Entrepreneurship, Cash Flow and Split Payment: Financial Challenges in the Face of New Tax Systems (Derecho y cambio social.)

Summary

• The study analyses the financial challenges of implementing Split Payment in the Brazilian tax system for entrepreneurship, cash flow management and working capital availability.p.2
• It is a qualitative, descriptive and exploratory literature review covering the tax reform, the IBS and CBS taxes and tax segregation mechanisms.p.2
• Micro and small enterprises are found to be more vulnerable to the change because of capital limits, weak financial control tools and technological adaptation difficulties.p.2
• In a Sebrae survey, working capital was cited by 22% of entrepreneurs who closed their businesses, although this is not a causal link to Split Payment.p.6
• Split Payment separates the tax portion of a transaction during payment processing, shortening the time between the transaction and the transfer of tax funds to the authorities.p.13
• The authors conclude that the effects are not necessarily a permanent loss of profitability or a higher tax burden, and depend on regulation and each firm's characteristics.p.25

Key insights

1. Split Payment may reduce the temporary availability of funds that previously stayed under company control until tax payment.p.8
2. Profitability and liquidity are distinct: a firm can report positive results and still struggle to meet immediate obligations.p.9
3. Split Payment is seen as a tool against tax evasion and for fiscal justice, but its efficiency depends on accurate information and secure technology.p.14
4. Micro and small firms may be more sensitive to changes in cash availability because of weaker access to credit and administrative limits.p.21
5. Suggested indicators to monitor the effects include operating cash balance, working capital need, average receivable period and average payment period.p.22
6. Financial reserves, cash flow projections and separation of personal and business finances are presented as core adaptation practices.p.24
7. The authors stress that changes in cash flow must be distinguished from changes in the effective tax burden.p.25