Illicit Envelope Wages Have a Continuing Effect on Competitiveness of Honest Entrepreneurs

For the sixth time we asked the anonymous opinion of entrepreneurs on payment of illicit envelope wages. The questionnaire revealed that paying illicit envelope salaries is still seen as a problem. The situation has not improved much.

• Traditionally, the respondents saw construction as the most problematic sector, followed by accommodation and catering. The problem is always the acutest in areas where cash is used more than usual.
• Compared to the previous questionnaire, the share of respondents who see the share of illicit envelope wages in the payments made by the companies of the sector as minimal has remained the same, i.e. nearly half of the respondents thing that in their sector, the envelope salaries are at most 5% of the salary payments.
• Compared to the previous questionnaire, the share of people who think there are no employees who get their salary “under the table” in their sector, has increased slightly – while last time, the share of such respondents was 60%, this survey showed 62%.
• In order to decrease payment of illicit envelope salary, entrepreneurs think it is important that the Tax and Customs Board should continue its information activities. However, if it does not work for some companies, they would like to see more control actions and stricter punishments. Additionally, they see that the liability of employees would extend to agreeing to envelope salary – that is the opinion of 69% of the respondents.

Mait Palts, Director General of the Chamber of Commerce said that we are taking small steps towards honest and transparent business, but even the smallest of steps take us further. “We hope that in the future, entrepreneurs will continue to think their tax decisions through, and employees will understand their responsibility when agreeing with illicit envelope salary. Each entrepreneur must keep in mind that 63% of the companies are ready to not to cooperate with a partner who is paying illicit envelope salary,” explained Palts.

Rivo Reitman, Deputy Director General of the Tax and Customs Board said that avoiding labour taxes or payment of illicit envelope salaries continues to be the most widespread tax problem in Estonia, but increasing communication on the topic with entrepreneurs and employees has helped to hinder the spreading of illicit envelope salaries.

While the survey conducted by the Estonian Institute of Economic Research shows that the number of employees who accepted illicit envelope salary dripped in 2018 as compared to 2017 from 13 percent to 6 percent, the risk analysis conducted by the Tax and Customs Board shows that the amount of loss from illicit envelope salaries in 2018 remained largely on the same level as in 2017.

“Our increasingly improving analysis of companies in risk of envelope salaries will help us reach better to companies where illicit envelope salaries are paid. We communicate with them primarily in the form of counselling and 38 percent of the companies have improved their tax practices within three months after contacts with us,” explained Reitmann.

The analysis conducted by the Tax and Customs Board shows that the taxes lost due to illicit envelope salaries is €86.4 million (€84.1 million a year before), of which 65.1 million is partial envelope salary (i.e. part of the salary is paid officially with taxes, part not). In the Board’s opinion there are approximately 16,000 companies in risk of paying partial illicit envelope salaries, the majority of them are located in Harju County.

The Tax and Customs Board has said that in autumn entrepreneurs will get a tool that will help to keep the tax affairs in order. It is an e-service for the assessment of tax behaviour (so-called Reflection). Through that, companies will see how the Tax and Customs Board sees their companies and what are the assessments given to the tax behaviour. Additionally, recommendations are given on potential improvements.