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International Internet Magazine. Baltic States news & analytics Tuesday, 19.03.2024, 11:26

FICIL report on shadow economy in Latvia: investor’s viewpoint

BC, Riga, 26.05.2016.Print version
The Foreign Investors' Council in Latvia presented the report on Shadow economy in Latvia from the investor’s viewpoint that will take place on Thursday, 26 May, from 10:00 to 12:00 in Radisson Blu Hotel Latvija.

The report has been developed in close cooperation among the Foreign Investors' Council in Latvia (FICIL), researchers from KPMG and the Stockholm School of Economics in Riga (SSER). It is based on qualitative interviews with top management representatives from the largest foreign companies in Latvia who openly share their observations as to why companies in Latvia engage in shadow economy and what systemic issues in the economy does it unveil. The report also provides for specific recommendations for decreasing the shadow economy in Latvia.

 

“Coming from abroad, it is very difficult for businesses and investors to understand the high level of shadow economy in Latvia – on the one hand, the legislation here is similar to that of other EU countries, on the other hand, the laws and virtues in reality are totally different,” explains Ģirts Greiškalns, Executive Director of FICIL. “The State Revenue Service is not the only responsible institution for the high level of shadow economy in Latvia. It is an issue of fair competition and thus also means compliance with transportation regulations and legislation on extra working hours, control and supervision of construction process, certification of construction materials and protection of consumer rights. Foreign investors often express their surprise about the large amount of cash in circulation and that in a country which is highly developed in terms of information technologies the use of electronic payment systems is still very limited. At the same time, I also hear a lot of understanding from investors regarding the situation and calls for better cooperation between business and the government, incentives for companies to operate legally and a better targeted support for newly established and small businesses,” comments Greiškalns.


The main factors contributing to the shadow economy in Latvia are unofficial wages, issues with public procurement, general corruption and unrecorded revenues, according to the report “Foreign Investors’ Viewpoint on the Shadow Economy in Latvia” presented by the Foreign Investors’ Council in Latvia (FICIL) today.


Unofficial wages, dubbed ‘envelope wages’ because envelopes are usually used to hand to employees part of their wages in cash without paying taxes, were named by foreign investors as one of the main factors contributing to the shadow economy in Latvia. Foreign investors emphasized the need to improve the system of personal income tax calculation as well as the collection and control process in order to curb employee-related tax evasion.


Public procurement was indicated by foreign investors as the second most important aspect of the shadow economy. In many cases, public procurement actually fosters growth of the shadow economy due to the rule to select the lowest price bid as the winner of a tender. With the help of envelope wages, some applicants are able to offer lower prices and thus win the tender.


Corruption in the public administration comes next. Foreign investors recognize two main types of corruption: where officials most often in the controlling institutions are paid to turn a blind eye to some type of violations and large scale corruption that involves public officials or organized groups making decisions that help them extract public funds.


Additionally, it is indicated by foreign investors that the current remuneration in the public administration is not motivational and should be significantly improved to reduce the extent of corruption.


As the fourth aspect of the shadow economy, foreign investors indicated a common practice by the local companies to do business by not recording sales, this way avoiding paying taxes. Foreign investors indicate that the price is highly linked with the size of excise tax and value-added tax.


Foreign investors also provided practical suggestions on fighting the shadow economy in the short and longer term. The primary recommendation is to agree on general tax policy among all involved governmental bodies and stay consistent to see the effects of the system work.


Secondly, foreign investors call for stronger enforcement and increased punishment, noting it should be directed at the companies in the black list, paying taxes at a below average level compared to the industry peers.


Next, foreign investors emphasize the need for creating tangible benefits of paying taxes including introduction of tender qualifying criteria in the procurement law. To continue, foreign investors recommend to continue the transfer to electronic exchange of documents, emphasizing the need for connection between the systems of various government agencies and regulators (e-health, e-education, e-customs etc).


Finally, it has been proposed to decrease the tax burden and simplify payment of taxes for small business in order to motivate them to come out of the shadows. To reach a long term effect it is recommended to focus on educating youth from an early age and changing the image of the State Revenue Service by means of well thought out PR campaigns on paying taxes and employee training.

 

At the event views and comments were presented by Mr Stephen Oldfield, Honorary Chairman of FICIL, Mrs Ināra Pētersone, Director General of the State Revenue Service, Mr Mārtiņš Krieviņš, Head of the State Chancellery and representatives of foreign investors.

 

Shadow Economy Report can be viewed here.

 

Shadow Economy presentation can be viewed here.






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