Brightening up the gray economy

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MORITZ GASTL

The Philippines is mildly obsessed with rankings. It has made considerable progress in the annual “Ease of Doing Business” rankings by the World Bank between 2011 and 2017. This was mainly thanks to increased transparency in building regulations and by allowing online corporate income tax and VAT returns to be completed offline. Yet, progress made in terms of time and cost involved in starting a business lags that of neighboring economies.

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Entrepreneurs still face major challenges to obtain all necessary permits and often opt to start operating without them. Roughly 65 percent of home and businesses in the Philippines are currently unregistered.

Moving from the informal to the formal economy can be simple but in many countries, the transition remains rare. A formal and legal business has articles of incorporation that enable investors and customers to know who they are buying and selling from, a properly registered address including all necessary permits and legal contracts that are binding and enforceable. Informal practices often blend documentary practice with ingenuity at a fraction of the costs but also restricts the owners of such businesses from getting access to formal bank loans, enforce contracts, and expand beyond a personal network.

Informal businesses typically still sell legal goods and services. They include many sari-sari stores that obtain products illegally or contractors that do not issue receipts. But why is that so bad for the economy? In reality, nobody expects a street vendor on EDSA to set up a limited company with audited accounts. But large-scale informality has ill effects on the Philippine economy. It makes the government lose out on important tax income and prevents company owners from gaining access to the formal tools to grow their companies.

A great way to start allowing more young companies to flourish in the Philippines is to cut bureaucracy. For starters, make registering a firm a breeze to give people time to focus on creating added value. It takes more than 200 hours per year for an individual to pay taxes and almost 900 hours for corporations to comply.

Obtaining business permits still take too long and often requires additional manpower and ironically, a “convenience fee.” Processes need to be more transparent so applicants can factor the time and effort spent on these things into their decision-making process.

A good example for this is receipts. The government mandates both small and large firms to get their systems accredited with the BIR in order to issue valid receipts. This, per se, is not a bad thing. However, cloud-based software is not accepted yet and, therefore, small companies have to turn to inconvenient and expensive offline solutions, not to mention the accreditation process itself that can take more than a year. Hard copies of receipts have to be kept for tax purposes, which are not only a huge administrative burden but also a waste of paper if they can be stored online instead.

Even access to finance is, to a large part negatively affected by bureaucracy. Due to a lack of a national ID system and, therefore, a lack of borrowing history in the credit market, the access to appropriate financing to grow businesses is very bad. For someone with limited funds trying to start a business, doing business formally can be a high-cost affair.

Combining structural reform, clever wheezes and technology to curb informality would be good for government finances, growth and poverty reduction. No economy will get rid of informality entirely, but bringing unregulated activity out of the darkness would improve millions of lives. The Philippines can lead the way in the region by embracing technology faster and creating an environment that supports young entrepreneurs to focus entirely on growing their businesses, instead of worrying about the regulatory burden.

Moritz Gastl is the managing director of MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.

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