Gender Norms and Intra-Household Relationships in Benin

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Formalization in Benin

The seventeen OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires) member countries adopted a revised General Commercial Law in December 2010, which came into effect in May 2011. The new law, introduced the entreprenant status, a simplified legal regime specifically designed for small entrepreneurs, whose intended objective is to facilitate the migration of businesses operating in the infor-mal sector into the formal sector. However, the law did not make explicit how the entreprenant status practically functioned, nor the specific combination of incentives that it would include, instead allowing each country to fill in the vacuum through ad-hoc secondary legislation and institutional changes. Benin, as a member of OHADA, informal firms versus new entrants registering.
The entreprenant status can apply to a physical person running a micro or small business involved in any type of activity. Formalization with this new status is easy, free of charge and takes only one business day. The introduction of the entreprenant status is part of a broader effort from the Government of Benin to simplify and reduce the costs of formalization. Reforms of other existing legal status were implemented a few months before the creation of entreprenant status, and included the creation of a one-stop shop for business registration, and a significant reduction of the registration costs associated with the main existing legal status. The registration cost for individ-ual enterprises dropped from CFAF 65,000 (USD 1096) to CFAF 10,000 (USD 17) and from CFAF 225,000 (USD 378) to CFAF 17,000 (USD 29) for limited liability compa-nies (only the entreprenant status is totally free of charge). For all statuses, the time to register was reduced to one business day. The only documentation required to become formal is a legal ID, and then firm owners fill out a short form, provide two pictures and sign a declaration saying that they were never imprisoned. As these reforms (including the creation of the entreprenant status) were implemented recently, information on the new conditions to formalize was not likely to be known by the majority of informal businesses operating in Cotonou at the time of the start of the program.
Formalizing in Benin means to choose a legal status and register at the GUFE (Guichet Unique de Formalisation des Entreprises), the one-stop-shop for formaliza-tion that gathers services of the chamber of commerce and of the tax administration. It offers some potential benefits (presented in Table A1) depending on the type of status chosen. Most of these potential benefits are related to the possibility to apply for bank services, or to access new markets like government and large companies’ contracts. The entreprenant status gives access to all advantages except the rights to export and to access large public contracts. It explicitly targeted micro and small businesses manag-ing one type of activity with a limited turnover.7
When they formalize, businesses get a unique fiscal identifier and are registered with the tax administration. Accordingly, the main potential cost of formalization is related to taxes. In Benin, the link between formalization and taxes is complex and varies according to the type of business. In theory, all businesses with a fixed location would pay taxes even if they were informal. But in practice, tax enforcement is easier for for-mal firms, since they have known addresses, can be sent tax notices, and can be found more easily, whereas tax collection from informal firms relies on field inspections from tax inspectors. When the program was launched the tax system applicable to most mi-croentrepreneurs8 was an assessment based on the rental value of the business premises. However, most informal firms do not have a lease contract proving rental value, and so taxes were based on the assessment of inspectors. Data from our baseline survey (see Table 1) show that formal firms were more likely to be paying taxes at all (84 percent paid versus 55 percent of informal firms), and paid a higher amount of taxes conditional on paying (an average of 17 percent of profits versus 9 percent). But both formal and informal firms express considerable uncertainty over the taxes they will pay, with more than 70 percent saying it is difficult to know in advance the tax they would have to pay.
After the entreprenant status and our interventions were launched, the government introduced a new tax regime for micro and small enterprises that shifted the tax basis from rental value of premises to turnover.9 This was not known at the time of the launch of our interventions, so should not affect formalization decisions, but will affect projected future tax revenue from newly formalized firms. Figure A1 shows the project timeline and the date of introduction of this reform.
When they formalize, businesses which were not paying any tax before benefit from a full year of tax exemption (as we will see later, in practice this exemption was also applied to firms already paying tax). In addition, businesses which also register with the CGA (an association providing business counseling and account certification) can benefit from a reduction of 40% in the amount of taxes due for the following 3 years. As a result, the amount of taxes paid by firms which formalize may actually decrease in the short-term.

Evaluation design

The Intervention

Given the flexibility provided by the OHADA framework as to how the entreprenant status should be implemented, the Government of Benin was interested in knowing the most impactful and efficient way to operationalize the legal status. We worked with the government to design and test the following three packages of incentives to formalization, with the goal of understanding what would be the best combination of incentives:
9 In December 2014, the Beninese Parliament adopted a new MSE tax regime. This regime intro-duced the Synthetic Professional Tax (TPS: Taxe Professionnelle Synth`etique) which replaces the four taxes that micro and small businesses were subject to before the reform. This reform creates more predictability and transparency in the calculation of the amount of tax due. Our survey data and qualitative surveys suggest that entreprenants started paying under the TPS regime in 2017 based on their 2016 turnover.
The Centres de Gestion Agr´e´es (CGA) is a semi-public organization that focuses on providing small and medium enterprises with business management, accounting, and tax consulting services.10 They provided advisors who would visit selected firms in person. These advisors were professionals with Masters degrees and an average of eight years of professional experience (see appendix 1). They explained the benefits of becoming an entreprenant, and provided (i) a leaflet describing the entreprenant status, its advantages and requirements, (ii) one leaflet explaining the registration process at GUFE, and (iii) one leaflet explaining the different tax regimes applicable to entreprenants and how to calculate taxes due within each regime. They did not emphasize the short-term tax reductions during these visits, but rather the steady-state tax regimes that firms would now be part of. The informal businesses that decided to formalize needed to submit an application at GUFE to obtain the entreprenant card. When necessary, CGA advisors helped entreprenants with the formalization process at GUFE, including filling in the declarations and preparing all the required accompanying documents.

Package B – Provision of business services and trainings, and assistance in opening a bank account

The second package aimed to supplement the basic help in package A by facilitating access to the training services and to commercial banks, which are potential benefits of formalizing, but which many firm owners may not otherwise benefit from in prac-tice. Following the first visit to each business, CGA advisors organized a second visit to deliver a 1-2 hour personalized training session. They then noted a variety of ad-ditional training sessions that business owners could access conditional on receiving the entreprenant card. They could sign up for training at CGA which included four workshops (a) basic accounting, (b) initiation to tax obligations, (c) financial education and (d) a fourth workshop where they could choose one of (i) basics of microenterprise management, (ii) initiation to sales development and access to markets, and (iii) basic of business plan development. Each workshop lasted three consecutive half-days. Once the business owner completed the four workshops with the CGA, he/she received an official diploma, and a sticker acknowledging that he/she received the training.
Firms receiving this package were also offered support from CGA to open a business bank account. The bank partners (Orabank and Bank of Africa) designed a specific banking product for the entreprenant, with dedicated services and simplified banking access conditions, including a debit card, bank account consultation with mobile phone, cash transfers, SMS-banking, internet banking and mobile money. The entreprenant bank accounts in both banks are cheaper than what businesses can usually get (around CFAF 1,000 per month, or USD 1.7, against CFAF 2,000, or USD 3.4) and do not require any initial deposit, whereas business bank accounts usually do in Benin. CGA advisors assisted the entreprenant to open a bank account and provided instructions on how to use it.

Package C – Provision of tax preparation support and tax mediation services

The third package aimed to address the uncertainty and concerns that entrepreneurs had about taxes. Firms which formalized under the third group were offered help in preparing tax forms (including tax returns and supporting documentation). However, given that most businesses were subject to the TPU, and that the amount of TPU to be paid by a given business is determined by the tax administration without any form being filled by the business, this “offer” was not technically implemented. The advisors also left their contact information in case the entreprenant had any complaints about future tax payments and inspections, and offered mediation services in case of a dispute between the firm and the tax administration.

Sample selection and study population’s characteristics

A listing survey was conducted in Benin’s largest city of Cotonou in March and April 2014. This survey was designed to obtain a representative sample of all businesses op-erating in Cotonou, including Dantokpa market.11 All businesses with fixed location, except international and nationwide companies and liberal professions, were targeted. Overall, 19,246 businesses were listed, of which a sample of 7,945 were surveyed. We then dropped businesses which were already formal and firms which had very high or very low profits and sales to arrive at a sample of 3,596 for the study, all of which have sales below the turnover eligibility thresholds for the entreprenant.12 Appendix 2 provides details on the sampling protocols and this selection process. Appendix 3 describes how each key outcome was measured.
Table 1 provides descriptive statistics for businesses selected in the sample, and compares them to the overall set of informal businesses and to formal businesses. Busi-nesses selected for the study have very similar characteristics to the whole population of informal businesses surveyed, and the overall study shows good external validity for the whole city of Cotonou. Formal businesses had on average 3 employees and monthly profits of around CFAF 223,000 (USD 374), while informal businesses had 1 employees and a monthly profit of CFAF 46,000 (USD 77). 52% of businesses were involved in trade activities, 28% worked in services, and 17% were craftsmen. 63% of businesses sampled for the study were owned by women. This reflects the high share of female owners in Dantokpa market. Approximately 30% of business owners never went to school, and less than 20% of the businesses were keeping some type of accounting.
In comparison to similar studies in other contexts, the businesses in this study are smaller in size, reflecting the less developed nature of the country and small size of most informal businesses. In the study in Malawi (Campos et al, 2015), businesses had on average two employees and monthly profit of USD 214, while in the study in Sri Lanka (de Mel et al. (2013)), businesses had on average three employees and monthly profit of USD 300.

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Experimental Design

The 3,596 informal businesses13 were randomly allocated into three treatment groups and one control group. The first group of informal businesses received package A of incentives, the second group packages A and B of incentives, and the third group pack-ages A, B and C.
The randomization was done in the office using STATA and the following method-ology was used for stratification:
1. 16 strata were created using the following variables: business owner gender, busi-ness operating in Dantokpa market, trader, and business owns a bank account.
2. Inside each stratum a Z-score was created as the average of standardized profits, turnover and number of employees. Based on this Z-score, triplets of businesses were created and inside each triplet, businesses were randomly allocated to 3 groups, each of 1,200 firms.
3. The 1,200 businesses in one group were then randomly allocated further into a first treatment group with 301 businesses, and second treatment group with 899 businesses.
As a result, 301 businesses were allocated to receive package A (treatment group 1), 899 to receive packages A and B (treatment group 2), 1,199 to receive packages A, B, and C (treatment group 3), and 1,197 to the control group. Figure A2 describes the organizational chart of the interventions. Table A2 shows the groups are balanced in terms of baseline characteristics across the different groups.

Data

Two main sources of data are used for this study: administrative data on formalization and program implementation and in-person quantitative surveys with business owners. In addition, we supplement this with qualitative data from study participants and im-plementing agencies.14
Our main measure of formalization is based on monthly administrative data on business registration provided by the GUFE. This database includes the complete list of all newly registered businesses for all legal statuses. Since most businesses in the control group would not have been aware of the new entreprenant status, this measure will capture any alternative legal status they registered under. Appendix 4 describes the matching process used to identify whether firms in the GUFE database came from our sample.
Other main outcomes on business performances (profits and turnover) and intermediate outcomes like business knowledge and practices, taxes and banking were measured through in-person interviews with business owners. The baseline survey of the selected sample of businesses was conducted in March-April 2014 prior to program implementa-tion. Two follow-up surveys were conducted in April-June 2015, and in May-June 2016. Attrition rates at first and second follow-up surveys were 11.8 percent and 15.9 respec-tively and were not correlated with treatment status (Table A3). The post-attrition sample remains largely balanced in terms of baseline observables (Table A4).15 Two years after the baseline survey, 8.6 percent of the businesses had closed their operations, and business closure was also not correlated with treatment status.

Program implementation and take-up

Table 2 summarizes key program implementation information, with further details provided in appendix 1. Panel A uses the administrative data from the CGA. Between April 2014 and January 2015, 2,344 of the scheduled 2,399 “first visits” (98%) were completed by CGA. First visits were considered as not completed successfully when CGA advisers were not able to locate the business. All businesses who received a first visit in treatment groups 2 and 3 were offered a second visit by CGA. Only 932 of these second visits were completed with success (44% of total). According to our qualitative surveys and focus groups with the CGA, the main reasons for this relatively low take-up rate were that many businesses were not interested by the second visit, or did not have time to receive it. This finding is consistent with McKenzie and Woodruff (2014) who find an average attendance rate of only 65 percent for business training programs in developing countries. During the two years following the program launch, 302 businesses registered with the CGA (13 percent of the total in treatment group 2 and 15 percent of the total in treatment group 3), and 272 businesses participated in a group training session at CGA (12 percent of the total in treatment group 2 and Panel B of Table 2 shows implementation information taken from our follow-up sur-vey. It confirms that registration was much cheaper and faster under this new status. The median firm in the treatment group took 3 days to formalize, and more than 80 percent declared that they did not pay anything in the process (those who paid some-thing in the treatment groups formalized with a different status than the entreprenant status). Qualitative work conducted a few days or weeks after the businesses had re-ceived a visit from the CGA suggests that the program understanding was relatively good. However, data from our endline survey suggest that one and a half to two years later, most businesses had forgotten about the program. Only 36 percent of businesses in treatment groups 2 and 3, and 32 percent of those in group 1, remembered the entreprenant program. Moreover, only 23 percent in groups 2 and 3, and 22 percent in group 1, were able to describe correctly what it is. In the control group, only 13 percent of the businesses declared that they had heard about the entreprenant pro-gram, and 5 percent were able to describe it correctly. It suggests that only marginal externalities were generated by the program on those not directly targeted. This is consistent with qualitative interviews conducted with informal businesses not targeted by the program.17
In practice, tax mediation services were implemented by CGA for all businesses registered with the CGA (even for those in treatment group 2). Some entreprenants reported to the CGA that the tax administration requested tax payments that were higher than expected, or that the tax exemption offered during the first year after registration to the CGA was not implemented. The CGA advisors helped them to solve these issues as they arose. The CGA reported that 29 (2.4 percent) mediation cases happened during the two years of program implementation and that all these cases were solved in favor of the entreprenant (i.e. the tax exemption was respected by the tax administration). Firms in group 3 were the main consumers of these services comprising 23 out of the 29 cases of tax mediation (and the remaining 6 in group 2). The main difference between group 2 and group 3 is that the salience of the tax mediation services was increased for firms in group 3 by providing information on the existence of this service before firms had to decide to become formal or not. In comparison, firms in group 2 were only informed about the general support they could receive from the CGA and learned about the mediation services only if they first become formal and then had an issue with the tax authority and informed the CGA.

Table of contents :

Introduction Générale 
1 Does Inducing Informal Firms to Formalize Make Sense? Experimental Evidence from Benin 
1.1 Introduction
1.2 Formalization in Benin
1.3 Evaluation design
1.3.1 The Intervention
1.3.2 Sample selection and study population’s characteristics
1.3.3 Experimental Design
1.3.4 Data
1.4 Program implementation and take-up
1.5 Theory and Empirical Strategy
1.5.1 Theory: How might the entreprenant program impact formalization and business performance?
1.5.2 Estimation
1.6 Impact of our interventions on formalization and of formalization on firms
1.6.1 Overall impact on formalization
1.6.2 A supplementary information experiment
1.6.3 Impact on intermediate outcomes for firms
1.6.4 Impact on firm performance
1.6.5 Why don’t more firms formalize?
1.7 The Costs and Benefits to Government of Formalizing these firms
1.7.1 The cost of inducing firms to formalize
1.7.2 The tax benefits to the government of bringing firms into the formal system
1.7.3 Would better targeting help?
1.8 Conclusions
2 Firm Formalization, Individual Property Rights and Intra-household Relationships 
2.1 Introduction
2.2 Context
2.2.1 Gender Norms and Intra-Household Relationships in Benin
2.2.2 Entrepreneurship and Firm Formalization in Benin
2.2.3 Formalization has Limited Effects on Business Outcomes in this Context
2.3 Theoretical Framework
2.3.1 General Setup
2.3.2 Direct Effect of Formalization
2.3.3 Impact of Formalization on Husband’s Optimal Decisions
2.3.4 Impact of Formalization on Wife’s Optimal Decisions
2.3.5 Summary of Model Results
2.4 Experimental Design and Data
2.4.1 The Entreprenant Study
2.4.2 Sample Characteristics and External Validity
2.4.3 Data and Outcomes
2.5 Empirical Specification
2.6 Results
2.6.1 First Stage: Impact on Firm Formalization
2.6.2 Impact of Firm Formalization on Revenue Allocation and Willingness to Pay to Hide a Windfall Transfer
2.6.3 Mechanisms
2.6.4 Robustness Checks and Alternative Interpretations
2.7 Conclusion
3 Technology, Taxation, and Corruption: Evidence from the Introduction of Electronic Tax Filing 
3.1 Introduction
3.2 Context: Tax Administration and Electronic Tax Filing in Tajikistan
3.3 Experiment Design
3.3.1 Sampling and Randomization
3.3.2 Program Implementation
3.4 Conceptual Framework
3.5 Data
3.5.1 Risk Score
3.6 Empirical Specification
3.7 Results and Discussion
3.7.1 Adoption of Electronic Tax Filing
3.7.2 Impact of Electronic Tax Filing
3.7.3 Mechanisms
3.7.4 Robustness Checks
3.8 Conclusion and Policy Implications
Bibliography 
Appendices 
Appendix A Chapter 1
A.1 Details of Intervention Implementation
A.2 Details of Sampling Procedure
A.3 Measurement of Key Outcomes
A.4 Matching program data to administrative data on formalization
A.5 Estimating Future Additional Tax Revenue from Newly Formalized Firms
Appendix B Chapter 2
B.1 Outcome definitions
Appendix C Chapter 3
C.1 Script Used to Invite Firms to Training
C.2 Measurement of Key Variables and Outcomes
C.3 Cost Effectiveness Analysis Using Time Saved by Firms
C.4 Machine Learning Methodology

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