A “simple” path to formal employment

International Labour Organization (ILO)

The following article was written by ILO’s Department of Communication

A “simple” path to formal employment

In Brazil, formal employment has risen by almost 14 per cent in a decade…SUPERSIMPLES is part of the reason. The forthcoming American Regional Meeting of the ILO will consider employment and social protection policies as boosters of productivity and formal employment.

Feature | 09 October 2014

Wilker Barbosa

BRASILIA (ILO News) – Wilker Barbosa is the owner of Eventhus Buffett, a small business in Brasilia that organizes parties, dinners, birthdays and weddings. From the food to the waiters, he provides clients with everything they need for a successful event.

 Barbosa’s business started out in the informal sector in May 2008, but only two months later his company became part of the formal economy. According to Barbosa, that change was mainly due to his decision to join SUPERSIMPLES, a government programme that has reduced taxes and simplified regulations for many small businesses in Brazil.

 “For me, it’s a great system,” Barbosa says. “Just to give you an example, when I started my business I paid R$ 90 (about US$39.50) in taxes for every R$ 1,000.00 (about US$439) billed. After joining SUPERSIMPLES, I only paid R$ 40 (US$17.55) for every R$ 1,000 earned.” Since joining the system, Barbosa has profited from tax credits of around 40 per cent per year.

But moving into the formal economy is not only about respecting tax and labour laws. Governments across the world try to reduce the size of the informal economy because of the many other negative aspects that are associated with it, including poor labour conditions and a lack of social protection for workers and employers alike.

Policy initiatives show that a set of approaches can be combined to facilitate the move to formality. A recent ILO study on Enterprise Formalization discusses some of them, citing the Brazilian SIMPLES programme launched in 1996 (which became SUPERSIMPLES in 2006) as a successful strategy to formalize enterprises.

SUPERSIMPLES was created by the General Law on Micro and Small Enterprises that was adopted by the Brazilian parliament in 2006. Since it came into force in July 2007, some 9 million businesses have joined this system of taxation, paying more than R$ 267 million (US$ 118,215,784) in contributions to the treasury.

Reducing tax burden by 40 per cent

The innovative taxation system brings eight different taxes into a single one, thus reducing the average tax burden of companies by 40 per cent. The Brazilian Senate has recently passed a bill that extends SUPERSIMPLES to the whole country.

 From 2015, the only criteria for small businesses wanting to join the system will be maintaining an annual sales ceiling of R$ 3.6 million. The Brazilian Service of Support to Small and Medium Enterprises (SEBRAE) estimates that some 450,000 small businesses representing more than 140 activities in the service sector will be entitled to join the programme.

 The new rules will also exempt some activities from paying taxes on goods and services in advance. Before, companies with low capital ran the risk of going bust when their products did not sell well. In some cases, they were simply pushed into the informal sector.

Reducing red tape

With SUPERSIMPLES, red tape has also been considerably reduced. Starting a business has become much faster, as the only document required is proof of a registered production site, which can now be located in the residence of the micro entrepreneur. This was not the case before.

According to the Brazilian Minister of the Department for Micro and Small Enterprises, Guilherme Afif Domingos, the new rules “should strengthen the formal economy, create more jobs, promote citizenship and social protection for entrepreneurs and their families.”

It’s a long way to formality
According to the ILO’s 2012 Labour Overview, the extent of informal employment in Latin America and the Caribbean was 47.7 per cent in 2011, down from 49.9 per cent in 2009. The numbers are higher for young people: six in 10 working youth aged 15 to 24 have an informal job. The ILO estimates that, if the region continues to grow in the same way as it has over the past decade (an exceptional period), it will take up to 55 years to halve informality rates.

He says that the first step will be to expand the scope of the system in tandem with a broad review of the taxation system, including tax ceilings, bands and rates, in order to make it even more attractive and compatible with the goals of promoting employment and income opportunities.

“In 2012 the rate of formal employment in Brazil reached 56.6 per cent, up by 13.9 percentage points in a single decade. This very positive trend can be explained by economic, institutional, political and social factors that mutually reinforced each other,” concludes Lais Abramo, head of the ILO country office in Brasilia.

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