hand, Simplified Regimes of Formal Obligations aim to ensure that small taxpayers continue to pay taxes under the general regime, but their primary goal is to reduce compliance costs by simplifying the formal obligations they bear.

Meanwhile, Preferred Regimes are limited to granting fiscal benefits and social security resources to small businesses within the taxation of the general regime.

Therefore, of the three mentioned regimes, only the Presumptive Simplified Regimes replace the taxes and social security resources of the general regime with a new tax determined based on the application of presumptive tax techniques.

The Simplified Regime of Formal Obligations only improves tax compliance but does not replace the taxes of the general regime.

Preferred Regimes maintain the formal obligations for complying with taxes under the general regime but decrease the tax burden by granting certain fiscal benefits, typically in Corporate Income Tax (reduction of tax rates, deductions, tax credits), and in the Employer’s Contribution to Social Security Resources.

Hence, from a theoretical standpoint, the general analyses to be formulated will be based on the concepts of the institutes according to the definitions given previously.

However, it is important to clarify that regarding the mention of each special regime, it will be based on the official designation given by each country.

The designation of the institute under analysis does not change its tax nature, and to understand it, it is necessary to analyze its essence and the essential elements that configure it.

The development of this section will focus on the objectives, essential elements, and general characteristics of these regimes, distinguishing between those aimed at individual taxpayers and those targeting micro and small businesses.

Regarding the objectives of each class of subjects, methodologically, the most prioritized ones in each will be described, acknowledging that some sought-after objectives are shared by both classes of subjects.

Furthermore, in developing this theme, careful consideration is given to the historical evolutionary framework of these regimes. The objective is to examine the strategies employed during each period of their evolution.

Finally, an analysis will be conducted on their general characteristics and the current trend they exhibit in the tax systems of countries in the region.

3Source: Own information (2023): 15 Latin American and Caribbean countries implement these tax regimes.

4IMF (2007): In this African subcontinent, 25 countries applied preferential regimes for taxpayers with lower contributory capacity. Meanwhile, according to the IDB (2006), 31 countries in Latin America implemented them.

5IMF (2022) “Peru Technical Report – Régimen Tributario para Contribuyentes Menores y Zonas Económicas Especiales”, prepared by Roberto Schatan, Juan Carlos Benítez, Isaías Coelho and José Madariaga.

6Rajaraman, Indira (1995) “Presumptive Direct Taxation”. Economic and Political Weekly Vol.30, No. 18/19 (May 6-13, 1995).

7Mos-Monserrat, Colin, Ribaut, Brys (2023) “La Conception des Régimes d’Imposition Forfaitaire”, OCDE.

https://www.oecd-ilibrary.org/docserver/acd81d56-fr.pdf?expires=1720830048&id=id&accname=guest&checksum=B7CED47BBCDC4D84E101C538C82863EF

Chapter I

SELF-EMPLOYED TAXPAYERS

Objectives

It is considered desirable objectives of this type of regimes the following:

1. Simplification

Simplification implies making a tax system simpler, easier to comply with, both in terms of fulfilling formal obligations and substantial ones.

As its generic name suggests, simplification has been the first and primary objective of these regimes.

For individual taxpayers, simplicity has its reason for being in the fact that it is practically impossible for small taxpayers with minimal or no administrative organization to settle taxes under the general regime due to its high complexity and the associated high cost.

In many cases in countries of the region, for this sector, the cost of complying with formal obligations has sometimes even exceeded the tax to be paid. But this phenomenon can be argued to not be exclusive to the region, as it has global reach.

In European countries, Eichfelder and Vaillancour (2014)8, highlight the existence of a considerable number of studies indicating a high relevance of the compliance costs of ‘bureaucracy’ formal obligations in relation to the tax burden. In their research, the sum of formal compliance burdens often ranges between approximately one-third and two-thirds of the tax to be paid.

Obviously, this burden increases as the economic relevance of the obligated subjects and the administrative structure they possess decreases. Specifically, in low-income individual taxpayers, where such organization is nonexistent.

Among the main administrative costs (‘administrative burdens’), the OECD (2020)9 points out the following: a) formal filings, b) provision of information, c) record keeping, d) withholdings, e) audits, f) the high complexity of legislation, and g) the high bureaucratic level.

“It can be argued that the lower the ability to contribute, the higher the indirect compliance cost, often exceeding what individual taxpayers should pay in taxes. In the case of micro and small businesses, administrative costs under the general regime can consume one to two-thirds of the tax burden.”

Therefore, the original formulators of tax policy aimed to make tax compliance easier under the general tax regime, although initially, the focus was specifically on addressing the issues of Value Added Tax on individuals.

The success of the VAT implied its extension to the widest possible range of goods and services, as well as to all economic agents.

Applying exemption to subjects whose income fell below a threshold had brought about many deviations in its implementation and difficulties in tax administration control. Therefore, there was a push to replace VAT exemption with a simplified regime for liquidating and paying the tax.

Unfortunately, in the origins of this strategy, many of these regimes, it can be noted, were complicated, that is, contrary to the objective they had set, which led to failure in their implementation.

As is well-known, Value Added Tax (VAT) in Latin American and Caribbean countries follows the financial method, which is the European approach. This method calculates the input tax credit against the output tax to determine the resulting tax liability.

Many simplified VAT regimes initially sought to adopt the financial method, and the liquidation formula was determined through a presumed tax liability by category, computing the actual tax credits (so that small taxpayers could demand invoices from their suppliers).

Few small taxpayers who joined were generally not from the informal sector, which was the intended target, but rather taxpayers who switched from the general regime to enjoy its benefits.

Obviously, such a change was possible because it was supported by underreporting sales by many taxpayers, thereby avoiding exceeding the threshold allowed for joining the regime.

This led the authorities to establish limits on the computation of credits up to a certain percentage of debits, depending on the economic activity, thus creating a “minimum tax.”

However, since the liquidation method had the same complexity as the general regime, it was challenging for small taxpayers, leading to low levels of adherence, causing a crisis in the system, and ultimately its repeal.

“It is contradictory that a simplified regime ends up being complicated, which unfortunately has happened on many occasions.”

This loss of simplicity occurred because many of these regimes sought to emulate, in their legislative technique, the tax assessment of the general regime they were replacing, in order to determine as precisely as possible, on a presumed basis, the value added or income.

Another mistake that was often made was also to seek greater equity in the resulting tax burden. Unfortunately, in doing so, the axiom that “greater simplicity leads to less equity and vice versa” was overlooked.

Simplicity in determining the tax burden involves facilitating the calculation through the use of parameters, averages, indices, etc., so the result may be more beneficial for some taxpayers and more detrimental for others compared to the same income level.

“When the goal is simplicity, it’s necessary to reasonably sacrifice a certain degree of equity, thus avoiding the complexity that comes with providing specific treatment to the multiple situations that may arise in reality”

To determine the exact or more equitable tax burden, orthodox taxes of the general regime are available. Therefore, it’s not possible to resort to the development of simplified regimes based on complex tax calculation, which are intended to replace due to their complexity.

Subsequently, other forms of simplified presumptive assessment, both for VAT and Income Tax, were based on a percentage of sales or purchases to determine the tax, or on the determination of a fixed fee per category. These modalities are the most simplified and have been widely accepted in their application.

However, this simplification in taxpayer compliance must be accompanied by a simplification of control by the tax administration.

It should not be overlooked that a simplified regime for tax assessment can be complicated for control, and vice versa. The key to tax policy should be to develop a simplified regime in both respects.

If not achieved, experience indicates that over time, such a regime will cause greater asymmetries and distortions, requiring continuous reforms and instability in tax compliance until its definitive dissolution.

The taxpayers targeted by this regime have been referred to by the tax administration as “hard-to-control taxpayers” González (1994)10 or “hard-to-tax,” distinguished by the economic activity they engage in or their economic size. They are characterized by: a) the number of taxpayers involved, b) their poor organizational level, c) the inability to impose rigorous accounting practices, and d) their tendency to operate in the informal sector.

In this hard-to-tax core, the following taxpayers have been highlighted: a) small artisans, b) small retail and wholesale traders, and c) small primary producers (agriculture, livestock farming, forestry, artisanal fishing, hunting, mining), d) transporters, and e) service providers.

Hence, the need for simplification is mutual, both for the tax administration and for taxpayers with lower contributory capacity.

Distortions have been accentuated depending on where the emphasis has been placed, whether on simplifying the assessment or on control. Experience indicates that it is necessary to find a middle ground in formulating this kind of regime, which has not proven easy to achieve in practice.

2. Formality

In the social and economic context of our region, there are very high rates of informality that hinder control of evasion throughout the chain of production, transformation, distribution, and service provision.

Therefore, from the State’s perspective, the objective of a simplified regime is primarily a matter of tax administration rather than tax policy, as is generally believed.

Tax informality is when taxpayers are not registered and therefore do not fulfill their tax obligations, neglecting their contribution to public finances.

At the outset of the implementation of VAT, some tax policy formulators argued that small taxpayers were not of fiscal interest due to their limited economic contribution, and it was considered that they should be exempt from the tax.

Within this line of thinking, there are two positions: a) exemption from both tax payment and registration, and b) exemption from tax payment, but with the obligation of registration and compliance with certain formal duties.

Exemption was generally established based on the parameter of gross income or the level of billing. This allowed, due to the difficulty of controlling this indicator, many taxpayers with higher contributory capacity to fraudulently categorize themselves as exempt, shifting the burden of proof to the tax administration.

Deficiencies in controlling business volume led, through social contagion, to non-compliance spreading to other economic sectors with higher economic capacity and increased informality levels.

It also created unfair competition among economic agents, between those who formalized their businesses and those who chose to remain outside of taxation, simulating a low level of income.

For tax administrations, it is not acceptable to have a limited register that does not allow obtaining useful information to cross-reference data and detect areas of evasion within the universe of higher-income taxpayers.

Therefore, in formalizing this universe of taxpayers, the essential goal should be to obtain the necessary information to control the providers or service providers of greater magnitude.

Its objective also consists of fostering a tax compliance culture, so that, in light of their potential economic progress, they are more inclined to register and fulfill their tax obligations within the general regime.