Tax default rates among individual micro-entrepreneurs drop sharply

The Federal Revenue Service has disclosed that more than 6.4 million individual micro-entrepreneurs (known in Brazil by the MEI acronym) have been in default for a minimum of one month. As per the latest data from August, 41.4 percent of MEIs have not fulfilled their obligations to pay their federal taxes.

This marks a 6.9-point reduction in default rates compared to a year prior, when 48.3 percent of MEIs were in arrears.

Federal taxes on MEI fees vary between BRL 67 (USD 13) and BRL 72 (USD 14) — based on the type of business activity, and encompasses levies at multiple levels.

The peak default rate for 2023 was recorded in January, with 52.6 percent of MEIs in default.

Legally established in 2008, the MEI framework was designed to bring millions of informally employed Brazilians into the formal economy. Registration as a MEI confers legal entity status, enabling invoice issuance, business permit acquisition, and social security contributions.

Eligibility for MEI status is restricted to self-employed individuals with no more than one employee and an annual income not exceeding BRL 81,000 (USD 16,300) in the previous year. The government wants to raise that threshold — under which firms must stay to qualify for simplified tax rules and lower rates, among other benefits.

According to the Brazilian Institute of Geography and Statistics (IBGE), there were 13.2 million registered MEIs in 2021, with over half (50.2 percent) engaged in the services sector.

The IBGE further notes that 9 percent of the MEIs registered in 2021 were hairdressers, while another 7 percent were involved in clothing sales.

Following the 2017 labor reforms that permitted companies to outsource core activities, the number of MEIs has seen a significant uptick. Annual new registrations leapt from slightly over 1 million in 2017 to close to 3 million in 2021.

The share of micro-entrepreneurs in the overall employed population increased from 3.5 percent in Q1 2015 to 5.1 percent in Q3 2022. Serasa Experian data indicates that 75 percent of new businesses established in the first four months of this year were MEIs.

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