COMPETITIVENESS IN LOCAL CLUSTERS WITH COMPANIES THAT ARE FRAMED INTO SIMPLES WAY OF TAXING

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1 Aprovado no Congresso de Lódz Polônia. Publicado na Revista Technology Policy and Innovation do Centrum Innowacji Uniwersytetu Lódzkiego Amerykánsko- Polski Program Offsetowy. ISBN COMPETITIVENESS IN LOCAL CLUSTERS WITH COMPANIES THAT ARE FRAMED INTO SIMPLES WAY OF TAXING Divonsir de Jesuz da Silva Dutra Federal Center of Technological Education (CEFET-PR), Ponta Grossa, Paraná, Brazil Alessandro Kremer Federal Center of Technological Education (CEFET-PR), Ponta Grossa, Paraná, Brazil Regina Negri Pagani Federal Center of Technological Education (CEFET-PR), Ponta Grossa, Paraná, Brazil Kazuo Hatakeyama, PhD. Federal Center of Technological Education (CEFET-PR), Ponta Grossa, Paraná, Brazil João Luiz Kovaleski, Dr. Federal Center of Technological Education (CEFET-PR), Ponta Grossa, Paraná, Brazil

2 INTRODUCTION The Federal law no /96 disposes on the tax regime of the micro and small Brazilian companies and sets the Sistema Integrado de Pagamento de Impostos e Contribuições das Microempresas e Empresas de Pequeno Porte (SIMPLES), that is an Integrated System of Taxes Payment and Contributions of the Micro companies and Small Size Companies. That system differentiates, simplifies and favors the micro and small Brazilian companies. The differentiated and favored treatment is represented by the reduction of taxes, contributions and social responsibilities enabling the micro and small companies more competitive in the market. That competitiveness is represented by the practiced prices since, with the same percentile margin of profit, smaller prices are presented in relation to the companies not suitable in the referred law. On the other hand, if the advantages originated by the SIMPLES are not passed on to the prices, being practiced the same price levels of those companies not suitable on that law, there will be an additional profit that may be invested in the differentiation. The additional profit derived from the differentiation (by innovation), if constantly reinvested in new innovations, will provide the sustainability to strategy. According to Porter (1993, p. 44), companies, through the competitive strategy, aim to define and establish an approach for the competition in their industries that it is, at the same time, lucrative and sustainable. In that way, a local cluster tends to increase its competitiveness if constituted by industrial companies suitable in the SIMPLES. This competitiveness can be represented by the prices or the differentiation of the product. In that sense, the objective of the present study is to analyze the competitiveness of the Local Clusters constituted by micro and small companies that fit into the SIMPLES, exploring the favoring and the differentiation proportioned by the system. LOCAL CLUSTERS The Local Clusters, through a series of studies and surveys, is demonstrating that such form of organization propitiates the acquisition of competitive advantages, which difficulty would be possible if pursued individually. Defined by Redesist (2003, p. 3) as being...territorial gatherings of economic, political and social units - with focus on a specific group of economic activities - that present bonds even if incipient, and involve several segments that pursue the competitiveness in a chained way. Still according to Redesist (2003, p. 3),... they involve participation and interaction of companies - that may range from goods producing and final services companies to inputs and equipment suppliers, consultancies and services rendering, traders, customers, among others - and their varied forms of representation and association. In another way, Porter (1993, p. 209) argues that Local Clusters are... geographical concentrations of interrelated companies, specialized suppliers, services providers, companies in correlated sections and other specific institutions (universities, regulation bureaus, and associations), that compete, but also cooperate amongst themselves. This way, the Local Clusters can be defined as companies installed in the same geographical area and that in one way or another, independently of the branch activity, they are integrated in the search of a common economical objective. COMPETITIVENESS

3 The constant pursuing of competitiveness, verified in the most several sections of the economy, presents as challenge to the determination from where the efforts should centered to turn more competitive. The abounding literature on competitiveness presents a series of definitions that justify, and demonstrate its importance, since the level of competitiveness can become the indicator of success or failure of a company. Dengen (1989, p. 106) highlights that competitiveness is the basis of the success or failure of a business where free competition is present. Those with good competitiveness prosper and stand out of their contestants, independently of its potential of profit and growth. According to Dengen (1989, p. 106) the competitiveness can be defined as the correct adaptation of the business activities in its micro-environment. Ferraz et al (1996, p. 03) states that the competitiveness is the capacity of the company to formulate and implement strategies of competition that allow to enlarge or remain, in a durable way, a maintainable position in the market. Using the presented definitions, the competitiveness can be understood as the capacity to pursue and learn new knowledge with the purpose of adapting to the market the company acts, settling down this way, advantages over the competitors. Putting in a different way, it is the production of goods and services with superior quality and more reduced costs than the competitors. THE SIMPLES The Integrated System of Taxes Payment and Contributions of the Micro Companies and Small Size Companies (SIMPLES), was established in Brazil in 1996 through the Law Nº (1996, p /7). The purpose of the referred law, according to its first article, is to make competitive the micro and small Brazilian companies through a differentiated, simplified and favored treatment. According to Dutra (2004, p. 09) the differentiated treatment is represented by the different existent income tax or income brackets according to the level of annual revenue of the company. The treatment is simplified to exist solely one tax in the federal level for the companies fit into it. The favoring of the SIMPLES to the micro and small companies is represented by the sensitive reduction of the taxes, federal contributions and burden on the payroll. The favored treatment is evidenced by the substitution of taxes and contributions listed below, whereas other companies unfit to this range are subjected to: Contribution for the Programs of Social Integration and of Asset Formation of the Public Servants PIS/PASEP; Social Security Contribution on the Net Profit CSLL; Income Tax of Legal Entities IRPJ; Contribution for Financing the Social Security - Cofins; Tax on Industrialized Products IPI; Contributions for the Social Security under the Responsibility of Legal Entity. For Dutra (2004, p. 10), the favored treatment is also characterized by the reduction of the payrollrelated costs incident on the payroll. This treatment causes the workmanship costs to become cheaper and, as a consequence, diminish the costs with production on the companies fit into SIMPLES.

4 The main criterion for framing a company into SIMPLES is the annual revenue. According to the Law no (1996, p /7), altered by the Law no (1998, p. 04 and 05), so that a company can be framed in the system, where the annual revenue cannot exceed to R$ 1,200, FEDERAL TAXES AND CONTRIBUTIONS The SIMPLES, owed monthly by the companies fit into it, is determined by the application of differentiated percentages over the monthly gross revenue of the company. The differentiation of percentages occurs according to the range of annual revenue of companies and they are determined as shown in the table 1, presented below: Table 1 Profit Levels for Framing in SIMPLES Profit levels Percentile of Contribution Up to R$ 60, % From R$ 60, to R$ 90, % From R$ 90, to R$ 120, % From R$ 120, to R$ 240, % From R$ 240, to R$ 360, % From R$ 360, to R$ 480, % From R$ 480, to R$ 600, % From R$ 600, to R$ 720, % From R$ 720, to R$ 840, % From R$ 840, to R$ 960, % From R$ 960, to R$ 1,080, % From R$ 1,080, to R$ 1,200, % Source: (Adapted from Federal Law nº (1996) complemented by Law (1998)) If the company is subject or if it contributes to Tax on Industrialized Products (IPI), it should be added 0.50% to the mentioned percentages. PAYROLL-RELATED COSTS The payroll-related costs according to SEBRAE (2000, p. 90) are represented by direct, provisioned or indirect responsibilities, paid absences and reimbursement responsibilities. The payroll of the company is the base for the calculation of the payroll-related costs. Since the Brazilian labor law expect the existence of two specific types of remuneration to workers, for the analysis, it is necessary to distinguish the hourly or commissioners from the monthly paid ones. Considering only the payroll-related costs, what differentiates a used hourly worker or commissioner from a monthly one is the Rest Weekly Paid (DSR). The payroll-related costs on the payroll for companies framed in the SIMPLES are shown in Table 2, below:

5 Table 2 - Payroll-related costs for Companies fit into SIMPLES Payroll-Related Costs Hourly and Commissioners Monthly Direct responsibilities 8.00% 8.00% FGTS Pension Fund 8.00% 8.00% Provisions 21.00% 21.00% Vacations 12.00% 12.00% 13rd Wage 9.00% 9.00% Reimbursement (average) 5.00% 5.00% DSR 25.80% Total 59.80% 34.00% Source: Sebrae (2000) The reimbursement responsibilities are the values spent with employees as a fine for dismissing them. The costs with those responsibilities are obtained through the rising of the annual average, of the payments made with that purpose. For a comparison, it was considered in all the situations a medium reimbursement of 5.00%. To analyze the expenses with payroll-related costs, it is necessary to distinguish the situations in which the remuneration occurs per hour or monthly. For Sebrae (2000, p. 57) if the expenses with the employees' remuneration were classified as variable, in other words, if it varies in relation to the production level and/or of sale, the remuneration should be made by the worked hour. On the opposite if the expense is fixed, in other words, if it exists independently of the production level and/or sale the remuneration will occur monthly. This way, the expenses with the remuneration with those employees directly linked with the production, characterized as a cost, is accounted per hour. In the same way, the remuneration of those employees not linked to the production will be per hour as well. This remuneration, however, is related to the sale in some way (commissions), although it is characterized as expense (variable). On the other hand, if there is employees' remuneration, regardless the production level or sale, it will be monthly and it is characterized as fixed expense. Once the distinctions are done, it is necessary to point out that, when the remuneration characterizes as cost or variable expense, this will be per hour. On the opposite, if the expense is fixed, the remuneration will be per a month. THE STANDART TAXATION To understand the federal taxation on Brazilian companies (not framed in SIMPLES) it is necessary to separate them. In Brazil, companies with standard taxation are classified as companies taxed by the presumed profit and companies taxed by the real profit. The difference between the two types of companies is in the calculation base of a tax and a federal contribution. In the company taxed by the real profit, the Income Tax of Legal Entities (IRPJ) and the Social security contribution on the Net profit (CSLL) occur on the profit of the company. In the presumed profit, this tax and this contribution, occur over the gross revenue. The Tax on Industrialized Products (IPI) is selective, differentiated by product and it is characteristic of the industry sector. The respective income tax depend on the classification of the product

6 according to the norms of the Federal Revenue. Depending on the essentiality of the product that cannot be recorded by the tax. It is necessary to point out that the income tax of incidence of IPI are the same in the two framing types, in other words, in the presumed and in the real profit. Considering the other taxes and contributions, independently of distinction of taxation option, the calculation base is the gross revenue. Turning to Sebrae (2000, p. 18), the presumed profit is used for more than 96.00% of the companies not framed in SIMPLES. It is this taxation rule that will be taken into account for the comparisons with companies framed in SIMPLES. Regarding the payroll-related costs, independently of the taxation category - presumed profit or real profit - these will be the same ones, obeying the remuneration criteria per hour or per month. FEDERAL TAXES AND CONTRIBUTIONS The taxes and federal contributions over the revenue of the companies that opted for the presumed profit are mentioned in the table 3 below: Table 3 - Federal Taxation on Companies of Normal Framing Taxes and Contributions Percentile of Contribution PIS 0.65% COFINS 3.00% IRPJ 1.20%, 2.40% or 4.80% CSLL 2.88% Source: Sebrae (2000) The tax burden originated from the Income Tax is established according to the characteristic of the company. If the company is on the commercial or industrial branch the income tax will be of 1.20%. If it is a rendering of non-regulated services the income tax will be 2.40 %. Finally, if it is regarding regulated services, the income tax will be 4.80%. If the company presents profit superior to R$ 240, annual, and additional income tax of 10.00% will be added over it. This way, the tax burden on a commercial/industrial company will be 7.73%. For rendering of non regulated services, it will be 8.93%. If the company is a rendering of regulated services, the tax burden will be 11.33%. THE PAYROLL-RELATED COSTS The payroll-related costs of companies with standard taxation are presented in the table 4 below:

7 Table 4 - Payroll-Related Costs for Companies with Standard Taxation Payroll-Related Costs Hourly and Commissioners Monthly Direct responsibilities 36.30% 3630% Welfare Department (INSS) 20.00% 20.00% SESI or SESC 1.50% 1.50% SENAI or SENAC 1.00% 1.00% INCRA 0.20% 0.20% Wage Education 2.50% 2.50% SEBRAE 0.60% 0.60% FGTS Pension Fund 8.50% 8.50% Work Accident Insurance 2.00% 2.00% Provisions 26.49% 26.49% Vacations 15.14% 15.14% 13rd Wage 11.35% 11.35% Reimbursement (average) 5.00% 5.00% DSR 32.56% Total % 67.79% Source: Sebrae (2000) ANALYZING THE RESULTS Initially, analyzing the taxes and federal contributions incident on the sale in the companies framed in SIMPLES, those are reduced to a single withdrawal. That unified tax presents income tax that varies according to the level of revenue of the company. If the company acts in the industry sector, it is increased to the respective income tax the equivalent to 0.50% as to IPI, and the same simplified system is used for withdrawal. For comparison effects, an industrial company with a level of annual revenue of up to R$ 840,000.00, if framed in SIMPLES, contributes with the equivalent to 7.40% as for taxes and federal contributions. If the company were framed in the gross profit category, it would be subject the tax burden of 7.73% (PIS 0.65%, COFINS 3.00%, IRPJ 1.20%, CSLL 2.88%). Being the company of the industry sector, the one framed in SIMPLES submits to an increment of 0.50% as for IPI. The ones not framed in the system are subjected to income tax differentiated that are determined by the Bureau of the Federal Revenue and much over 0.50%. Increasing the annual revenue of the company framed in SIMPLES, the taxes of the income tax are increased as well, not going over 8.60%. If compared that tax burden with the one of the companies not framed in the system (7.73%) it is possible to notice the existence of a difference of 0.87%. If there were not the incidence of IPI, analyzing the two tax burdens, the taxes and federal contributions would be smaller for the company not framed in SIMPLES (gross profit). When the IPI is considered and its respective incident income tax, the total tax burden (in federal terms) will be superior in the company not framed. Therefore, considering only the taxes and federal contributions, the companies not framed in SIMPLES will only present more advantages than the ones not framed if the amount of money resulting from the application of the IPI is smaller than the difference between the two tax burdens.

8 The companies of not regulated services rendering differentiates from the others when not framed in SIMPLES, for the income taxes of IRPJ. That tax corresponds to 2.40%, which provides a federal tax burden of 8.93% (PIS 0.65%, COFINS 3.00%, IRPJ 2.40%, CSLL 2.88%). When analyzing the range of revenue and the respective contribution of income taxes, it is noticed that the company framed in SIMPLES, that present an annual revenue up to R$ 1,200,000.00, is subject the tax burden of 8.60% over the revenue. This way, the SIMPLES income tax will be 0.33% less (8.93% %). If the company is in the rendering of regulated services branch, according to the paragraph XIII, article 9th of the Law no /96, its framing in the SIMPLES is not allowed. The differences between the companies framed and not framed (gross profit) in SIMPLES are also evidenced when analyzing the payroll-related costs. Relying on Sebrae (2000, p.48) it is noticed that the total payroll-related costs of framed companies in SIMPLES is 34.00% to monthly employees and 59.80% for hourly and commissioners (Table 02). Still according to Sebrae (2000, p.49), considering the companies not framed, the payroll-related costs with the monthly employees are 67.79% and % with the payroll of hourly and commissioners (Table 04). In the payroll of the monthly employees of companies framed in SIMPLES, the payroll-related costs are inferior to 33.79% (67.79% %). If considered the payroll of the hourly employees and commissioners, that difference will be of 40.55% (100.35% %). It is noticed, therefore, that the favored treatment given by SIMPLES to the companies framed on it reduces the costs with labor costs, with taxes and federal contributions. Considering that, according to Martins (1979, p. 29) the expense due to the consumption in the production is cost and that the expenses with administration, sales and financings are expenses, the labor costs and their responsibilities can be classified as cost or expenses, depending on where it is applied. According to Sebrae (2000, p. 57) if the labor costs is variable - varying in relation to the production level and/or sale - the remuneration will be made by worked hour. If the expense is fixed - if it exists regardless of the production level and/or sale - the remuneration will occur per month. Following the same line of thinking, the current costs of taxes and contributions are variable, because they vary according to the sale. Independently if it is classified as variable or fixed, whether cost or expense, it is understood that those expenses are part of the total costs of the company and will be taken into consideration in the sale price formation. According to Sardinha (1995, p.70), The selling price is determined by adding a markup at the cost of the product. This markup should cover all the other expenses still not included in the costs of the product, besides allowing a reasonable return to the investors. This way, with a smaller cost, represented by the reduction of the tax burden and payroll-related costs, to a same markup, it will be possible a smaller selling price. Dutra (2004, p. 10) highlights that tendency when mentioning... with the same percentile markup applied on a smaller total cost, it will be provided a smaller selling price, which turns the micro and small companies more competitive on the market due to the price differentiation. This way, the reduction of taxes, contributions and payroll-related costs represent a competitive advantage for the micro and small companies framed in SIMPLES in relation to the others not framed.

9 There are two types of competitive advantages: one based on costs, and another in the differentiation of products. Porter (1993, p. 48) argues that the smallest cost... it is the capacity of a company to project, to produce and to market a product comparable with more efficiency than their competitors. The differentiation is the capacity to provide to the buyer an exceptional and superior value, in product quality terms, special characteristics or assistance services. When passing along the advantages obtained with SIMPLES for the price, this will be used as a competition factor. According to Sardinha (1995, p. 30), it is evidenced that the products are homogeneous and the strategy of competitiveness is the price. If the company framed in SIMPLES do not pass along to the prices the advantages obtained with the reduction of the taxes, contributions and payroll-related costs, it will be according to Dutra (2004, p. 11),... appropriating of one over profit or additional profit. This is characterized by the practice of the same level of price of the companies not framed. Still according to Dutra (2004, p. 11),... practicing the same price level of companies not framed, the costs are reduced by the advantages of SIMPLES, increasing, as a consequence, the profits (Sale Price = Cost + Profit). The additional profit or the over profit appropriated by micro and small companies, if used for the financing of innovations in products or in processes, propitiates a form of differentiation, where the company will stop competing with prices but with the product on the market. When considering the innovation as one of the main factor of competitiveness, Porter (1993, p. 56), states that The companies create competitive advantages learning (or finding out), new and better ways to compete in and industry and taking them to the market, which is, in summary, an act of innovation. The innovation is defined here in a broad way, including improvements in technology as well as in better methods. On the other hand, if the additional profit or the over profit is applied in the differentiation derived from the innovation, this will be characterized as the innovator s profit and will be appropriated by the company till a competitor copy the innovation, since up until then that one will monopolize the market (DUTRA, 2004, p. 11). If the innovator's profit continues being invested in the development of new technologies, of product or production, the growth tendency of the company is inevitable, once the product, and not the price, will be used as competitive advantage. This strategy will self-sustainable if the innovator s profit is used for new innovations. According to Porter (1993, p. 44), The companies, through competitive strategy, seek to define and establish an approach for the competition in their industry that is, at the same time, profitable and sustainable. Highlighted the advantages proportioned by SIMPLES to the micro and small companies framed on it, concerning the local clusters, it if verified that their competitiveness might be augmented. In order to obtain or increase the competitive advantages over the other ones, Porter, Porter (1993, p. 52), argues that... the company have to proportionate the comparable value to the consumer, but also carry out its activities efficiently than its competitors it lives (smaller cost), or then, carry out its activities in the exceptional way, that creates the bigger value to the consumer and obtains the bigger price (differentiation). The framing of those companies that compose the clusters in SIMPLES can represent the increase of competitiveness. Those companies will have, for the offered advantages, the opportunity to compete with prices as a consequence of the reduction of the costs or for the differentiation, if the over profit or the additional profit is used to finance the innovations. CONCLUSION

10 The Local Clusters composed by micro and small companies framed in SIMPLES present a smaller production cost. That cost is represented by the payroll-related costs, once they are smaller than the one of the companies not framed in referred system of federal taxation. In the same way, the favoring proportioned by SIMPLES, represented by the reduction of the taxes and federal contributions, which are part of the variable cost of the company, provides a smaller total cost. The advantages proportioned by for the reduction of the production costs and variable costs turn the micro and small companies framed in SIMPLES more competitive. In consequence, they will increase the competitiveness of the Local Clusters composed by industrial companies framed in that simplified taxation system. The system provides two forms to obtain or increase the competitiveness: the first is evidenced by the reduction of the taxes, contributions or payroll-related costs and, as consequence, the total cost. The reduction of the total cost of production provides the practice of smaller prices, becoming them more competitive price related on the market. The second stands out for the appropriation of the over profit or additional profit, if the advantages obtained with SIMPLES are not added to the prices. If the over profit or additional profit is used for the differentiation through the innovation, the company will monopolize, even if temporarily, the market, escaping from the competition through prices and using the product innovation as main competition factor. SUMMARY Local productive arrangements tend to augment competition if formed by micro and small industrial enterprises fit into SIMPLES way of taxing. This system differs, simplifies and favors in terms of taxes and federal contributions to all Brazilian enterprises that fit to it. The present study aimed to analyze the competition provided by SIMPLES to micro and small enterprises and, consequently, to the Local Productive Arrangements constituted by them. The methodology used for the development of this paper was a bibliographical survey, pointing the competitive advantages provided to Local Productive Arrangements constituted by micro and small enterprises fit to SIMPLES. The main results are the following: the competition in Local Productive Arrangements may augment if they are constituted by enterprises fit to SIMPLES; the system provides reduction of production costs represented by workmanship costs and variable costs, and also by taxes and contributions; the cost reduction turns enterprises more competitive via market prices; if the enterprises do not include in prices the advantages obtained and invest the additional profit over the profit in the differentiation through the innovation, they will start competing with the product, assuming the innovator profit for themselves. Key words: Clusters, Competition, SIMPLES, Innovator Profit, Differentiation REFERENCES Brasil. Decreto Lei nº 9.317, de 05 de dezembro de Dispõe sobre o regime tributário das microempresas e das empresas de pequeno porte, institui o Sistema Integrado de Pagamento de Impostos e Contribuições das Microempresas e das Empresas de Pequeno Porte - SIMPLES e dá outras providências. Diário Oficial da República Federativa do Brasil, Brasília, p /7, 06 de dezembro de Brasil. Decreto Lei nº 9.732, de 11 de dezembro de Altera dispositivos das Leis nºs e 8.213, ambas de 24 de julho de 1991, da Lei nº 9.317, de 5 de dezembro de 1996, e dá outras providências. Diário Oficial da República Federativa do Brasil, Brasília, p. 4 e 5, 14 de dezembro de Dengen, R. J.; MELLO, A.A.A. O empreendedor fundamentos da iniciativa empresarial. São Paulo: Mcgraw-Hill, Dutra, D.J.S. A gestão do conhecimento nas micros e pequenas empresas enquadradas no SIMPLES: a busca do lucro do inovador. In. KM Brasil 2004 Congresso Anual da Sociedade Brasileira de Gestão do conhecimento. São Paulo: SBGC, Ferraz, J.C.; Kupfer, D.; Haguenauer, L. Made in Brazil. Rio de Janeiro: Campus, Martins, E. Contabilidade de Custos. São Paulo: Atlas, 1979.

11 Porter, Michael E. Vantagem competitiva das nações. Rio de Janeiro: Campus, Redesist. Rede de Pesquisa em Sistemas Produtivos e Inovativos Locais. Glossário de Arranjos e sistemas Produtivos e Inovativos Locais. IE/UFRJ. Rio de Janeiro, Novembro, Sardinha, J. C. Formação de Preços: A Arte do Negócio. São Paulo: Ed. Makron Books, Sebrae Serviço de Apoio à Micro e Pequena Empresa. Custos Industriais e Formação do Preço de Venda. Curitiba: Ed. Sebrae, 2000.