Receipt or invoice? Just that, thanks…

The Case of the City of Bucaramanga

Bucaramanga is a small, picturesque Colombian city located in northern Colombia. It is known primarily for its attractive parks and its vast archaeological, artistic, and historical heritage. However, not everything is beautiful and admirable in this city in the department of Santander. This small town is also plagued by one of the major ills that is all too common in our underdeveloped countries: the informal economy.

According to the study titled “The Informal Economy and Unemployment: The Case of the City of Bucaramanga (Colombia),” economists Gloria Isabel Rodríguez Lozano and Mayda Alejandra Calderón Díaz point out that there is a problem of unemployment and an informal economy in that city, driven by the limited capacity to generate formal jobs. One of the main reasons for this situation is the formal economy’s inability to absorb the city’s labor force. This, in turn, leads to the expansion of the informal market and, consequently, the growth of the underground economy.

Like the situation in Bucaramanga, Latin America is rife with countless similar cases, in which the informal economy is a reality that hinders the development and prosperity of nations. And this reality stems not only from the market’s inability to create formal jobs but also, in other cases, from factors such as weak institutions, corruption, smuggling, and crime, among others.

Now, before we continue, let's take a look at what we mean when we talk about the informal economy.

Informal or underground economy—what does that mean?

The origins of the concept date back to studies of the labor market in the Third World—specifically in Africa—during the 1970s. British anthropologist Keith Hart first developed the concept, drawing a distinction between paid work and self-employment. He associated the term with the latter category. Subsequently, the International Labor Organization (ILO) institutionalized the term and gradually imbued it with some of the connotations we associate with it today, as a synonym for poverty, the black market, underemployment, etc.

Some more modern definitions link the informal economy to actions by economic agents that do not adhere to institutional norms, or to income-generating activities that are not regulated by the state. According to the document “Informal Economy,” prepared by Alejandro Portes and William Haller for the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the underground economy encompasses the following:

1) the illegal economy: the production of goods and services prohibited by law (drug trafficking, prostitution, illegal gambling).

2) the informal economy: evasion of tax rules established in tax laws.

3) the informal economy: activities that violate the reporting requirements established by government agencies.

4) the informal economy: economic activities that disregard the cost of complying with the laws and administrative regulations governing their conduct.

All in all, these four subcategories together comprise what could be broadly defined as the informal economy or the underground economy.

To continue our analysis, let’s now examine why understanding this phenomenon is important for our reality and our well-being as a community.

Why is the informal economy so important? How does it affect me?

The underground or informal economy is more significant than we realize, and it affects us individually and collectively more than we usually realize.

To begin with, activities that are part of the informal economy fall outside the scope of government controls and regulations. This leads to tax evasion and, consequently, fewer resources for the government. Example: If an empanada vendor decides to operate outside the system, they will avoid paying VAT on their sales, business registration fees and a commercial license, and IRACIS on their profits, among other taxes. Because they do not pay taxes, the government receives less revenue to invest in education, public safety, infrastructure, public health, and society as a whole.

Within this cycle, in fact, informality has even more serious repercussions. It fosters corruption and crime. By circumventing government oversight and regulations governing commercial operations, economic actors tend to become corrupt and even engage in illicit activities, which are generally more lucrative. This is what typically happens in our country with drug trafficking, which, being an extremely lucrative activity with relatively low costs, in turn creates a climate of crime in the community.

Eventually, since capital flows do not enter the system, the country’s economic growth and people’s well-being stagnate. Furthermore, a form of “unfair competition” arises between formal and informal workers, since the latter have lower operating and administrative costs in their businesses. This, in turn, creates a market distortion. A clear example of this situation is smuggling, the main characteristic of which is the substantial price difference between the smuggled product (lower production costs) and the legal product (higher production costs).

Our Reality: The Underground Economy in Paraguay

According to the 2016 report by the NGO Pro Desarrollo Paraguay, as of 2015, the size of our underground economy had reached the staggering total of US$$. 11,010 million, resulting from smuggling, tax evasion, drug trafficking, etc.

In other words, this is equivalent to:

• 39.6 percent of Gross Domestic Product (GDP)
• 60 % more than the 2015 General National Budget
• Three times Itaipú's total revenue (US$1.4571 trillion in 2014)
• 58 % more than the international reserves

How can I help with the formalization process? Tax regulations that are easy to comply with

As we saw earlier, one of the major aspects of the informal economy is related to tax evasion. Of course, in addition to tax regulations, there are also various municipal, departmental, customs, civil, and commercial regulations that serve as tools for formalizing businesses. However, let’s take a look here at some of the most fundamental tax regulations for this purpose, which, incidentally, are easy to apply and comply with in our daily lives.

One of the laws that serves as the basis for the formalization of our economy is Tax Law 125/91, specifically the section on Value-Added Tax (VAT), which, in Article 85, establishes that it is a obligation Taxpayers (service providers and professionals) must issue and deliver invoices for each sale or provision of services they perform, and must retain a copy of each invoice for tax purposes.

This means, quite simply, that when you buy a product—such as a soda at a gas station—or hire a service—such as an architect for a construction project—the seller and the professional, in each case, must, By law, we must issue a legal receipt for the transaction. The law is clear on this point, but we often fail to comply—out of convenience, because we’re in a hurry, or simply out of laziness.

Another regulation that promotes the formalization of the Paraguayan economy is found in the same body of law, as amended by Law 2421/04. In this case, Article 8 of the Personal Income Tax (IRP) regulations establishes that net income (the basis for calculating the tax) is calculated by deducting from gross income the expenses necessary to earn that income, provided that they represent an actual expenditure and are properly documented (legal invoice) and are at market price. In addition, this regulation includes a number of expenses—not necessarily related to income generation—that are also deductible for tax purposes. These expenses include those related to: living expenses, education, housing, health care, and food, among others.

The ratio legis, or rationale, for this regulation is based on establishing an incentive mechanism for taxpayers to request legal receipts for their purchases, since such receipts serve as documentation for deducting the total amount payable in taxes. The logic is simple: the more receipts a taxpayer accumulates (a tool that contributes to the formalization of the economy), the lower the amount they will have to pay when filing their IRP tax return.

Conclusions. Let’s be agents of change…

The underground economy is a complex problem, and solving and eradicating it is a gradual, long-term process. As we have seen, informality is a vicious cycle that leads to poverty, crime, poor-quality public services, and reduced income. In short, it affects our well-being and quality of life.

However, as members of society, we play a leading role and possess a profound transformative power—one that we often fail to recognize. Being an agent of change is a decision—a matter of awareness, will, civic education, and responsibility. The sum of our individual efforts will translate into the collective effort of us all. Let’s start with something simple but effective. So, dear reader, when you’re asked at a store, “Receipt or invoice?” don’t hesitate—in addition to saying thank you, insist on receiving the legal receipt.