# **8.1 The Case of Estonia**

47. According to the Statistical Office, in 2004 (the latest year available) undeclared work in Estonia was only 7.3 percent of GDP, down from 10 percent in 2001 and the lowest among the NM-EU countries.). But other estimates also suggest that Estonia has been rather successful in containing undeclared work as indicated below:

- According to Meriküll and Staehr (2008), Estonia achieved a marked drop in the prevalence of unreported employment from 1998 to 2002 (from 19.5 percent to 9.6 percent) while in Latvia and in Lithuania it increased (from 16.3 percent to 22.5 percent and from 7.2 percent to 11.7 percent respectively);

- According to surveys by the Estonian Institute of Economic Research (EKI), the share of employees who regularly or occasionally receive envelope salaries declined from 16 percent in 2003 to 12 percent in 2008. It is estimated that about 60,000 workers (almost 10 percent of total employment) are receiving envelope wages. EKI estimates that in 2008 this type of tax evasion reduced revenue from social insurance contributions and personal income tax by around 2.7 billion Estonian kroon or 1.1 percent of GDP, while tax evasion from alcohol and cigarette excises was 0.8 billion kroon or 0.3 percent of GDP;

- Undeclared work is most prevalent among small firms with low productivity, which can often only survive by evading at least part of their tax liability. Firms that pay envelope wages often also underdeclare sales, thus evading VAT and using cash from VAT fraud to pay envelope wages. According to EKI estimates, the share of undeclared purchases of goods and services (including illegal purchases) declined from 13 percent of expenditures in 2000 to 7 percent in 2008; undeclared purchases were most frequent in construction or renovation services (30 percent), computer software (29 percent), and tobacco products (25 percent). According to the Estonian Tax and Customs board (Eesti Maksu- ja Tolliamet, EMTA) estimates in 2007 VAT fraud amounted to 2.5 billion kroons (1.1 percent of GDP and 3 percent of state revenue); it increased to almost 4 billion kroons (1.6 percent of GDP and 4.7 percent of state revenue) in 2008;

- According to a 2008 survey by EKI, 15 percent of the employees who said that they are in favor of unrecorded salaries argued that the state has enough resources already and that unrecorded salaries are necessary for the company to survive in the current economic situation (57 percent) and/or that the tax burden is too high (56 percent);

- Underdeclaration of income is also widespread among the self-employed who represent, however, only about 10 percent of all employed persons. The selfemployed often reduce their taxable income by declaring only part of their income and by deducting personal expenditures as business expenditures from the tax base. According to estimates by EMTA, the revenue loss (social contributions and personal income tax) from undeclared income from the self-employed amounted in 2008 to 460 million kroons (0.2 percent of GDP);

- Pensioners who continue working also often evade taxes. As they are covered by health insurance they do not need to declare their salaries in order to receive health care coverage and many of them do not pay taxes.

- Kriz et al. (2007) also find that payroll and income tax evasion is most prevalent in small firms in the construction sector and in agriculture, among individuals who are

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