CHAPTER 5
Taxing SMEs Roel Dom and Wilson Prichard
The Tax Compliance Challenge Tax reform initiatives have long sought to expand the taxation of micro, small, and medium enterprises (SMEs). Small firms constitute a large majority of firms in most low- and middle-income countries. They make up a large share of the gross domestic product (GDP) and generate at least as many jobs as large firms—in fact, often more. However, they are also frequently unregistered or noncompliant with tax laws (Ayyagari, Demirgüç-Kunt, and Maksimovic 2011; Benjamin and Mbaye 2012; Kumar 2017; Page and Söderbom 2015). This chapter takes a closer look at the taxation of micro, small, and medium enterprises. Instead of focusing on a specific tax instrument, such as income tax, the chapter presents examples from different tax instruments to illustrate some of the barriers to taxing SMEs, as well as reforms proposed to address these challenges. Much like in chapter 4 for larger corporate taxpayers, no specific definition is offered for SMEs because they are highly diverse. They differ not only in terms of sectors and industries, but also in terms of their economic behavior, profitability, or growth potential (OECD 2015). Because this study draws on existing literature, it relies on the definitions there. In low-income countries, the taxation of SMEs often overlaps with the goal of taxing the informal sector, as many or most SMEs in lower-income countries are to some degree informal. Although it is common for governments to call for
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