Estonian tax authority: Economic struggles increasing pressure to pay cash-in-hand wages

  • 2020-07-07
  • BNS/TBT Staff

TALLINN – Although the number of recipients of cash-in-hand wages is declining, more difficult economic times increase the pressure to pay envelope wages, it appears from analyses carried out by the Estonian Tax and Customs Board, the Chamber of Commerce and Industry and the Institute of Economic Research.

"We are seeing pressure from both sides -- there are workers receiving unemployment benefits who ask for work 'unofficially' in order not to lose state benefits. And entrepreneurs who are tempted to offer it and thus gain an advantage over competitors," Rivo Reitmann, deputy director general of the Tax and Customs Board, said in a press release.

A survey conducted among entrepreneurs of the Chamber of Commerce and Industry also suggests that entrepreneurs perceive the problem of envelope wages as the same and even slightly more positive than a year ago, but a more difficult economic situation and entrepreneurs' assessments of the situation may result in a backfire.

Mait Palts, director general of the Chamber of Commerce and Industry, said that the decline in the share of envelope wages so far has been due to long-term information and prevention work, but the fact that entrepreneurs value transparent entrepreneurship more also plays a role.

"Entrepreneurs attach increasing importance to the credibility of their partners, which in turn reduces the parties' willingness to participate in the shadow economy," Palts said.

He added that despite the current good results, a major challenge in his view is that, due to the coronavirus crisis, many companies and their employees are under economic pressure and the temptation to pay cash-in-hand wages is higher than usual. Palts expressed hope that the parties to the employment relationship would not go down the easier path.

The long-term trend indicates that the number of recipients of envelope wages is decreasing year on year. According to the Institute of Economic Research, up to 16 percent of employees received full or partial cash-in-hand wages in 2010, compared to approximately 8 percent of employees last year.

There are also fewer companies that pay envelope wages and only a small part of them cause significant damage to the state -- those from which the state loses more than 12,000 euros a year in labor taxes make up approximately 3 percent of all companies, the Tax and Customs Board said.

According to Reitmann, the Tax and Customs Board is still strongly focusing on envelope wages and the center of the problem has changed -- instead of a few large wrongdoers, there are many small ones. As a result of the inspections and conversations by the Tax and Customs Board, a total of 6.4 million euros in additional payments have been assigned this year.

"We are looking at companies on a risk-based basis, both by conducting on-site inspections and by inviting company representatives for an interview," Reitmann said.

He added that in the first six months of this year, the authority has checked or in some other way contacted representatives of 1,168 companies and explained why, in the Tax and Customs Board's view, they hold the risk of cash-in-hand wages. "A third of the companies have improved their behavior themselves after that. The rest we look in the eye more seriously," he said.

Reitmann emphasized that the employee is also responsible for accepting the envelope wages. "We have imposed an obligation on the employee to pay the unpaid income tax ex post when it is clear that the envelope wages were received knowingly," he said.

This year, the Tax and Customs Board has paid more attention than before to the payment of cash-in-hand wages at public procurement sites, for example, this spring and summer, inspections have revealed unregistered employees from several sites who received salaries "unofficially". According to Reitmann, it is unacceptable that companies whose tax matters are not in order work on public procurement objects.

"We work with contracting authorities and reacting ourselves when we see tax evasion. It is also important that the public sector itself does not use the services of dishonest contractors when commissioning works and, as the contracting authority, pays more attention to the background of subcontractors," he said.

The Tax and Customs Board emphasized that by accepting cash-in-hand wages, people give up significant benefits. For example, envelope wage recipients are deprived of sickness benefits, unemployment insurance and the opportunity to receive fair parental benefits.

A correctly registered job and an official salary also provide legislative protection against the employer in the event of an employment dispute.

According to the Tax and Customs Board, cash-in-hand wages are still the greatest tax problem in Estonia, due to which the state of Estonia lost approximately 134 million euros in taxes last year. In 2018, the loss of income was 142.1 million euros, and in 2017, 147.1 million euros.

It is estimated that 8 percent of employees receive envelope wages and about a quarter of Estonian companies partially pay their employees cash-in-hand wages.