Gimme a break! Brazil's small-business owners are looking to improve their tax deal. Every little bit helps

Latin Trade, March, 2005 by Kenneth Rapoza

Viviane Pizzol owns a small store and buffet restaurant on the Rua Santos, an avenue in an upscale neighborhood in Londrina, the third-largest city in southern Brazil. At midday on the weekend, foot traffic flows in and out of Pizzol Mini Market. The cash register is busy. The self-service restaurant is jam-packed.

Pizzol is a classic example of the Brazilian small-business owner. In business for 24 years, 2004 marked the first time she's ever taken out a loan. She blames Brazil's high interest rates. State-run Banco do Brasil loaned her US$3,739 for two and a half years at 1.6% per month so she can add shelf space. The annual percentage rate adds up to a crippling 19.2%.

Pizzol has managed to survive without lenders, but taxes are another story. For unemployment insurance, it's $176 per month, a figure which doubles in December because of a law that grants all salaried employees an extra month's income at the end of the year. Then there's social security taxes, another $636 monthly. Another $48 to pay union fees. That's mandatory, even if she doesn't participate in a union.

"If one of my employees makes $187 per month, he really costs me $299," she says. "Taxes have to come down. Tell me, who pays more taxes than a Brazilian business owner?"

Almost no one in the Western Hemisphere. Payroll taxes in Brazil are 42.1%, compared to 24.3% in the United States. Social security and corporate-income taxes cut 34% from the gross profits of companies of all sizes here. There are nearly 60 different types of taxes. And they have quite an appetite. For every $100,000 a company makes, roughly $40,000 goes to taxes, according to government numbers.

Small businesses could do better, if Brazil's small-business lobby, known as Sebrae, gets its way. Tax reform at the end of 2003 promised to provide even more tax incentives to all small businesses. Many sectors, like private schools and professional services, however, are not covered by current law.

The 2003 law, called simples, allows small companies earning up to $448,632 annually to pay all of their federal taxes one time per month instead of on different due dates for different taxes. That didn't go far enough, apparently. So the Sebrae version includes state and local taxes, too. On top of that, Sebrae and its allies in Brasilia hope to raise the qualifying ceiling to $2.2 million. Currently, companies that outgrow simples, even by a few hundred thousand, watch their federal taxes nearly double to 15% per month. It might not seem like much, but companies here pay taxes on gross revenue. A small accounting company making $2,990 per month might have $1,122 left over after paying salaries and utility bills. A 15% tax burden slices that profit in half.

"The new law won't change the way we compute taxes, but it will continue to lower the tax burden for the qualifying companies," says David Soares da Silva, a tax lax.wer at Farroco & Silva in Silo Paulo. "That's what Sebrae wants. What they ultimately get is another story."

Besides simplifying tax payments, the law would cut taxes altogether on exports; create a unified registration system so company data can be easily swapped between banks and governments; and it would allow financial institutions to open more credit lines for small businesses, currently responsible for over 56% of the country's job market and 20% of national economic output.

No credit. Without access to credit, small companies find it harder to stay in business. The entrepreneurial class suffers, and the job market follows. On a national level, small companies have access to only 10% of the credit offered by both private and public banks. In Silo Paulo, for example, Sebrae estimates that 61% of small-business owners do not qualify for a bank loan. Nearly a third have financed operations on credit cards. Nearly 60% of new start-up companies fail, no matter what they are selling.

"The situation small-business owners find themselves in is bad," said Silvano Gianni, president of Sebrae in Brasilia. "Many small-business owners and startups are forced to evade taxes because they can't keep their doors open otherwise. This law is going to lower taxes and lower interest rates for the small-business owner who, until now, has been operating under a bureaucracy that treats them no differently than a major national corporation."

Finance Minister Antonio Palocci said last year that the government would exempt small companies earning $13,459 annually from federal taxes in 2005, if they are paying state and municipal taxes. "The government was slow to catch on to small businesses' needs," Gianni says. "But we've managed to convince people in Congress that this is a big problem for Brazil. I'm optimistic."

The business class has been fuming over taxes since May. Calling for tax breaks has become as hot a growth issue as interest-rate cuts. Luciano Sousa, owner of Itala Sportswear in Londrina, designers of boutique leisurewear, says the simples plan has helped, in spite of all the other barriers companies face. The four-year-old company earns an average of $22,432 monthly, 5.4% of which goes to the feds. The governor, Roberto Requao, is also helping. Parana state taxes for small businesses earning over $14,954 per month is just 3%. "These tax benefits are very beneficial" Sousa says. "But the Sebrae plan will be even better." He wife, Luciana Romagnoli, Itala's designer, says payroll taxes and labor laws are the bigger burdens.