How to Design a Presumptive Income Tax for Micro and Small Enterprises

IMF How To Notes, June 29, 2023

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Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income.
Simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes.
The note addresses design issues for a turnover tax regime: which taxes it replaces, eligibility criteria, how to determine the optimal threshold, and how to set the tax rate.
The note provides a table of tax rates and turnover thresholds observed internationally.
The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.

Which taxes a turnover tax regime replaces.
Criteria for eligibility for the presumptive turnover tax.
Determining the optimal turnover threshold for inclusion/exclusion.
Setting the turnover tax rate to balance revenue, compliance costs, and incentives.

A central trade-off: although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities.

A table of observed tax rates and turnover thresholds across countries is provided to inform design choices.
The note offers analytical steps to guide practitioners through the process of designing turnover tax regimes.

Design the turnover tax to minimize compliance costs for micro and small enterprises while preserving adequate revenue.
Set eligibility criteria and thresholds carefully to limit avoidance by larger firms and to encourage formalization by informal firms.
Choose a tax rate that balances the risk of artificially reduced sales by larger firms against discouraging formalization.
Use international evidence on tax rates and thresholds as part of the diagnostic and design process.
Follow the suggested analytical steps in the note to tailor the regime to country-specific conditions.

How to Design a Presumptive Income Tax for Micro and Small Enterprises, Jean-François Wen, June 29, 2023, IMF How To Notes

How to Design a Presumptive Income Tax for Micro and Small Enterprises
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