By Sebastián Valdés Lutz
Opinion Column
"El Campo" Magazine, "El Mercurio" Newspaper
February 15, 2021
I don’t know of commercial practices as ancient, extended and harmful as that of the “IVA chico” (small VAT), which existence is so unknown to the media, social media and the international content network found in our usual internet browsers.
The “small VAT” gets its name from the action of issuing invoices for a net price inferior to that of the real business agreement between parts, therefor generating a smaller Value Added Tax (VAT). In this way a portion of the business transaction is registered, for VAT and Income Tax, and the other portion stays “as black” for both effects.
I don’t know how this practice was born, but my intuition tells me the origin of the “small VAT” resides in the existence of the Presumed Income for agricultures’, and his necessity to undercut his invoices so as to not exceed the limits that allow him to maintain this tax privilege. Once this chain of sham tax credit was initiated and accepted, it was a matter of time before the VAT lost its importance as tax and became an intermediate input.
Different to any formal market, horticulture products are negotiated at net price and not having to do with its gross price, because the VAT is negotiated separately. In many cases, the closing is completely made in “the black”, without an invoice backup, which is the maximum expression of the evasion associated with “small VAT”.
The businessman that buys horticultural products with “small VAT” is seeking not to shrink his earnings when selling, negotiating with his client a VAT similar to the one used at purchase, extending therefor the “sin of evasion” furthermore along the chain. When the client does not accept any type of invoice for the transaction, as is usual among small marketplace owners, it’s common that the businessman will “unload” the credit VAT tax that he has, selling an “ideologically false” invoice to a third party, in which market prices can usually be half the price of the VAT on the document.
The “small VAT” has spread like cancer throughout the national horticulture industry, wholesale market, and small marketplaces and in transactions made directly at the farm, legitimizing in this way the practice, and as a result, undermining ethics, honesty and integrity.
The amount of the tax evasion related with small VAT, because of Income Tax and Value added Tax is very hard to calculate, but if we consider the annual sales of small marketplaces of horticultural products are close to US$2.000 million, and of US$2.500 million in the wholesale markets of Lo Valledor and Vega Central, we can easily deduct that we are talking about very serious numbers. However, it is not the tax evasion of “small VAT” that is most damaging to Chile, particularly to the horticultural industry. The “small VAT” is in essence an anti-free market practice, which allows the unscrupulous to obtain above normal profits in direct detriment of those who follow the rules, informality in detriment of formality and those who profit from the government in detriment of those who profit from adding value. The greatest damage of the “small VAT” for Chile, is leaving in the people who subtract and leaving out those who add.
As with drugs and corruption, the “small VAT” is so extended as a practice within the horticulture sector, that it’s difficult to know if the best solution to eradicate it is to increase control and repression, or as an alternative, focus on its harmful effects on the market, eliminating VAT for all agricultural products, as has been done in other countries. Control and repression to end “small VAT” is something no government has done, maybe because of ignorance about the problem or its magnitude, or, most likely, because of the implicit political unpopularity of harming thousands of humble micro businesses. Eliminating the VAT for agricultural products is a serious subject, but would surely eradicate the distortions of the “small VAT”, drawing closer the new domestic horticulture sector to the companies that want, and need the rules to be respected.
The “small VAT” is one of the bastions of informality within Chilean agriculture. The absence of rules that informality imposes always harms those who wants to be correct, and therefore is so harmful for Chile. Our responsibility is, and will be to fight informality, protect merits, innovation, and create value, in whole, the seeds for a bigger and just agriculture.