Typically, one of the most debated topics in the business world is the constant search for cost reduction and revenue increase, as well as the feasibility of more competitive market pricing.
Among the potential ways to reduce operational costs, we find the creation of tax arrangements that allow for a decrease in tax rates or a change in the tax base that is more beneficial to the taxpayer. This phenomenon is even more common when we observe a scenario involving small and medium-sized enterprises.
In Brazil, there are 6,4 million commercial establishments. Of this total, 99% are micro and small enterprises (MSEs), which account for 52% of formal jobs in the private sector (16,1 million), according to a report published by SEBRAE.
Potential tax reforms in Brazil have been widely discussed in recent years, and their impact on micro and small enterprises (MSEs) is a central concern, given the potentially devastating effect on the Brazilian market. This segment, which represents a significant part of the national economy, is particularly sensitive to changes in the tax structure.
SMEs do not have the same financial and administrative resources as large corporations to deal with the complexity of the tax system; therefore, the way reforms are implemented may bring both challenges and opportunities for these businesses.
It is important to highlight that, in 2023, the National Congress enacted Constitutional Amendment No. 132/2023, which initiated the process of reforming the tax structure. Currently, the Legislature continues to debate the topic, now at the sub-constitutional level, through PLP 68/2024 and PLP 108/2024.
Therefore, legislators have been seeking ways to enable fiscal readjustment that allows for state funding, as well as enabling the business market to continue to prosper.
A Necessary Simplification of the National Tax System
One of the main objectives of the tax reform under discussion is the simplification of the current tax system. Currently, Brazil has one of the most complex tax burdens in the world, with a series of federal, state, and municipal taxes that overburden businesses, especially small ones.
It is important to highlight that, in addition to the existing distinction between forms of taxes (fees, contributions, and taxes), we also have different triggering events that generate the collection of such amounts (income tax, wealth tax, donation tax, etc.), as well as the different entities that are entitled to such amounts (Federal Government, States, Federal District, and municipalities).
For SMEs, simplification can mean a significant reduction in administrative costs, allowing entrepreneurs to invest more time and resources in their businesses, instead of dedicating themselves to fulfilling complicated tax obligations.
With the potential creation of a single consumption tax, which would replace taxes such as PIS, Cofins, IPI, ICMS, and ISS, micro and small businesses would benefit from a less bureaucratic and, in fact, simpler system.
However, it is crucial to ensure that this simplification does not result in an increase in the effective tax burden on these companies, which already operate with lower profit margins.
Substantial Changes to the Simples Nacional (Simplified National Tax System)
The Simples Nacional, a specific tax regime for micro and small businesses, is one of the greatest achievements of this segment, as it simplifies tax payments through a single payment slip, in addition to offering reduced tax rates.
One of the concerns of SMEs is how tax reform might affect this system. Without a single payment method and reduced rates, Brazil will take a clear step towards increased tax evasion, a rise in tax enforcement proceedings, and informal employment.
While there are proposals to increase the revenue limit for joining the Simples Nacional (Simplified National Tax System), which would allow more companies to benefit from the regime, there are risks that simplifying the overall tax system could weaken the competitive advantages of the Simples Nacional.
It is therefore necessary that the reforms maintain the particularities of this regime so that SMEs are not harmed.
Tax Burden Redistribution Aiming for Social Equity
Another topic of great discussion during the tax reform is the redistribution of the tax burden among the different sectors of the economy. For micro and small businesses, this can have varying effects.
If the tax burden is redistributed fairly and proportionally, SMEs can benefit from a relative reduction in taxes, which would increase their competitiveness. However, sectors such as services, where many SMEs are concentrated, have expressed concern about the risk of increased taxes due to the transition to a single consumption tax.
Furthermore, tax exemptions or reductions for certain inputs or productive activities can directly impact the operational costs of SMEs. Companies that depend on essential materials and services may be directly affected if these particularities are not taken into account during the restructuring of the system.
New Tax Principles
With the advent of Constitutional Amendment No. 132/2023, new principles were enshrined in the constitutional text that should guide national tax law. These are: Simplicity, transparency, tax justice, cooperation, and environmental protection.
Let's look at paragraph 3 of article 145 of the Constitution, included by Constitutional Amendment No. 132/2023, regarding the constitutional amendment of the Tax Reform:
Art. 145. The Union, the States, the Federal District and the Municipalities may impose the following taxes:
(...)
§ 3 The National Tax System must observe the principles of simplicity, transparency, tax justice, cooperation, and environmental protection.
Regarding simplicity, the tax system should be straightforward, avoiding the complexity of taxes and rates. For this reason, the large number of taxes levied on consumption was eliminated, and a single tax model was established.
Regarding transparency, this emerges as a response to a society that coined the slogan " I don't know where our taxes go ." Based on the idea of accountability, the rules, procedures, and results of the tax system must now be clear and accessible.
Furthermore, the mere feeling of having access to information about taxes is not enough; it is essential that the tax system be equitable and proportional, considering the taxpayer's ability to pay. This gives rise to the principle of Tax Justice.
For the other principles to be effective, cooperation is necessary, highlighting the importance of collaboration among all those involved in the tax system.
Finally, due to environmental agendas, the tax system should encourage environmental protection and discourage harmful practices. For this reason, a number of products and services may undergo substantial changes in their tax burden, either increasing or decreasing.
Incentives and Business Formalization
Another expected impact of tax reforms is the encouragement of business formalization. Many entrepreneurs, especially smaller ones, opt for informality due to the high costs and complexity of the current system. As a result, there is no effective accountability or declarations to the tax authorities, and it is considered clear tax evasion.
With a simpler and more accessible system, it is expected that more entrepreneurs will formalize their businesses, increasing their legal security, access to credit, and participation in public tenders.
However, for this to happen, it is crucial that the reforms offer clear and tangible tax incentives to SMEs, as well as effective communication that guides entrepreneurs regarding the new procedures and advantages of formalization.
What can we expect from the new reform?
In the context of tax reforms, micro and small businesses should expect significant changes in the fiscal environment, with both positive and challenging impacts.
Simplifying the system and potentially reducing taxes for productive sectors could create opportunities to lower costs and increase competitiveness. However, it is necessary to closely monitor discussions regarding the maintenance of the Simples Nacional (Simplified National Tax System) and the redistribution of the tax burden to ensure that the specific needs of micro and small enterprises (MSEs) are respected.
According to the Federal Government's forecast, the tax reform is estimated to generate additional economic growth of 12% to 20% over 15 years. Today, this 12% represents an additional R$ 1,2 trillion in the 2022 GDP. In other words, if the reform had been approved 15 years ago, each Brazilian would today have, on average, an additional R$ 490,00 per month in income.
In short, the success of the reforms will depend on how they balance the need for simplification and tax fairness with the protection of the rights and advantages gained by micro and small businesses over the years.
Learn more about this topic in our article "Tax Reform and its Impacts on the Brazilian Tax System" and our free mini-course " Central Aspects of Tax Reform".
Bibliographic references
BRAZIL. Tax Reform – Questions and Answers. Available at: https://www.gov.br/fazenda/pt-br/acesso-a-informacao/acoes-e-programas/reforma-tributaria/arquivos/perguntas-e-respostas-reforma-tributaria_.pdf Small businesses in numbers. Sebrae . Available at: https://sebrae.com.br/sites/PortalSebrae/ufs/sp/sebraeaz/pequenos-negocios-em-numeros,12e8794363447510VgnVCM1000004c00210aRCRD#:~:text=No%20Brasil%20existem%206%2C4,(16%2C1%20milh%C3%B5es).
