Ivar Laur Estonian Tax and Customs Board Tax Gap in Estonia Ivar Laur Estonian Tax and Customs Board

What is tax gap for us? Difference between theoretical potential and actual tax collection Without collection gap (debts) Without policy gap General measurement for estimation of problems’ size If you wish: the size of uncovered “market share”, where we need to put extra effort to bring money home

When and why started to estimate? First attempts: 2004 To understand the size of uncovered “field” To plan the resources and activities for covering the “field” Which tax… How much… How… Why… To whom… …we lose?

Tax gaps we estimate VAT Social contribution (SC) Personal income tax (PIT) Excises (alcohol, tobacco, fuels) Every gap separately, sometimes summing up by components (SC and PIT) Combining top down and bottom up methodologies

Current situation

Changes in tax gaps 2015 2013 Total: 419,5 mln € 2014 Total: 515 mln €

Methodology principles VAT gap – top down / bottom up Top down: tax base by final consumption, compared to accrual collection Bottom up: added value scenario Data source: National accounts, tax administration Social contribution & personal income tax Top down: outsourced public survey Bottom up: comparison of salary level in comparable conditions

Methodology principles - excises Alcohol & tobacco excise – top down Market demand through public surveys about volume of consumers (legal and illegal), border traffic volumes Comparison with legal quantities (considering legal quantities brought by tourists) Fuels’ excise – top down Market demand through Road Board’s study about vehicles’ run by road usage and technical inspections Comparison with legal quantities (considering transit traffic and filling tanks abroad)

Challenges of tax gap estimation Methodologies –different approaches, where is the truth? Data – have methodology, but no data Time – have data, but not quickly enough

Common opinions about tax gap “If you know the gap, then go and get it. What are you still waiting and talking here?!” Tax gap should be tax administration’s performance indicator Tax gap is tax administration’s problem (until my competitor gets advantage through tax evasion)

Why taxes are not declared correctly? Unawareness Economical reasons – not enough money, bad luck in business It is the main income Frightened Reckless Which group dominates? How to approach different groups? How to target those groups?

How to reduce the tax gap? Widespread common guidance: control/audit more, be tougher with suspicious element Focus only to criminals, they are bad Tougher enforcement, punishments are not tools to influence masses What is the goal: to punish or better compliance? Tough punishments are needed for those, who’s mind can’t be changed

To reduce tax gap – increase „voluntary“ compliance „Voluntary“ I’m happy to pay taxes Don’t want to… Don’t see a point to…. Can’t afford to… Can’t figure out the new way to… …continue with tax evasion, tax fraud

To increase voluntary compliance Clear link between taxes and services state provides – what am I buying? Social campaigns… Responsible behaviour by politicians and public servants Clear tax rules that make „easy lying“ difficult As few exceptions as possible Rules that require extra effort to bypass Example: „forgetting“ vs deliberate lying

Concrete steps to reduce tax gap Working register – July 2014 Objective: get totally unregistered employees visible Even with minimum salary Vat listings (collecting transactions’ data) – November 2014 Objective: Increase VAT collection by reducing domestic transactions’ so far hided added value making it more difficult to hide turnover or use fictitious input invoices between non-related business partners

Changes in labour market

Changes in labour market

Changes in turnover and declared VAT

Changes in turnover and declared VAT

How politicians may influence tax gap? Challenge to the state to break the spreading opinion: „Why should I pay taxes if it’s for politicians and high level public servants for their personal expenses?“ Source: http://news.postimees.ee/3359091/riigikogu-at-attempt-two-to-limit-its-love-for-cars

Warning: highest level of favouring the „envelope“ salary Do you favour of „envelope“ salaries? Why it has increased? What to do to change it back? Complicate situation to tax authority to fight with noncompliance

Conclusion Tax gap is loose figure, but difficult to find better measurement for general situation estimation The way to describe noncompliance through money Never know the exact truth Need to accept and act according to the best knowledge, but constantly develop further the best knowledge

Thank you! Questions?