The Simplified Regime, established in 2001, has had massive adherence by sole traders over the years. At the same time, it has failed miserably with companies taxed under IRC. Currently, 99% of the self-employed pay their IRS through this scheme, while for companies only 15,000 out of 160,000 joined this system.
Over the past 14 years, the Simplified Regime has offered the self-employed a simple, cost-effective alternative to traditional profit/loss methods of accounting. With assessment based on a fixed percentage of gross invoicing, small independent businesses simplify record keeping, reduce taxes and increase productivity. Individual entrepreneurs whose annual turnover does not exceed €200,000 in 2014 (formerly €150,000 in 2013, and €100,000 at inception) qualify for the Simplified Regime.
As the following chart illustrates, the Simplified Regime is not so simple any more. Formerly with just two categories, the scheme has recently expanded to five. Under this method of assessment, taxpayers do not deduct professional and business expenses against their annual income. Instead, taxable income is computed by applying the coefficients to gross turnover (see table).
Clearly, a major innovation in 2014 is in the sector of Service Activities with the new distinction for “Other Activities in Category B”. Unlike professional services (profissões liberais) – professions usually requiring advanced degree qualifications as opposed to vocational careers in non-academic skills and technical trades – that remain with an exclusion limited to 25% (originally 35% at inception), vocational services are allowed to eliminate 90% of their invoiced income. This means that final taxable income is just 10% of turnover.
For example, property managers who coordinate diverse support services for property owners now qualify for this 90% exclusion on their fees. A €30,000 annual income would pay less than €225 in IRS, a tax rate of less than 1%.
Compared to previous practices, the same income when reported as undistinguished service income in 2013 would have paid over €6,300 in tax, based on the prevailing 75% coefficient.
Those in sales and in tourist activities also enjoy a reduction in 2014 – albeit less dramatic – with taxable income dropping to 15% from 20% last year. Resident property owners engaged in Local Lodging were taxed on one-fifth of their invoices in 2013. Based on an income of €20,000, they would have paid €365. Now, with the coefficient decreasing to 15%, taxation on the same income falls to €220, a 40% reduction or just over 1% of total turnover. Non-residents are levied a flat 25% (3.75% of turnover).
Many will applaud these modifications. Not just because they will pay less tax but, equally important, these measures promote growth and reward compliance, fundamental values at the heart of any sustainable tax system. There is no faster or better way to promote employment. Entrepreneurial spirit is fostered, self-reliance encouraged, two more essential values at the heart of any healthy economy.
When tax rules go unheeded, all taxes are lost, not just one. While some IRS revenue may be sacrificed, VAT collections at 23% and Social Security at 30% will more often be collected with the State coffer a net winner. Why so little attention is being given to these constructive changes by the media, politicians and accounting professionals is curious to say the least.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a.
www.eurofinesco.com
