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

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. 

However, in the past few years, the MEI system has been exploited by employers, as Brazil’s labor legislation becomes more and more slack. Since 2017, when Congress approved a labor reform and the Supreme Court ruled in favor 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.

The...