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

2. 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

3. 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?

4. 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

5. Current situation

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

7. 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

8. 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)

9. 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

10. 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)

11. 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?

12. 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

13. 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

14. 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

15. 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

16. Changes in labour market

17. Changes in labour market

18. Changes in turnover and declared VAT

19. Changes in turnover and declared VAT

20. 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:

21. 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

22. 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

23. Thank you! Questions?