The better the question. The better the answer. The better the world works. У вас есть вопрос? У нас есть ответ. Решая сложные задачи бизнеса, мы улучшаем мир. У вас є запитання? У нас є відповідь. Вирішуючи складні завдання бізнесу, ми змінюємо світ на краще. Meilleure la question, meilleure la réponse. Pour un monde meilleur. 問題越好。答案越好。商業世界越美好。 问题越好。答案越好。商业世界越美好。

 

At a time of ongoing economic adjustment and global shifts in policy, it is imperative to focus on elevating entrepreneurship to youth job creation as an employment path and means to a sustainable livelihood. With global youth unemployment rate continuing to rise, we do not anticipate a return to the “business as usual” of a decade ago. Instead, we have an opportunity to partner across youth, and government, to rethink employment and job creation opportunities for the young people of the G20 economies.

EY and the G20 Young Entrepreneurs’ Alliance (G20 YEA) partnership in research, insights and policy strategy supports youth entrepreneurship. The Smart taxation for young entrepreneurs: navigating tax rules and planning for growth report ahead of the G20 YEA 2018 Summit in Buenos Aires, Argentina expands on the major priorities in 2017 – including the critical role for “smart” taxation, and, more broadly, competitive regulation – in supporting the successful scaling of the enterprises of young entrepreneurs. In EY’s view, smart taxation means targeted tax planning support, and administrative simplification, for young entrepreneurs.

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G20 government policies’ role in connecting vision to growth for young entrepreneurs

Access to economic opportunity for young people through employment, entrepreneurship and finance is a critical, growing challenge in G20 economies today. Entrepreneurship is expected to support sustainable growth through its potential to drive innovation and create jobs. Also, to promote work for young people that is full, productive and innovative.

However, while growing and managing their businesses, young entrepreneurs can get caught up in the complexities of compliance, tax planning and other legal and regulatory considerations. These can be significant inhibitors for growth. There is a clear disconnect between young people’s interest in starting a business and their perceptions of the reality of becoming an entrepreneur.

In a large global survey, more than 50% of respondents across major country groups believed they had the capabilities to start a venture, while just over 40% recognized the opportunities to make this happen. Legal and regulatory factors were singled out as key constraints. The data on tax compliance reinforce this issue.

Streamlining taxation can free entrepreneurial time and energy

It is easy to see how the cost of tax compliance and planning – in money, time, anxiety and leadership resources spent – can be a significant hurdle to growth in youth entrepreneurship. The policy challenge is to reduce complexity and streamline compliance and planning to support, rather than hinder, young entrepreneurs in their journey to growth.

“We call on G20 leaders to enable SMEs to scale through taxation incentives for scale-ups and investors by adopting progressive policy measures like a separate tax category for young entrepreneurs working in priority areas of innovation and social entrepreneurship. We further encourage the harmonization of taxation schemes in the G20 countries to lower barriers for doing business across borders and creating tax incentives for cross-border access to capital in the G20.”

– The 2017 G20 YEA Berlin communique recommendation on taxation.

This view is also echoed in the global business community. The B20 Argentina (2018) SME Development Task Force proposes several key recommendations on taxation, focused on promoting “simplified and SME-friendly regulatory frameworks,” which also are relevant for young entrepreneurs. These include recommendations to reduce the disproportionate tax compliance cost for SMEs, promote policies to ease costs associated with hiring SMEs, and introduce SME knowledge programs to improve access to relevant technical information and training.2

Smart taxation policies focus on both planning and compliance

As businesses, young entrepreneurs see an important role for governments in promoting entrepreneurship, hiring, and employment; increasing tax compliance and lowering the tax preparation burden; and incentivizing spending and social benefits through tax policy. This is a fresh approach to taxation, tailored to young entrepreneurs and called “smart” taxation. Smart taxation target tax planning support, and administrative simplification for young people.

The premise of the policy ideas on taxation explored in the 2017 G20 Summit, and in the B20 2018 Task Force on SME Development, provide a solid starting block for smart taxation policies to support young entrepreneurs.

Young entrepreneurs aim to comply with tax rules, but often are overwhelmed by the onerous requirements. The first step is to remove the obstacles to tax compliance, and then provide access to tools and education for effective tax planning. From the entrepreneurs’ perspective, tax preparation and collection is a business issue – a view that we share with others. For example, in its survey of G20 taxation practices of SMEs and entrepreneurs, the Organization for Economic Co-operation and Development (OECD) highlighted regulatory requirements and the cost of tax compliance as having a disproportionately high impact on these firms. Consequently, it is one of the most important issues in taxation. 3

This is where taxation steps out of the policy realm and into the enterprise. Getting this right – through tax management, planning, and compliance is important for young entrepreneurs. Smart taxation impacts cash flow management, and determines how effectively entrepreneurs can grow and scale their business. Stated differently, well-managed tax planning can be a source of cash for a young entrepreneur’s firm, and easier tax compliance is a sense of security for the well-intentioned business owner.

Key examples of tax compliance and preparation support

In G20 countries, smart taxation is becoming an important foundation for policy. A number of these examples cover SMEs, and not startups or young entrepreneurs explicitly. Nonetheless, they are important to highlight as young entrepreneurial firms are undoubtedly one of the core groups covered under these policies.

  • Administrative simplification

    Policy

    G20 country example

    Simplified tax structure
    • South Africa: Introduced Turnover Tax, a simplified small business system for micro businesses to meet their tax obligations, while reducing their compliance costs.
    • Mexico: Tax incorporation regime exempts small businesses from paying income tax in the first year and reduces this exemption by 10% in each successive year.
    • Italy: To foster loyalty among management, employees and suppliers (such as lawyers and accountants), startups may offer capital shares by way of additional remuneration. The revenues from these financial instruments are tax deductible for both fiscal and contributory purposes.
    • Argentina: Several tax benefits are available for companies qualifying as SMEs, such as quarterly (instead of monthly) value-added tax (VAT) payments, creditability of 100% of the tax on financial transactions, and early elimination of the tax on minimum presumed income.
    Process simplification and ease of compliance
    • UK: Permits the use of cash accounting for entities with VAT-taxable turnover of less than US$1.9 million and a flat rate for businesses with annual turnover less than US$207,500 (excluding VAT).
    • India: Allows businesses with a turnover of up to US$0.2 million to file GST returns quarterly (instead of monthly) to simplify processes and reduce compliance cost. To encourage compliance in filing GST returns, the GST network provides free accounting and billing software to firms (especially SMEs). This includes a facility to auto-generate necessary GST reports and help SMEs enhance cash management, generate mismatch reports, process their payroll, etc.
    • Australia: Allows the use of cash accounting for small businesses, with aggregated turnover of less than US$7.7 million. An eligible small business may defer the settlement of its excise duty and equivalent customs duty from a weekly to a monthly reporting cycle. And, small businesses have the option to “pay as you go” by installments using a pre-agreed amount to save time.
  • Strategic tax management

    Policy

    G20 country example

    Educating SMEs
    • US: The Internal Revenue Service website provides numerous online learning and educational products for small businesses and self-employed individuals. The tools include a virtual workshop on small business taxes, online ordering of small business products, and a Small Business Administration Learning Center.
    • Australia: A dedicated page for small businesses on the Australia Tax Office (ATO) website offers a range of tools and services to help manage their taxes.
    • Ireland: A new company may receive a visit shortly after registration or may request a visit from a revenue official to assist with the tax system. Support includes addressing issues or queries and providing general assistance.
    • Finland: Classifies startups in a special customer group that receives more guidance than companies with experience in complying with tax obligations.
    Stakeholder consultation
    • Australia: ATO operates a registration-based online community for SMEs with turnover between US$1.5 and US$192.5 million. The forum helps ATO interact directly with small businesses to understand tax management issues, opportunities to reduce compliance cost and ways to improve tax administration.
    • UK: The Government took numerous steps to engage the small business community after releasing its consultation document on simpler income tax, including:
    • Publishing a short document on the HM Revenue and Customs website, outlining what the proposal meant for small businesses and asking questions of interest
    • Working with Business Link to include a note on its “what’s new” pages alerting small businesses to the consultation document
    • Meeting members of the Federation of Small Business and the Forum of Private Business to discuss the proposals
  • Administrative simplification

    Policy: Simplified tax structure

    G20 country example

    • South Africa: Introduced Turnover Tax, a simplified small business system for micro businesses to meet their tax obligations, while reducing their compliance costs.
    • Mexico: Tax incorporation regime exempts small businesses from paying income tax in the first year and reduces this exemption by 10% in each successive year.
    • Italy: To foster loyalty among management, employees and suppliers (such as lawyers and accountants), startups may offer capital shares by way of additional remuneration. The revenues from these financial instruments are tax deductible for both fiscal and contributory purposes.
    • Argentina: Several tax benefits are available for companies qualifying as SMEs, such as quarterly (instead of monthly) value-added tax (VAT) payments, creditability of 100% of the tax on financial transactions, and early elimination of the tax on minimum presumed income.

    Policy: Process simplification and ease of compliance

    G20 country example

    • UK: Permits the use of cash accounting for entities with VAT-taxable turnover of less than US$1.9 million and a flat rate for businesses with annual turnover less than US$207,500 (excluding VAT).
    • India: Allows businesses with a turnover of up to US$0.2 million to file GST returns quarterly (instead of monthly) to simplify processes and reduce compliance cost. To encourage compliance in filing GST returns, the GST network provides free accounting and billing software to firms (especially SMEs). This includes a facility to auto-generate necessary GST reports and help SMEs enhance cash management, generate mismatch reports, process their payroll, etc.
    • Australia: Allows the use of cash accounting for small businesses, with aggregated turnover of less than US$7.7 million. An eligible small business may defer the settlement of its excise duty and equivalent customs duty from a weekly to a monthly reporting cycle. And, small businesses have the option to “pay as you go” by installments using a pre-agreed amount to save time.
  • Strategic tax management

    Policy: Educating SMEs

    G20 country example

    • US: The Internal Revenue Service website provides numerous online learning and educational products for small businesses and self-employed individuals. The tools include a virtual workshop on small business taxes, online ordering of small business products, and a Small Business Administration Learning Center.
    • Australia: A dedicated page for small businesses on the Australia Tax Office (ATO) website offers a range of tools and services to help manage their taxes.
    • Ireland: A new company may receive a visit shortly after registration or may request a visit from a revenue official to assist with the tax system. Support includes addressing issues or queries and providing general assistance.
    • Finland: Classifies startups in a special customer group that receives more guidance than companies with experience in complying with tax obligations.

    Policy: Stakeholder consultation

    G20 country example

    • Australia: ATO operates a registration-based online community for SMEs with turnover between US$1.5 and US$192.5 million. The forum helps ATO interact directly with small businesses to understand tax management issues, opportunities to reduce compliance cost and ways to improve tax administration.
    • UK: The Government took numerous steps to engage the small business community after releasing its consultation document on simpler income tax, including:
    • Publishing a short document on the HM Revenue and Customs website, outlining what the proposal meant for small businesses and asking questions of interest
    • Working with Business Link to include a note on its “what’s new” pages alerting small businesses to the consultation document
    • Meeting members of the Federation of Small Business and the Forum of Private Business to discuss the proposals

This overview provides a snapshot of the current landscape in G20 countries. It highlights key areas of support in current taxation policies that can support young entrepreneurs in tax planning and ease of compliance. These are invaluable tools to support young entrepreneurs.

With a smart future for taxation, youth entrepreneurship can thrive

To grow and scale youth entrepreneurship, taxation policy has a significant role to play. This is about a fresh approach to tax, focusing on targeted support for young entrepreneurs in tax planning and in streamlined compliance.

This paper offers four smart tax policy recommendations that guide more effective tax planning and easier tax compliance for young entrepreneurs. These proposals benefit the G20 countries as they offer support to their young entrepreneurs as they attempt to grow and scale their businesses, hire and develop talent. From a societal perspective, smarter taxation for young entrepreneurs can bolster entrepreneurial action, development of product and service offerings, capital flows and employment.

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EY - George Atalla

George Atalla

EY Global Government and Public Sector Leader
+1 703 747 1548
EY - Luis Pontes

Luis Pontes

EY Government and Public Sector Latin America Leader
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EY - Petr Medvedev

Petr Medvedev

EY Global Government and Public Sector Taxation Leader
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EY - Rebecca Hiscock-Croft

Rebecca Hiscock-Croft

Senior Strategic Analyst, EY Global Government and Public Sector
+61 415 419 227