Bulgaria: New efforts to curb the informal economy

Bulgaria's Economic and Social Council in April issued a statement describing measures implemented to tackle the informal economy and giving recommendations on further actions. A campaign to combat the informal economy was launched subsequently by the Bulgarian social partners, asking all stakeholders to demonstrate their intolerance of informal practices. It aims to popularise good business practices and find ways to limit, and ultimately prevent, undeclared work.

Background

In April 2015, the Bulgarian Economic and Social Council (ESC) presented its official statement (33 KB Word, in Bulgarian) on the reduction and prevention of the informal economy as an opportunity to stimulate growth and employment. The ESC recommends that efforts should be focused on areas where informal practices are traditionally a big problem. A national campaign against the informal economy, ‘Business in light for a better future’, was launched in September 2015 by the Confederation of Employers and Industrialists in Bulgaria (KRIB) and Confederation of Independent Trade Unions in Bulgaria (KNSB).

Policies against the informal economy

The Bulgarian state budget has an estimated €1 billion annual shortfall (in Bulgarian) because of the informal economy, according to the ESC. The Minister of Labour and Social Policy has said that the most common example of undeclared employment is workers without contracts. ESC figures suggest that although the share of workers without a labour contract dropped from 16.6% in 2010 to 6.4% in 2014, the share of people on bogus contracts increased from 10.8% in 2010 to 19.6% in 2012 and reached 44.2% in 2014.

The ESC noted measures implemented by the government and revenue institutions (such as the National Revenue Agency) to prevent and reduce the informal economy including:

  • connecting cash registers with the National Revenue Agency;
  • requiring manufacturers of excise goods (alcohol and fuel) to install monitoring equipment that sends data to the customs agency and requiring fuel outlets to transmit data on quantities of fuel held;
  • improving VAT collection;
  • ratifying Convention 177 on home-working and amending the Labour Code;
  • adopting one-day labour contracts for seasonal workers (included in the changes to the Labour Code in 2015);
  • simplifying the tax and administrative burden, introduction of a flat tax and introduction of electronic payments;
  • restricting cash payments.

The criminalisation of social security fraud and corruption was proposed in 2014, but this has not yet been approved by the Bulgarian parliament.

ESC recommendations

Although the social partner members of the ESC regard informal practices as an impediment to a healthy economy, they acknowledge that it contributes a significant amount to Bulgaria’s GDP. Alongside limiting the creation of informal jobs and informal economic entities, they want regulations to make the formal economy more attractive. The ESC’s recommendations focus on four main areas:

  • preventing violations of labour and social security legislation;
  • limiting ways of hiding a company’s actual turnover;
  • preventing the evasion of customs duties, excise duties and taxes, and VAT fraud;
  • preventing corruption (such as using bribery to win tenders).

The ESC statement describes suggested actions in all four areas, in the short- and long-term. Most involve changes in the law and administrative measures, awareness-raising campaigns and capacity training.

The legislative and administrative improvements are intended to achieve a better balance between sanctions and incentives, including a guarantee that laws will apply equally to all businesses and individuals. Legal changes are proposed to administrative and financial law, labour and social security law, and commercial and contractual law.

Information campaigns could be organised with the assistance of the national hotline maintained by the Bulgarian Industrial Capital Association (BICA), as well as through discussions on social networking sites and specially designed forums. There is also a suggestion that there should be wider publicity about the more serious breaches, and about the consequences for employers who hire workers informally and employees who agree to bogus contracts.

The ESC’s training proposals are intended to raise awareness about the nature and incidence of  the 'grey economy’ and how it can damage economic growth. Target groups could include tax officials, and groups at risk of informal employment, such as young people, seasonal workers, minorities, migrants, and home-workers.

Commentary

The informal economy in Bulgaria has been reduced by 7% between 2010 and 2014, according to data from the Reduction and Prevention of Informal Economy in Bulgaria project (in Bulgarian). The ESC notes that this has been achieved through the active cooperation of state institutions, social partners and civil society organisations.

The effort to combat the informal economy is being sustained through a multilevel partnership between employers, trade unions and the government. All three have participated in launching the 'Business in light for a better future' campaign. Minister of Finance Vladislav Goranov pointed out in September that the government's efforts to tackle the informal economy led to an increase in tax and social security revenues of BGN 1.64 billion (€0.8 billion as at 20 November 2015) over the previous year. The Ministry of Finance is also developing electronic means for taxpayers to declare their income and pay their contributions with minimum effort. 

The ESC emphasises that the informal economy is a long-term challenge and a problem for society as a whole, not just the state, business or unions. Reducing the informal economy could be achieved with shared commitment and cooperation between the state administration, social partners and civil society organisations.

 

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