Informality affects 39,8% of GDP
Author: Cleiton Fernandes
Source: Diário de Pernambuco - 13/06/2004
By Cleiton Fernandes - Diário de Pernambuco - 13/06/2004
Informality in the Brazilian economy has taken on alarming proportions: it affects 39,8% of the Gross Domestic Product, an index that exceeds by more than 20% the average of 133 countries analyzed in a recent World Bank survey and more than 50% of non-rural jobs in Brazil. Country. In agribusiness, the situation is even more dramatic because 90% of the workforce is in the informal sector. Based on this information, published in the study Eliminating Barriers to Economic Growth and the Formal Economy in Brazil by the multinational McKinsey & Company, many economists already say: Brazil has become a great Paraguay.
These indicators led economist Eduardo Giannetti da Fonseca, an expert in the field, to place Brazil in the same degree of “nightmare” as Paraguay: with a high incidence of the group that makes up informality, such as tax evasion, evasion and avoidance, forgery, piracy and smuggling of goods. According to the study, done at the request of the Brazilian Institute of Ethics in Competition, the set of informality affects the sectors of civil construction, pharmaceuticals, food retail and fuels more.
“Companies have shown an interest in seeking the foreign market to escape informality, a kind of unfair competitor to our companies”, analyzes Émerson Kapaz, president of Instituto Etco. In eleven sectors, related to agriculture, retail and construction, in addition to industrial areas and labor-intensive services, corresponding to 63% of the total employment generated in the country, more than half are in an informal situation.
In the audiovisual / software sector, informality has been growing at an alarming rate. In 1997, only 5% of the CD market was pirated in Brazil. In 2002, they already accounted for 53%. In the fuel sector, the highest growth is registered in non-flagged stations, which increased their participation from 6%, in 1999, to 27%, in 2002. The clothing segment has the highest informality index, with over 60 % of occupations. In the case of cigarettes, of the total of 151 billion units sold per year, more than a third (51 billion) occurs illegally, more than 35 billion of which are due to smuggling.
ENTRAVES - Among the factors that drive informality, are the sociodemographic structures and trends, which have driven a large part of the rural economically active population to migrate to cities. “But this contingent ended up entering the informal market, as there are no vacancies in formal companies”, says Giannetti. The rigidity and complexity to formalize or "write off" a business, high tax charges and the lack of an effective and modern system of taxpayer support are other obstacles to formalization in the country.
The Etco Institute points to some international experiences, although limited, as a suggestion for successful formalization programs that can be adopted in the national economy. Among them, there is the need for government priority and sectoral focus.
Structural reforms can still be carried out, such as updating the database on taxpayers, integrating information systems and creating a simplified taxation system for micro and small companies. For Etco, removing barriers to the formal economy is possible. The McKinsey study estimates that the growth potential in GDP per capita would be 7% per year.
Tax burden encourages evasion
One of the most relevant barriers to the formal economy in Brazil concerns the tax burden. Excessive corporate taxation causes tax evasion or avoidance. This behavior occurs in most sectors, and may generate an advantage of 20% to 30% in the final price of the product. "As it stands, it is impossible to escape legally from taxation in the country," laments José Tarcísio da Silva, president of the Federation of Micro and Small Enterprises of the State (Feamepe). Taxes are levied on the production and distribution of goods, on benefits and protection mechanisms for workers (such as social security contributions) and on rates applied to financial transactions.
The McKinsey study says that the Brazilian tax burden, which currently stands at around 39% of GDP, is a key element for the country to mitigate the problem of informality. In general, in developing countries, the tax burden is - at most - 25% of GDP, with around 80% of taxes levied on formal companies. At the same time, the collection of taxes on individuals and property is very low. In contrast, in developed countries, although the burden is usually 30% or more of GDP, only half is charged to companies.
The study concludes that Brazil occupies an intermediate position on this issue. Its tax burden in 2001 was 34,41% of GDP, much higher than most developing countries and compatible with that of developed countries. However, its incidence is similar to that of other developing countries: high rates of corporate taxes (mainly social security contributions and direct taxes) and low participation of Individual Income Tax.
Silva notes that in view of this reality, micro and small companies come out as one of the biggest losers. Indeed. According to the survey, of the 15% of small businesses (out of the 50 thousand sample) that pay taxes, taxes represent, on average, 6,29% of the company's revenue. If the load dropped to 3,13%, the collection would increase by 1.170%.
Impact of informality
RETAIL
Informality is widespread in Brazilian retail, with 54% of the workforce informally employed - an index that reaches 95% among street vendors. Incentives for informality are powerful. Simulation of the profitability of a small “typical” retailer in the food sector indicates that tax evasion can more than triple net income. The Brazilian tax distortion contributes to the predominance of the informal retailer with a modern format (medium supermarkets and mini-markets), which presents an under-declaration of sales and employees.
PHARMACEUTICAL
The pharmaceutical sector has a similar competitive dynamic. Producers with informal practices have grown their market share rapidly, reaching approximately 1/3 of the total market - with a relevant impact on public health. In addition, informality spreads to other links in the chain. Interstate tax schemes, taking advantage of the differential state tax rates (which can bring savings of more than 10% in the price of the drug), have become common practice in distribution. In pharmaceutical retail, more than 30% of the workforce is informal.
FUELS
At gas stations, at least 20% of the workforce is informal, especially in establishments that do not have a flag - which increased their participation from 6% (1999) to 27% (2002). Given the importance of the price of the product and the tax burden in the formation of the price to the consumer, informality in the fuel sector takes different forms of tax evasion. The most common is adulteration, which reaches at least 10% of the volume sold, according to the ANP. In the alcohol market, it is estimated that a volume of 50% will be sold without registration. The tax evasion of the sector can exceed R $ 3,3 billion.
BEERS AND SOFT DRINKS
Informality in these two sectors occurs mainly in the form of tax evasion. Approximately, R $ 1,3 billion is withheld, against an annual collection of R $ 9,4 billion. Evasion is practiced throughout the chain, always with the participation of producers, who act as substitute contributors for the following links. The main form of evasion is the double issue or reuse of invoices, whether in the sale of the product, or purchase of inputs. Another practice is the simulation of the destination, through which manufacturers take advantage of the differences in tax rates between states to collect less than what is due.
AUDIOVISUAL AND SOFTWARE
In this sector, informal performance has been growing at a galloping rate: while in 1997, only 5% of the CD market was pirated in Brazil, in 2002, they already accounted for 53% of the market. Impunity contributes to the continuity of the problem. Between 1999 and 2001, the Public Ministry initiated 6.248 lawsuits in the phonographic and audiovisual sectors, of which only 17 resulted in conviction, with the arrest of 53 people. Currently, 9,5% of the world's musical piracy occurs in Brazil.
CLOTHING
This sector has one of the highest levels of informality, with more than 60% of occupations. In addition, the intensification of counterfeits is also quite worrying. According to Abravest estimates, piracy appropriates about R $ 3 billion per year, or about 8% of the sector's revenue. The outsourcing process - common in the sector - contributes to illegality as the transfer of know-how from the production process to small companies allows them to continue to produce informally, even if the manufacturer is replaced.
Source: Research - Removing Barriers to Economic Growth and the Formal Economy in Brazil, from McKinsey & Company.
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