Many African economies face persistent challenges of low tax compliance and high levels of informality, particularly among small contributors such as small and medium enterprises (SMEs) and own-account workers. These groups, while numerous, typically have low incomes and limited capacity to comply with complex tax systems. In response, most African countries have adopted simplified tax regimes, including presumptive taxes – fixed, regular payments designed to reduce the administrative burden of tax compliance.
In recent years, there has been growing interest in how these regimes might contribute not just to improve compliance, but to broader goals such as increasing revenue, expanding the tax base, and encouraging formalisation. While African countries are still experimenting with these approaches, lessons can also be drawn from Latin American reforms. Countries like Argentina, Brazil and Uruguay have combined simplified tax regimes with subsidised or reduced social security contributions to incentivise formalisation and expand social protection. After more than a decade of implementation in various contexts, key insights are emerging that can inform policy design across Africa.
1. Improved social security coverage
These schemes have significantly improved social security coverage, especially among own-account workers.
In Brazil, contributors to the SIMPLES and SIMEI regimes grew from 4,3 million to 22,6 million by 2010. They pay around USD 1 as tax and contribute 5% of income towards benefits like pension, disability and maternity leave.
In Argentina, around 2.2 million own-account workers are enrolled as monotributistas, paying about USD 23 per month. This covers income tax, value-added tax (VAT) and social security, and offers access to health care and minimum pensions.
In Uruguay, the monotributo scheme is restricted to specific trades (e.g. handicrafts, tutoring, hairdressing, gardening, sex work, etc.), and has around 50,000 participants. They contribute approximately USD 50 per month and receive most of the same social security benefits as the general population, except for unemployment benefits and conditional access to health care, which requires an additional contribution.
These schemes contribute only marginally to public revenues owing to the low tax rates (as in Brazil and Argentina) or limited reach (as in Uruguay). For instance, Argentina’s monotributo accounts for less than 0.2% of public revenue.
2. Strengthening the principle of solidarity
These schemes are highly regarded by their beneficiaries.
In Uruguay, monotributistas appreciate the ability to work without fear of penalties. They value the access to consolidated formal markets and value chains, improving their income and business standing. They also value access to social security benefits, though some feel like “second-class” citizens because they receive fewer benefits than regular contributors.
These schemes reflect the principle of solidarity in social security as they offer benefits relatively similar to the general system but at lower or subsidised contribution rates. In fact, in some cases where social security institutions operate with deficits, governments step in through tax-funded top-up contributions.
3. Fiscal cost and formalisation shortfall
While these schemes were originally intended as transitional – helping workers move into full formalisation – their success is limited as most monotributistas remain in the simplified scheme owing to the large differences in contribution requirements between simplified and general systems.
Yet, though difficult to calculate precisely, these semi-contributory schemes are thought to be more fiscally sustainable than non-contributory alternatives. Without them, many participants might rely entirely on publicly funded old-age pensions or assistance.
Key takeaway for African countries
After over a decade of experience, simplified tax regimes with social security contributions have proven effective at expanding coverage and providing legitimacy to informal workers. While they offer tangible benefits such as access to social protection, greater recognition by the state, and improved market access for SMEs, evidence suggests that they haven’t consistently resulted significant increases in public revenue or an effective transition to full formalisation. This underscores the need for realistic expectations and careful policy design when adapting such approaches to African contexts.
