Brazil’s tax system for entrepreneurs reflects a changing labor landscape

. Aug 14, 2019
mei Brazil’s tax system for entrepreneurs reflects a changing labor landscape Worker selling churros in Rio de Janeiro Worker selling churros in Rio de Janeiro

As the crisis struck the Brazilian economy, millions saw themselves unemployed and looking for a way to earn a living. In this scenario, the Individual Micro Entrepreneur system (or MEI) became an appealing alternative to many new business owners or independent professionals. But even a tool to simpler and cheaper tax rates is not immune to its own controversies. 

The MEI system was created in July 2008 as an

attempt to formalize a larger share of the workforce. It allows entrepreneurs with annual earnings of BRL 81,000 to have a corporate tax ID (CNPJ), entitling them to social security benefits such as maternity pay and retirement pensions by paying only five percent of the minimum wage (approximately BRL 50) per month. For the government, it helps increase tax revenue, as these business owners would not be contributing otherwise. MEI owners are also allowed to issue legal invoices to their clients, helping to diminish tax evasion. </p> <p>However, in the past few years, the MEI system has been exploited by employers, as Brazil&#8217;s labor legislation becomes more and more slack. Since 2017, when Congress approved a <a href="">labor reform</a> and the <a href="">Supreme Court ruled in favor</a> of allowing companies to outsource their core activities, many employers have been hiring workers as MEI contractors, as if their were third-party service providers. As a result, employees are given much fewer protections and labor benefits.</p> <p>The latest move in this direction was the inclusion of drivers of ride-hailing apps as eligible for the MEI system. The decision comes amid debates around the world on whether these drivers should be entitled to labor rights as employees, or not.&nbsp;&nbsp;</p> <p>Ivandick Cruzelles, labor lawyer and professor at Mackenzie Presbyterian University explained that hiring people using the MEI system is a way for companies to save money and time on bureaucracy.&nbsp;</p> <p>“MEI’s tax bracket is like a company’s and it is cheaper than [hiring registered workers]. They pay 5 percent of one minimum wage, while autonomous workers (without a MEI), pay 20 percent, and those hired under the terms of Brazil’s labor legislation (CLT), pay 8 to 11 percent. It is very expensive,” he told <strong>The Brazilian Report.&nbsp;</strong></p> <div class="flourish-embed" data-src="visualisation/594722"></div><script src=""></script> <h2>MEI: what changes with the pension reform? </h2> <p>Under the current pension rules, women and men may retire after completing 30 and 35 years of service, respectively, regardless of their age. Under the MEI system, workers are not entitled to that option. However, with the impending <a href="">pension reform</a> establishing 65 and 62 as minimum retirement ages for men and women, MEI workers would have the same conditions as the overall population, explains Mr. Cruzelles.</p> <p>This is more ammo for the argument that <a href="">people already retire at older ages</a>, especially the poor. But it also brings up another aspect of the debate: tax exemptions.&nbsp;</p> <p>As Mr. Cruzelles explains, the MEI system ends up becoming a tool of tax exemption, at a time when public accounts are in turmoil. It is seen as a trade-off to boost the economy and, in the future, raise tax revenue once more.&nbsp;</p> <p>“It is an option by the government, they suppose that formalization will increase under MEI, even though each individual contributes with less money. On the other hand, tax exemptions are a huge problem for the government, it has been frustrating expectations. As a matter of fact, the pension reform moved forward in Congress with GDP forecasts going down.”</p> <script src="" type="text/javascript" charset="utf-8"></script> <p>In fact, <a href="">research by economists</a> José R. Afonso and Juliana Damasceno de Sousa published by the magazine <em>Conjuntura Econômica</em> shows that, in September 2018, 52.5 percent of Brazilian workers had no labor protections, supporting the thesis of giving benefits through the increase in tax collection. However, when the researchers looked closely, they found out that the employed taxpayers with the highest incomes have been contributing less.</p> <p>“The relative share of those who earn up to 3 minimum wages increased almost four times, while those who earn more than 10 have fallen steeply: from 31.5 percent of taxpayers to 2.4 percent of the total between 1988 and 2017,” they wrote.</p> <p>For the researchers, this is an irreversible change, due to the costs employers incur to hire a registered worker, which have made Brazil a clear global leader in labor costs. The authors did point out that the same trend is witnessed around the world. &#8220;It is less connected to tax reasons and more related to the preference for working without a schedule, single location or long-lasting contracts,” they wrote. </p> <h2>Are Brazilian labor rights history?</h2> <p>The mix between legislation and cultural changes was considered by many as the end of Brazil&#8217;s Consolidated Labor Laws, burying a legacy of social security and workers rights <a href="">that date back to 1943</a>. According to Mr. Cruzelles, it is more a matter of transformation, rather than an end.&nbsp;</p> <p>“We don’t see the rights extinguished yet. It has transformed totally, of course, but labor laws will only be over when the idea of work is. While labor remains the biggest source of innovation, income and social ideas society looks for, it will exist. The current laws may end, but then there will be another kind of labor law to regulate working relations,&#8221; he said.&nbsp;</p> <p>“The fact that workers are becoming more autonomous and having more freedom shows the vision of a more liberal society where each individual is responsible for building their own wealth and the state has the smallest possible role. What we see is that the change of the government has been an ideological change. If it is good or bad, only the numbers and polls will tell.”

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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