The special tax regimes for small taxpayers in LA: the pending challenge.

Paraphrasing Vito Tanzi[1], we can say that in Latin America small taxpayers are allergic to the general regime of the tax system. But it should also be made clear that this allergy has its causes and that these are well founded. It is not logical to demand the same tax burden and cost of formal compliance from this universe as from taxpayers of greater tax significance.

But a lot of time was wasted with this stubbornness, to the extent that a Tax Administrator even argued at a CIAT Technical Conference in the 1990s that “…accepting a special regime for small taxpayers was a confession that that country had an atrophied tax administration”.

However, reality prevailed, and countries began to create multiple special regimes to include them in the tax formality. It is worth noting that they were very innovative, I dare say, they were the most creative in the world.

What I have called the special regimes of first-generation were limited to creating separate tax regimes by tax (income tax, VAT). Until we reached the second generation, which includes not only taxes but also social security resources.

Here it should be clarified that, based on experience, several categories of subjects in this group began to be distinguished, namely:

  • very small taxpayers,

  • small individual taxpayers,

  • micro enterprises,

  • small enterprises, and

  • medium enterprises.

While countries initially focused on the very small taxpayers[2], the problem had not been solved, and so they created regimes for the remaining small taxpayers.

Brazil, with the SIMPLES (1997), set a milestone for micro and small enterprises[3] by creating a special regime that replaced 14 federal taxes and social security contributions. In 2006, it took another leap forward by including indirect taxes (ICMS and ISS) from States and Municipalities. The presumptive technique was the application of a progressive rate according to the level of income.

Argentina took the other leap forward in 1998 with the creation of the single tax (monotributo), aimed at individuals, with a comprehensive concept, by including with a single payment of a fixed fee determined by legislation[4], national taxes, social security resources and health insurance.

The objective of SIMPLES was to make life easier for micro and small businesses and to increase the employment registered by them, taking into account that the business contribution was not for the payroll of the wages they paid, but a percentage of the income.[5]

On the other hand, the single tax (Monotributo)[6] had as its purpose the tax formality of the small individual taxpayers, and their social inclusion. In other words, this special regime had not been set up to increase collection but, from the TA’s viewpoint, to broaden the taxpayers’ base and thus be able to control the providers, and from the interest of the taxpayers, to grant social inclusion by being beneficiaries of retirement, and qualified health benefits.

Even the OECD and G20 countries have given them a special treatment, albeit with a broadly different strategy. This is how special regimes have been created for the income tax (Austria, China, Czech Republic, France, Hungary, India, Italy, Japan, Poland, Portugal, Slovak Republic, Spain). In VAT, they have mainly chosen the exemption.[7]

At present, tax policy makers in Latin America do not discuss whether a special regime is needed for small taxpayers, but rather which ones are most suitable for the needs of their country.

Within this framework, two new regimes that were recently created in countries of the region are not giving the desired results: not only have they not reduced informality but they have also led to an outflow of taxpayers from the general regime, which implies a loss of collection.

In other words, the poor design of these regimes can lead not only to their failure to meet the proposed objectives, but also to an increase in the distortions that their implementation was intended to correct.[8]

There are lessons to be learned, so as not to trip over the same stone twice. Among them we can highlight:

  • More than one special regime should apply, depending on the category of the small taxpayer,

  • There should be at least one regime for small individual taxpayers that aims at their social inclusion, granting them benefits from social security resources and for TA, having them registered would make it easier for them to control the informal production and marketing chains that supply them (as well as the smuggling on which many rely),

  • there should be another regime for the micro and small enterprises (and the low-level medium sized ones), aimed at facilitating their compliance and , as a stimulus, able to grant them certain tax advantages (payment plans, lower social security contributions, etc.).

In short, a successful special regime would be one that would involve incentives for small taxpayers,  recognizing their particular situation, and enable the TA to facilitate their control, and more than anything else, the control of the medium and large taxpayers who informally supply them, generating serious harm not only to the national treasury, but also to the competition, since it is unacceptable that small compliant taxpayers are left out of the market in the face of non-compliance, because of the economic benefit that evasion entails for that sector.[9]

[1] He noted that in Latin America, individual taxpayers were allergic to income tax.

[2] The dilemma for tax policy makers was exemption or a special regime, given their low tax significance.

[3] Because of the level of invoicing allowed in many countries in the area, it would also include medians of low-income.

[4] Currently, the tax of the gross revenues from provincial jurisdictions that have an agreement with the Nation is included.

[5] In this way, labour-intensive companies were subsidised. As for equal income, the same was paid, regardless of the number of staff employed.

[6] Today it has more than 3,000,000 of taxpayers.

[7] Instead, Spain and Turkey apply a special regime.

[8] As the saying goes, sometimes “the remedy is worse than the disease”.

[9]  ” Regímenes Especiales de Tributación para Pequeños Contribuyentes: Teoría y estudio comparado: Roberto P. Sericano, Author: Darío González, Editorial EDICON, Consejo Profesional de Ciencias Económicas de la Argentina.


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