The “small taxpayer” and its tax treatment

is an old topic that is still today a problem about which tax policy specialists have not been able to find appropriate criteria that allow establishing a basic technical structure to build a model in this regard.

It is obvious that countries have their own characteristics in what relates to economic, administrative, social, cultural, geographic, and communication aspects, among others, making a solution to the problem more difficult.

Undoubtedly, the topic we are presenting has a close relationship with the inclusion of these companies in the formal sector of the economy, all of which would lead us to a comprehensive and exhaustive analysis that exceeds the possibilities offered by the CIAT on this page, and therefore beyond the objective of this work.

This is why all that we will present our topic in a tight synthesis, linked exclusively with which in our opinion should be the philosophy of these simplified systems as well as the basic elements that, in our view, should be included in the design of its technical structure. On the other hand, we will only mention the most highlighted global aspects that predominate in the criteria used by the majority of the laws, without entering in their specific analysis.

Main characteristics

The study of the topic indicates that ‘small taxpayers’ meet a series of common characteristics that identify them, highlighting the following:

-They create individual enterprises where many of them are family with a small number of employees. They are small size economic units located in general in the final stage of the economic cycle or retailers, usually with a low cultural level.

-Generate a low value-added and their sales are of little significance, do not possess administrative and accounting procedures which prevents them to pay tax on a real basis, therefore they lack of professional advice.

-Irregular societies normally do not possess legal personality and in general have characteristics similar to those previously mentioned, therefore they might also be considered as included in the regime of “small”.

-Some of these companies are not registered in the taxpayers’ registry, nor in the Social security or other bodies of State control.

-Their location in the final stage of the economic cycle means that their operations are carried out with the final consumer who is not normally a taxpayer and therefore considering the characteristics already mentioned, this encourages tax evasion.

-With regard to evasion the most troubling gap is located to level of “providers” given that there is no interest from “small businesses” to request the documentation for the acquisitions they carry out. This encourages providers to not issue the relevant invoice, therefore these income will not be reflected in their VAT or in their income tax, so it creates a chain that involve entities generating significant contributions to the collection potential.

The above tells us that the problem is not only an issue with tax policy through the design of a specific tax or special regime, but also for the difficulties met by the tax administration to fulfill efficiently its purpose, however the important advances in technology and control criteria.

Methods generally used and their objectives

The expressed indicate that it is essential to design a tax model with a simplified payment method that, even if deviating from the actual result, given that in all cases it would be “presumed”, facilitate that task and also allows the administration to accomplish its work efficiently.

We must emphasize that not all legislation pursued a similar goal when designing their technical structure. It is common to find tax policies where the design seeks exclusively to simplify the tax payment to the taxpayer and make easier the task of administration, but without considering or warning that this generates an evasion breach at the level of other taxpayers with a strong impact on the collection.

Is normal that the designs require additional information that in many cases is excessive and unnecessary, what generates rejection in small companies. Such information should be provided in some simple and essential aspects such as the number of employees, amount of purchases of goods and capital, depending on the activity.

One of the most commonly used criteria focuses on establishing fixed fees as payment of the tax, which may vary. This shows us that in the philosophy of these simplified systems, collection is not abandoned. On this aspect the statistical information indicates that these methods generate an income that represents on average a negligible percentage of less than 1% of total revenue.

Our position: The experience and the aspects mentioned tell us that the purpose of the regime should not include among its objectives to obtain resources from these taxpayers but quite the opposite. We believe that the primary objective is to design a technical structure simple and streamlined as possible in a way that facilitates their task and especially allow to create an opposition of interests with their suppliers, so that they are encouraged to apply for the documentation of their purchases so avoid evasion by the suppliers. Therefore, the “small” should be used as a management tool of the administration to prevent evasion of the “big” – suppliers – which are those who provide major revenues to the Treasury.

As a result, to generate an effective opposition of interests, the technical structure of the regime should grant to the “small” a tax credit calculated on the basis of a percentage of the total amount of its documented acquisitions, in such a way that the requirement to request the invoice of their purchases would allow them to avoid paying the tax. Such credit should be more beneficial than not paying the tax included in the price of the purchases.

The regime should set fixed fees for payment of the tax, but their determination should become independent from the revenues of the company, given that it is an information difficult to identify and that usually tends to remain hidden. The method must make possible that the amounts of the fees can be absorbed by the tax credit. If the “small” requires his invoice that will increase his credit and on the other hand the collection of the “big” at the level of their main taxes. The lesser amount we collect from the “small” will indicate that they requested the aforementioned documentation and therefore the greater will be the income collected from the more important taxpayers – the suppliers.

Characteristics that the “small taxpayers” regime should present

From what has been said above, the design of the regime should consider:

(a) A general single tax that through a special regime would substitute the remaining basic taxes such as the general sales tax (Usually VAT Tax) and the income tax.

(b) A simple and attractive technical structure, with a target that does not include the collection.

(c) To grant a “credits” system based on the amount of their purchases to apply to account for the rates that are established as payment of the tax, generating an opposition of interests with their suppliers.

(e) The taxpayer must not have more than one business.

(f) Regarding the inclusion in the special regime, income information could be requested but would not be the main element. The determining factor must be set up with parameters associated with substantial basic expenditures, which although they are linked to income, would form the basis of the credit to obtain. These should be carefully selected so that they are: as few as possible, representative, objective and easy to control.

The technical structure of the regime that we are proposing aims to: i) the total collection of the administration increase in an indirect way through the providers, ii) The “small taxpayers” feel motivated to be identified and incorporated into the circuit of the formal economy with the possibility of not being taxed and iii) the administration would be more efficient.

Our desire is that the characteristics of the mentioned technical structure and its philosophy, invite to reflect and seek the best designs.

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