Climate Changes and Promoting Energy Efficiency

1
DESIGN CHOICES FOR SMALL BUSINESS TAX
REGIMES CASE STUDIES FROM AFRICA
Presenter Andrew Masters Date April 22, 2009
2
MEASURING THE INFORMAL ECONOMY
As a percentage of GDP (Schneider 2007)
3
INFORMAL ECONOMY (2)
As a percentage of GDP (Schneider 2007)

4
OBSTACLES TO TAXING SMALL BUSINESS

• It is easy for small businesses to remain outside
  the tax net, i.e. they are inconspicuous to the
  tax administration
• They are largely cash businesses inadequate
  accounting records and audit trail
• Complicated tax systems and numerous processes
  (licensing etc.) make it difficult and expensive
  for start-up firms to act in good faith
• In developing economies, small businesses are
  rarely excluded from the tax base but are rarely
  properly attended to by the tax administration
  compliance is thus low
• Presumptive taxes proliferate and are rarely
  fixed or regularly adjusted these regimes
  become stagnant pools often beneficial to small
  business for all the wrong reasons

5
DESIGN CONSIDERATIONS

• Overall design philosophy (Risk critical)
• Fairness and simplicity (Risk critical)
• Migration across regimes (Risk critical)
• Ease of compliance (Risk moderate)
• Ease of administration (Risk moderate)
• Compatibility with existing regimes (Risk
  moderate)
• Achievement of intent (Risk depends on above)

6
DESIGN CONSIDERATIONS (2)

• Overall Design Philosophy
• Purpose of regime?
• For small taxpayers?
• For small taxpayers not able to comply
  tax/accounting requirements?
• What of those entities engaged in service
  activities?
• Nature of taxpayer?
• Natural persons?
• Corporate entities?
• What about VAT?
• Regime parameters?
• Opt into normal tax regimes?
• When does simplicity undermine fairness, and thus
  the regime?

7
DESIGN CONSIDERATIONS (3)

• What about VAT?
• Registered vendors are merely agents collecting
  VAT on behalf of government
• VAT is fully recovered from the consumer by both
  registered and non-registered vendors
• See examples on next slide

8
DESIGN CONSIDERATIONS (4)
Examples
9
DESIGN CONSIDERATIONS (5)

• Fairness and simplicity
• All presumptive regimes trade fairness for
  simplicity
• A blunt instrument with both winners and
  losers
• Determining one acceptable level of profitability
  is always difficult
• Once selected the tax payable should roughly
  approximate the tax that would have been payable
  under the normal regime and should be perceived
  as fair
• If too punitive and deemed unfair run the risk
  of mass non-compliance
• All participants should have the option to
  opt-into the normal taxpaying regimes if so
  desired

10
DESIGN CONSIDERATIONS (8)

• Migration across regimes
• The migration should be as smooth as possible
• Taxpayers at lower turnover levels should be
  marginally better off to encourage growth
• Tax payable should approximate that payable under
  the normal regime
• Taxpayers at higher turnover levels should be no
  better off to encourage migration to the normal
  regime

11
TAXABLE INCOME MODEL

• Egypt
• Proposed for introduction in 2008 (still
  unimplemented)
• VAT threshold reduced from LE500,000 (89,000) to
  LE150,000 (26,550)
• Not to lose good practice of record keeping SMEs
  between old and new threshold to determine
  taxable income on a cash basis
• Below LE150,000 taxable income determined as
• 70 of turnover for service providers
• 40 of turnover for manufacturers
• May opt into normal regime at any time
• Applicable to both natural persons and corporate
  entities

12
TAXABLE INCOME MODEL (2)
Egypt Micro-enterprise regime for natural
persons
13
TAXABLE INCOME MODEL (3)
Egypt Micro-enterprise regime for corporate
entities
14
FLAT RATE MODEL

• Rwanda (Also Kenya, Liberia, Zambia)
• Small taxpayers below VAT threshold of RWF20m
  (36,000) may participate in simplified regime
• Flat rate 4 of turnover regime
• May opt into normal regime at any time
• Applicable to both natural persons and corporate
  entities

15
FLAT RATE MODEL
Rwanda 4 Turnover tax regime for natural
persons
16
FLAT RATE MODEL
Rwanda 4 Turnover tax regime for corporate
entities
17
SPECIAL TAX TABLE MODEL

• Uganda
• Corporate entities not permitted to participate
  in the simplified regime for small taxpayers
• VAT threshold is at USH50m (29,000)
• Small taxpayers may opt into the normal regime at
  any time
• Regime comprises of a special tax table using
  intervals as its basis
• Certain service providers are excluded from
  participation in the simplified regime

18
SPECIAL TAX TABLE MODEL
Uganda Turnover tax regime for natural persons
(stepped)
19
SPECIAL TAX TABLE MODEL
Uganda Existing regime compared to a 1 turnover
tax regime
20
SPECIAL REGIMES

• Tanzania
• Corporate entities not permitted to participate
  in the simplified regime for small taxpayers
• VAT threshold is at TSH40m (32,000)
• Simplified regime must be utilized by small
  taxpayers whose turnover does not exceed TSH20m
  (16,000)
• Regime comprises of two components
• Turnover based regime using a special table for
  taxpayers maintaining records
• Turnover based regime using intervals for
  taxpayers not maintaining records
• Where turnover exceeds TSH20m in normal tax
  regime and may voluntarily register for VAT

21
SPECIAL REGIMES
Tanzania Turnover tax regime for record keepers
(progressive)
22
SPECIAL REGIMES
Tanzania Turnover tax regime for non-record
keepers (stepped)
23
FORFAIT REGIMES

• Gabon
• Limited to individuals
• May opt into the normal regime where record
  keeping is adequate
• Available to small taxpayers rendering services
  whose turnover does not exceed 18,000
• Available to all other small taxpayers whose
  turnover does not exceed 36,000
• Tax payable is agreed by the tax administration
  and the taxpayer

24
PATENTE SYNTHÉTIQUE REGIMES

• Côte dIvoire
• Limited to individuals
• May opt into the normal regime
• Available to small taxpayers whose turnover does
  not exceed CFA50m (102,000)
• A substitute for profits tax, VAT and other
  patentes
• Based on prior years turnover and paid in 12
  equal installments
• Must elect regime before February each year, and
  then must remain within regime for 3 years
• Must maintain certain accounting records
• Fixed amounts of tax for intervals of CFA1m from
  CFA5m to CFA30m and then intervals of CFA2 m from
  CFA30m to CFA50m (36 intervals)
• Tax ranges from Nil to CFA3,920,000 (8,000)

25
ANGLOPHONE AFRICAN FINDINGS

• Use turnover to determine tax payable, exception
  being Egypt
• Most favored approach turnover x flat rate
  which discards progressivity for natural persons
• Next most popular approach special tax table,
  allows for some progressivity
• Generally, small incorporated entities may also
  participate. Excluded in Tanzania and Uganda
• Entities rendering certain personal or
  professional services are excluded from
  participation in some countries (Kenya, SA and
  Uganda)
• The VAT threshold is the most common parameter
  used to establish the boundary for a simplified
  regime

26
ANGLOPHONE AFRICAN FINDINGS (2)

• Most permit qualifying entities to opt-into the
  normal regime if so desired. Only two prevent
  this Tanzania and Zambia
• A number have a tax-free threshold for natural
  persons Egypt, Kenya, South Africa and Uganda
• Only one regime has a tax-free threshold for
  corporate entities South Africa
• Two countries offer additional regimes
• Egypt offers cash accounting for taxpayers
  between the old and new VAT thresholds but in the
  normal or regular regime
• South Africa has a preferential regime for small
  business corporations whose turnover does not
  exceed R14m (2m) preferential progressive tax
  table
• Most countries use the normal / provisional tax
  system to collect advance payments of tax

27
FRANCOPHONE AFRICAN FINDINGS

• Most permit qualifying entities to opt-into the
  normal regime if so desired
• A patent system (patente synthétique) based on a
  schedule of fixed taxes varying according to
  turnover and type of activity popular
  particularly in West Africa
• A forfait regime using basic accounting data
  with, in principle, the support of sectoral
  profit reports (monographies) Congo, Gabon,
  Morocco, Tunisia)
• Application of a rate to the business rental
  value - Benin
• Many jurisdictions apply a (final) VAT
  withholding in respect of sales to government
  bodies
• Many jurisdictions apply a (final) withholding
  tax on imports