Notification letters from Tax and Customs Board, Estonia


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In January 2008, the Estonian Tax and Customs Board sent notification letters to companies with low wage levels compared with the average level in the region and the respective business sector, which might refer to the payment of undeclared wages or ‘envelope wages’. The notification letters informed employers of the low competitiveness of the wage levels in their companies compared with average wage levels. As a result, 46% of the companies that received these letters adjusted the wage levels in their companies, increasing tax payments at the same time.



Tackling the problem of undeclared wages has been an important task for the Estonian Tax and Customs Board (Maksu- ja Tolliamet).

An annual survey on undeclared wages by the Estonian Institute of Economic Research (Eesti Konjuktuuriinstituut) has indicated that although the payment of undeclared wages declined in 2002–2006, it increased again in 2007. As a result, 14% of employees were paid ‘envelope wages’ in 2007. These trends have occurred even despite the fact that the general attitude of the population towards undeclared wages has remained negative. According to the research estimates, the Estonian government lost about EEK 2.2 billion (about €141 million as at 22 January 2009) of tax income due to the payment of undeclared wages in 2007 (see also EWCO, 2008).

As undeclared wages have still remained a concern in Estonia, the Tax and Customs Board has been introducing new measures in addition to regular monitoring activities to combat the payment of ‘envelope wages’. For this purpose, the board decided to send out notification letters to employers. This measure was first introduced in 2005 with the first 1,000 notification letters being sent to companies. The initiative of notification letters acts as a preventive measure, providing employers with the opportunity to change their tax behaviour before receiving penalties. It also aims to change employers’ attitudes in terms of commitment to tax morality in the future and raise awareness of competitive wages among both employers and employees.

The Tax and Customs Board is the main driver behind the initiative. In 2008, the initiative targeted 1,000 companies and 2,000 workers.


The main objective of the measure is to reduce the amount of undeclared wages and thus also increase tax revenues for the state. Improving the tax behaviour of employers will also help to prevent new cases of taxation fraud.

Specific measures

In January 2008, the Tax and Customs Board sent notification letters to companies where the risk of paying undeclared wages was estimated as high. The letters were sent to 2,000 employees and 1,000 enterprises in three groups – letters were sent either to employees only, employers only or both employers and employees of the same company. Previously, in 2005, some 1,000 notification letters were also sent out, but only to companies. The letters informed entrepreneurs of the low competitiveness of the wage levels in their companies compared with the average for the region and the operating sector. Employees were informed about the risks that accompany undeclared wages such as losing social guarantees. Companies are first given an opportunity to voluntarily make any necessary corrections in their employment declarations. Strict control measures are then introduced for companies that do not alter their declarations after receiving notification letters. The extent and duration of the change in tax behaviour are also analysed, for example in terms of whether increases in wage levels correspond to the situation in the sector and whether changes in tax behaviour are permanent or temporary.

Evaluation and outcome

Achievement of objectives

The notification measure may be considered successful as the tax behaviour of employers has improved and tax revenues have increased. Employers who have not corrected their tax behaviour voluntarily have been put on an inspection list. According to the audit department of the Tax and Customs Board, 46% of enterprises that received notification letters in 2008 started paying more taxes. Overall, 43% of employers did not react to the letters and in 8% of the companies the tax behaviour worsened.

When comparing different methods of sending notification letters, the most successful in terms of improved tax behaviour included cases where both the employer and the employees received the letters. In this scenario, 56% of such enterprises improved their tax behaviour, while 36% did not react to the notifications. In total, 126 enterprises and at least three of the company employees received the letters simultaneously.

Obstacles and problems

In 2007, 43% of the enterprises ignored the notification letter and thus the situation became worse in 8% of the enterprises. As a result, those companies were inspected.

Lessons learnt

Sending a notification letter to both the company and its workers was considered most effective. Improvements in tax behaviour were visible in 56% of those enterprises.

Impact indicators

In total, some 1,000 enterprises and 2,000 workers were sent notification letters.

After four months, the notification letters resulted in an increase in tax revenues of EEK 10 million (about €639,000), including EEK 8.8 million (€562,000) from notifications sent to enterprises and EEK 1.2 million (€76,600) from those sent to individual employees. However, according to the estimations of the Tax and Customs Board, the state loses about EEK 1 million (€63,900) of tax income a day on account of those 1,000 companies that were notified in January 2008.

It was estimated by the Tax and Customs Board that, while they manage to carry out about 2,000 inspections a year, the notification letters had an impact in about 500 cases – that is to say that tax behaviour among employers improved in these 500 cases. Thus, the measure is cheap to implement as tax behaviour is improved voluntarily by employers, without the need for inspections by the state.


The measure has proved useful and is easily exploitable and adaptable for new situations and fields of activity.


Estonian Tax and Customs Board,


Ahermaa, E., Varimajandus Eestis 2007 (elanike hinnangu alusel), Institute of Economic Research, Tallinn, March 2008.

Anvelt, K., Ümbrikupalk röövib riigilt päevas miljoni, Eesti Päevaleht, June 2008, available online at:

European Working Conditions Observatory (EWCO), ‘Problem of undeclared wages on the rise’, 2008, available online at: /ef/observatories/eurwork/articles/undefined/problem-of-undeclared-wages-on-the-rise.

Levit, G., More than EEK 330 million of unpaid taxes in half-year, Baltic Business Review, 30 July 2008, available online at:

Rum, P., Märgukirjade saatmine vähendas ümbrikupalga maksmist, Estonian Tax and Customs Board, 11 June 2008, available online at:

Tubalkain-Trell, M., EEK 490 million unpaid taxes in Estonia, Baltic Business Review, 29 October 2008, available online at:

Liis Lill and Kirsti Nurmela, PRAXIS Centre for Policy Studies


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