Action plans to combat undeclared work, Latvia
Since 2004, when the government adopted the ‘Conception on measures to eliminate illegal employment’, it has adopted two short-term action plans – to eliminate undeclared employment (7 April 2010) and to combat the shadow economy and ensure fair competition (26 August 2010). Both plans include measures aimed at increasing sanctions in cases of illegal or undeclared employment. On 15 December 2011, the government adopted amendments to the laws so that monitoring institutions could apply sanctions in cases where undeclared employment was identified, but where it was not possible to identify undeclared and non-taxed payment to employed individuals.
On 26 August 2010 the government adopted the ‘Action plan for combating shadow economy and ensuring fair competition for 2010–2013’. The plan was elaborated by the Ministry of Finance. It includes 63 measures grouped in 14 directions of action, of which seven are general and six are related to selected economy sectors: construction; transports and logistics; metal processing; retail trade; agriculture, forestry, fishing, and lotteries and gambling; and one to the sphere of excise tax.
The plan is related to the ‘Action plan for combating undeclared employment 2010–2013’, elaborated by the Ministry of Welfare slightly earlier (adopted in the Cabinet of Ministers on 7 April 2010). This plan includes 25 measures, grouped in four directions. Until 2009, measures for fighting undeclared employment were set in the ‘Conception on measures to eliminate illegal employment’ (adopted in the Cabinet of Ministers on 29 January 2004) and the ‘Action plan for enhancing of administrative capacity of VID for 2005–2009’, elaborated on the basis of the mentioned Conception.
The general objective of both action plans is to reduce the shadow economy and undeclared work as part of it, and to ensure fair competition. For this, it is planned that activities in the shadow economy should be made as disadvantageous as possible and activities in the legal economy made as advantageous as possible by facilitating transfer to the legal economy and improving communication between public management and society. Both plans include measures aimed at increasing the inevitability of punishment in cases of illegal or undeclared employment.
Several measures for combating undeclared income and work, increasing responsibility for avoiding taxes, providing a smooth transition from the illegal to the legal economy and enhancing the capacity of controlling organisations – the State Labour Inspectorate (Valsts Darba inspekcija, VDI) and State Revenue Service (Valsts Ieņēmumu dienests, VID) – are already implemented. Among them the most interesting are:
- simplification of tax regime for micro-enterprises by consolidation of several taxes into one so called micro-enterprise tax (it includes personal income tax, social contribution and risk fee regarding employees of micro-enterprises, corporate tax if the company meets requirements of this tax or personal income tax payments due from the owner of the micro-enterprise), introduced in 2010;
- declaration of the material status of population (so called initial status declaration) – obliges the population to submit declarations on their material status, including cash and valuables (gold, art items etc.), introduced in 2012;
- rehabilitation of tax violations by paying mandatory tax and social contribution from previously untaxed income that is now declared in the declaration of material status, or all unpaid taxes for enterprises without fines for delay or tax violation, introduced in 2012;
- amendments in the law On personal income tax: (1) increasing employers’ responsibility for undeclared employment, and (2) simplifying declaration (only items that are not available in existing registers should be declared), and amendments in the law On state social insurance increasing employers’ responsibility for undeclared employment, introduced in 2011.
The changes in the tax regime that are envisaged in both action plans and are directly related to combating undeclared work are described below.
Amendments to the laws On state social insurance and On personal income tax are aimed at increasing employers’ responsibility for undeclared employment.
Before the introduction of the described measure, the rights and obligations of the controlling institutions were not specified regarding the situation where undeclared employment was identified but it was not possible to justify undeclared and untaxed payments. In order to resolve this deficiency the Latvian Saeima adopted amendments in two wage tax laws on 15 December 2011. Regarding social contributions amendments were introduced in Article 16, Part 1 and 1.1. of the law On state social insurance, as envisaged in the Action plan for combating undeclared employment 2010–2013. Regarding personal income tax, amendments were introduced in Section VIII Article 31.2 part 1.1 of the law On personal income tax, as envisaged in the ‘Action plan for combating shadow economy and ensuring fair competition for 2010–2013’.
The amendments are valid from 1 January 2012. Now, in cases when undeclared employment is identified, but reimbursements and taxes are not, the VID is mandated to recover from the employer the mandatory contribution/tax payment as well as a fine. The fine is in an amount that confirms to the threefold contribution/tax payment calculated on the basis of VID data on income of the person, if this income is larger than the statutory minimum monthly wage (determined by the annual Regulation of the Cabinet of Ministers), or on the basis of a statutory minimum wage, if calculated remuneration is in the amount of the statutory minimum wage or less, or if it is not possible to calculate its amount.
A newly established part 1.2 of the Article 31.2 of the law On personal income tax sets forth that if it is not possible to determine a time period in which an employer has employed a person without entering into an employment contract, then the tax authority shall recover from the employer mandatory contributions/tax payments for three months, including the calendar month in which the violation was disclosed. A similar norm was introduced in the law On state social insurance.
The Ministry of Finance is the main actor, responsible for tax legislation and implementation of the ‘Action plan for combating shadow economy and ensuring fair competition for 2010–2013’. The VID is an institution, subordinated to the Ministry of Finances, controlling financial discipline and responsible for tax collection.
The Ministry of Welfare is responsible for implementation of the ‘Action plan for combating undeclared employment 2010–2013’. The VDI is an institution, subordinated to the Ministry of Welfare, controlling observation of the labour law and legislation regarding safety at work.
Taxpayers, employers and employees are also involved.
Outcome of evaluations: lessons and conclusions
Achievement of objectives
The government has announced that implementation of the ‘Action plan for combating shadow economy and ensuring fair competition for 2010–2013’ will help to reduce the shadow economy by 20% within four years. Assessments show that indeed, the level of the shadow economy has decreased in 2011, compared with 2010. Yet, it is difficult to assess the impact of the particular measure on the reduction of the shadow economy not only because of the short period of implementation (six months) but also because the described measures are two out of more than 80 measures envisaged in the action plans.
Nevertheless, the measure has increased the responsibility of employers for undeclared employment and reduced undeclared employment in their enterprises.
Harmonisation of wage legislation (two laws on wage taxes) may also be attributed to the achievements of the measure.
Obstacles and problems
Obstacles and problems were not identified.
The strong consequences in implementing the measure are important for the monitoring institutions, both VID and VDI. However, very limited data is available on the impact of this measure.
Neither VID nor VDI have published information on cases when the norm was applied.
Taxation is complicated and experiences of other countries regarding particular taxes cannot be directly transferred. Nevertheless, the impact of an applied solution on elimination of the shadow economy may be analysed after some time.
- Ministry of Finance: www.fm.gov.lv
- Ministry of Welfare: www.lm.gov.lv
- State Revenue Service (VID): www.vid.gov.lv
- State Labour Inspectorate (VDI): www.vdi.gov.lv
Regulation of the Cabinet of Ministers Nr 513 of 26 August 2010. "Par Pasākumu plānu ēnu ekonomikas apkarošanai un godīgas konkurences nodrošināšanai 2010–2013.gadam (On the Action plan for combating shadow economy and ensuring fair competition for 2010–2013". http://www.likumi.lv/doc.php?id=215861&from=off. (in Latvian).
Regulation of the Cabinet of Ministers Nr 197 of 7 April 2010 Par Pasākumu plānu nereģistrētās noderbinātības mazināšanai 2010 – 2013 gadam (On Action plan for combating undeclared employment 2010 – 2013). http://www.likumi.lv/doc.php?id=207807. (in Latvian).
Action plan for combating undeclared employment 2010–2013. http://www.mk.gov.lv/doc/2005/LMpl_170210.13.doc. (in Latvian).
Action plan for combating shadow economy and ensuring fair competition for 2010–2013 http://polsis.mk.gov.lv/LoadAtt/file29107.doc. (in Latvian).
Implementation of the Action plan for combating shadow economy and ensuring fair competition 2010–2013. http://www.fm.gov.lv/files/tausaimnieciba/nuekonomika/Enu_plana_progress_23032012.doc (in Latvian).
Schneider, F., Buehen, A. Shadow economy in Latvia and other European countries: What we do(not) know. Presentation at the conference Shadow economy in conditions of crisis, Riga, 1 October 2010.
VDI darbības pārskats, 2011. gada 1. pusgads (Report on VDI activities, first half of 2011).
Raita Karnite, EPC Ltd.