Government targets Simples Nacional to balance accounts

One of the measures proposed by the government of Luiz Inácio Lula da Silva (PT) to balance federal accounts is to promote changes in Simples Nacional, a special taxation regime for micro and small companies. The adjustments are studied by the Ministry of Planning, led by Minister Simone Tebet, and revive an old debate about the incentive – which, according to the Federal Revenue, is the largest of all tax exemptions in the Union.

Defenders say that Simples should not even be considered a tax waiver, as without it many of the companies covered would not even exist or would be informal – and, therefore, would not collect taxes. On the other hand, critics claim that the system discourages the growth of companies and has accumulated distortions over time, by raising the limits of eligibility and allowing the entry of independent professionals.

The Ministry of Entrepreneurship defends the tax regime and its role in the creation of formal jobs and the birth and death rates of companies, but told People’s Gazette who agrees with Minister Tebet “on the importance of Simples undergoing a review, to improve the system”. The ministry stated that it was ready to participate in the debate with the Ministries of Planning and Finance and civil society.

Tebet declared that Simples needs to be “improved”, reduce distortions and generate more revenue for the government. The measure would fit into the axis that the minister called vertical spending review – including the rectification of errors, fraud and inefficiencies.

She cited measures to check which professionals have classified themselves as Individual Microentrepreneurs (MEI), and also a data crossing, by the Federal Revenue, in order to identify companies that open several CNPJs so as not to be excluded from Simples. In her assessment, “what is considered Simple and Microentrepreneurial has been expanded too much”.

“There is tax expenditure that does not need to be extinguished, but improved. Supersimples, in relation to values. What is considered Supersimples in Brazil? Who is an individual microentrepreneur? It is a second analysis in the redesign. Let’s not extinguish it, but improve and tie a little more, that this also generates revenue”, Tebet told Folha de S.Paulo.

The minister stated that this review would be a way of achieving “tax justice” and mentioned that Simples Nacional covers between 27% and 28% of all “tax expenditures” – tax incentives – of the federal government. Because it has a tax regime that is different from the others, with reduced taxes, Simples is counted by the government as a tax expense, which is how the Federal Revenue Service calls exemptions.

The numbers estimated by the Revenue are slightly lower than those cited by Tebet. According to the Tax Expenditure Statement attached to the Budget, the Tax Authority’s forecast is that Simples will correspond to 23.94% of the Union’s entire tax waiver in 2024 and 22.25% in 2025.

Both this year and next, the total value estimated by the Revenue in tax benefits exceeds half a trillion reais. According to Tebet, the regime was “excessively expanded” and “courage” is needed to review errors and fraud.

The executive director of the Independent Financial Institution (IFI), Marcus Pestana, states that it would be necessary to change the amount of waivers in order to guarantee the health of public accounts. In relation to Simples Nacional, he assesses that the ceiling of R$4.8 million in revenue is very high for a small company, as it is equivalent to R$400 thousand per month in revenue.

Furthermore, he cites the “pejotization” of professionals, who stop working under the CLT regime to be hired with PJ and, to do so, become MEI or open companies through Simples. He also cites as practices to be corrected and avoided the case of companies that open several CNPJs to dilute revenue and continue paying less taxes.

Should Simples Nacional be considered a tax benefit?

Coordinator of the Law course at Faculdade Belavista, professor Ricardo Castagna argues that Simples should not be seen as a tax benefit from the government, but rather as a differentiated tax regime for small and micro companies. He sees the current framework as a “huge premise error, a conceptual error that ends up generating distorted public policies and decisions”, he stated.

According to Castagna, Simples Nacional is a differentiated tax regime, which should never be included in the Statement of Tax Expenditures, prepared by the Federal Revenue with projections of annual tax benefits. The professor says that the Simples regime is provided for in the Federal Constitution, which requires a unified and simplified system for paying federal, state and municipal taxes for small and medium-sized companies.

“The Constitution also defines that the protection of small and medium-sized companies is one of the pillars of our economic order”, he explains. According to him, tax benefits are concessions to boost certain sectors at specific times.

The Ministry of Entrepreneurship also argues that the premise adopted, that Simples is a tax exemption, needs to be reviewed. The ministry points out that the aforementioned tax waiver calculation does not consider aspects linked to the existence of Simples Nacional.

To this end, it cites data from the Public Policy Monitoring and Evaluation Council (CMAP). They indicate that the tax waiver would be at least 13% higher if company behaviors resulting from the existence of Simples Nacional were not considered, such as the cost reduction of the Brazilian tax system and the incentive for formalization.

Based on data from the Federal Revenue, the ministry also states that, in 2021 and 2022, companies in the real profit regime paid the equivalent of 10.09% of their revenue in taxes and social security contributions, while Simples Nacional companies paid 11.77%.

Laws increased gross revenue and opened Simples to independent professionals

Simples was created in 2006, during President Lula’s first term. In 2011, Complementary Law 139 increased the gross revenue limit of companies that are part of the regime and reduced the rates in the Simples Nacional bands. The changes led to an increase in the estimated waiver values ​​from 2012 onwards, meaning the government would have stopped collecting more taxes from these companies.

In 2011, the amount of tax expenditure estimated by Revenue with Simples was R$23.3 billion, equivalent to 20.12% of the R$116 billion in tax waivers that year. In 2014, the amount related to Simples jumped to R$61.7 billion, or 24.7% of the total.

In 2015, new changes came into force, brought about by Complementary Law 147, which expanded the list of sectors that were part of Simples. The new rule allowed independent professionals to join the regime.

If between 2011 and 2015 the total value of tax incentives more than doubled, going from R$116 billion to R$282 billion, the estimated waiver with Simples more than tripled, going from R$23.3 billion to R$72, 4 billion, according to the Revenue.

Simples accounted for more than 28% of tax incentives

In January 2018, Simples underwent a new update, when the collection ceiling was increased to R$4.8 million. As a result, the Revenue’s tax waiver estimate reached R$80.6 billion, or 28.45% of the total federal incentives.

The amount related to Simples Nacional grew further in 2019, reaching R$87.2 billion, and then presented two successive drops in 2020 and 2021, when it reached R$83.2 and R$74.3 billion respectively. In these years, the percentage in relation to total tax expenditure was also reduced, from 28.48% in 2019, to 24.13% in 2021.

In the last year of the government of former president Jair Bolsonaro (PL), fiscal spending on Simples grew again, reaching R$81.8 billion, however, its share in relation to total benefits continued to fall, reaching 22.05%.

For this year, the IRS estimates relief of R$125 billion with Simples, equivalent to 23.94% of federal waivers. The projection for 2025 is slightly lower, at R$120 billion. See the data in the table below:

For Joelson Sampaio, economics professor at FGV EESP, Simples has been greatly expanded and, therefore, there is room for improvement. He assesses that there are companies that can migrate to other rules.

On the other hand, Sampaio argues that Simples has an important role for micro and small companies, due to the high tax burden. “The tax burden is very high and can make the business unviable.”

World Bank assesses that Simples Nacional is “expensive and distortive”

The controversy over the impact of Simples on the economy and the system’s tax distortions or injustices is not new. In 2015, the then Minister of Finance, Joaquim Levy, commissioned a study on the regime from the World Bank.

The conclusions only came in December 2017, as reported by People’s Gazette. The report, titled “A Fair Adjustment”, highlighted that the regime was “expensive and potentially distortive” as it encouraged companies to remain small and thus avoid higher taxes.

According to the logic of World Bank technicians, the regime still harmed the competitiveness of medium-sized companies, as they ended up paying higher taxes.

In the end, the report states, those who pay the bill are companies “that could grow and create more jobs for those who are currently unemployed, or for underemployed and less privileged workers”.

Ministry of Entrepreneurship says that Simples helps create jobs

In the view of the Ministry of Entrepreneurship, Simples is an important tool for reducing bureaucracy in the business environment and reducing company expenses. According to the ministry, the regime influences the creation of formal jobs, and benefited firms have a formal employment growth rate 3% higher than those included in other regimes.

Furthermore, Simples Nacional tends to influence the birth and death rates of firms, generating an even greater total impact on the generation of formal jobs. According to ministry estimates, Simples tends to increase the rate of entry into activity of formal firms by 1.8%; and to reduce the exit rate of formal firms by 0.3%.

Still, the ministry states that there is room for improvement and that the system is not perfect, free from tax injustices. However, he says that the conventional tax regime is even worse.

The ministry argues that the revenue limit is unfair, especially for micro and small industries and businesses, which consume a large part of their limit with the acquisition of raw materials or products for resale.