Solutions from election runners: undeclared economy. IPN series. Elections-2014

More than half of the working population of Moldova does not declare the real salary. The economic entities avoid presenting real figures concerning employees’ salaries to the competent bodies so as to pay lower taxes. IPN Agency asked the election runners what solutions they propose for reducing ‘illegal labor’ and the ‘illegal payment of salaries’.

Newly created companies will not pay income tax for three years

The Democratic Party of Moldova (PDM) considers that among the reasons for which the economic entities prefer to pay salaries ‘in envelope’ to employees are the strict regulations governing the activity in the formal sector and the high taxes. Also, excessive bureaucracy hinders the creation of workplaces and represents an opponent of the business community. The PDM considers that in order to facilitate the relationship with companies and to reduce the fiscal burden in the economy, the Tax Service must significantly simplify the taxation system by merging and eliminating taxes and duties. According to the Democrats, a package of well-thought out compensations and benefits for employees and a harmonized fiscal policy will diminish the phenomenon. In order to stimulate the starting of small businesses and the creation of workplaces, the PDM suggests fully exempting the small or medium-sized companies from paying income tax during the first three years of the creation.

The PDM does not think that the salary earners must be penalized if they accept to receive a part of the salary unofficially. The solutions must be related to the fiscal relaxation in the economy and a more severe control of employers. In order to encourage the business environment to invest and create well-paid jobs, the Democratic Party formulated a number of benefit proposals for companies employing young people, especially graduates of universities and vocational schools. Thus, during the first three years of the hiring of young specialists, the state will pay the contributions to the social insurance fund for every working young person. This measure will encourage the employment of young specialists in the appropriate areas with work contracts. The PDM also suggests exempting the firms from paying income tax on up to 12% of their income if they invest in research and development.

Jailing of functionaries who parasitize on economic entities

The Christian Democratic People’s Party (PPCD) considers that the first measure that needs to be taken to diminish the phenomenon of undeclared economy is to reduce the fiscal burden. The second measure is to decrease the number of useless inspections at private companies, while the third measure is to toughen up the penalties for bribery up to jail terms for functionaries or police officers who parasitize on economic entities from which they extort money for protecting tax evasion. Following the reduction in the fiscal burden and the creation of optimal conditions for entrepreneurs, illegal labor must be penalized with imprisonment and with the liquidation of the company, in particular cases.

Furthermore, the PPCD considers the creation of a state bank that would lend to national businesspeople in preferential conditions would reduce their operational costs. A state bank could finance itself by managing all the cash transfers and salary payments in the public sector, including the transfers from the state budget to the budgets of the territorial-administrative units. It could also manage the payment of state court taxes, the payments for notary services and lawyer services, etc. Thus, the Government will become an active participant in the financial market and will make the private companies, by accessible financial services provided for national companies, to review the own packages of services and to diminish the interest rates in order to survive.

Three times higher taxes for those who take and offer bribe

The Liberal Reformist Party (PLR) noted that when no work contract is signed, the employers have complete power over the employees: they can hire them and do not pay benefits to them. On the other hand, when speaking about tax evasion, the people must understand that this method is condemnable. To combat this phenomenon, the fines for those who accept to work illegally and for those who pay salaries illegally must be increased in a move to raise the salaries, pensions, allowances, student scholarships, etc. Another solution is to reduce the tax for employers that provide salaries higher than the average official pay. In other words, greater fiscal relaxation is needed, which is a liberal measure. This Europeans practice will help change the mentality of employers and of employees, who will benefit from decent salaries.

As to penalties, the PLR says the fines provided by the legislation are not severe. That’s why the phenomenon of ‘illegal labor’ persists. These fines should be trebled for all the categories, while the state should better inform the people about the consequences of this phenomenon.

Common tax rate

The National Liberal Party (PNL) makes reference to a study of the Institute for Development and Social Initiative “Viitorul”, saying the illegal businesses and transactions in 2011 reached a record level of 19 billion lei. The ‘illegal labor’ annually deprives the state budget of 5 billion lei. The share of informal economy in the European countries is 30%, while in Moldova exceeds 50%. In Moldova, for a salary of 1,000 lei they pay to the state another 532 lei as a salary earner and as a company. In order to reduce the phantom-economy, a common tax rate of 10% should be introduced. The party gives the example of Albania, which was much poorer than Moldova. It caught up with us and outstripped us after imposing a common tax rate of 10% on personal incomes and business revenues.

The PNL also suggests increasing the minimum official salary from 1,650 lei (€85) to €190, as in Romania. The average salary must be also raised to 4,000 in villages and to 7,000 in towns by diminishing informal economy. Most of the penalties for employers, when the fiscal burden is reduced, would diminish the phenomenon of ‘illegal labor’. A solution is also to adopt a package of laws to change the social attitude to offenders and corrupt persons by replacing the principle of presumption of innocence with that of presumption of guiltiness. The PNL makes also reference to the opinion of experts, noting that a measure to combat phantom economy is to exempt the businessmen that work honesty and raise employees’ pays by 20% from paying social contributions.

Right to deduction of 60% from the taxable income

The Party of Socialists of the Republic of Moldova (PSRM) says the destructive fiscal policy makes the economic entities resort to different stratagems in a move to reduce the declared taxable incomes. This results in ‘illegal labor’ and salaries paid ‘in envelope’. The tax framework used in 2008-2011 should be restored, but this won’t be enough. A new set of regulating public policies is needed, including on the monetary segment. According to the PSRM, the larger fines will not improve the situation. The employees who accept salaries ‘in envelope’ should not be punished as they are already punished because they will have a lower pension. Moreover, not the employees choose the form and size of the officially declared salary. They are put in the situation to either accept the employer’s condition or to be fired.

The most important thing in combating ‘illegal labor’ and the payment of salaries ‘in envelope’ is to change the state policy. The PSRM says that if it enters Parliament, it will insist on the adoption a bill aimed at reducing the fiscal pressure on the salary fund. If the employers increase the salaries or the number of employees, they will get the right to a deduction of 60% of the taxable income, which represents the contributions paid into the state mandatory social insurance fund.

Zero tax rate on reinvested profit and on import of equipment

The People’s Party of the Republic of Moldova (PPRM) notes that the payment of salaries ‘in envelope’ can be combated by applying a stable fiscal policy during five years so that the economic entities can plan their investments in business. A common tax rate of 10% should be imposed on private individuals and legal entities so as to increase the tax paying rate and the tax base. The authorizations and certificates for starting a business should be eliminated. No taxes should be imposed on the reinvested profit and on the import of equipment and advanced technology. The states institutions should be de-monopolized and freed from corruption. An attractive investment climate must be built.

The party considers that any fine imposed in the area of remuneration will lead to larger informal economy. The Code of Administrative Offenses envisions a number of fines, including for institution and company managers, but the responsible bodies do not react to the committed illegalities. So, the problem resides not in the imposition of the fine or in its size, but in the functionality of the system. The PPRM believes that the state must ensure appropriate incomes for decedent living for the people, not penalize them for making effort to get a source of livelihood. Conditions should be created for the economic entities to honor their obligations to the state by attractive fiscal policies. Otherwise, the people will continue to go abroad.

An honest, balanced and intelligible taxation system

The state must act as a protector and must create a favorable, stable and predictable business environment by its social and economic policies, especially the regulatory ones. To achieve these objectives, the Liberal Party (PL) suggests ensuring transparency in the salary payment process so as to optimize the taxes on incomes coming from economic activity. An honest, balanced and intelligible taxation system will guarantee the observance of the legislation and will lead to a reduction in the number of salaries paid ‘in envelope’.

The PL says the toughening up of penalties, especially the pecuniary ones, does not always have the expected result. When the benefits obtained by eluding the legal norms are greater than the possible financial risks, the punishment may not produce the expected result. It would be much more efficient to adjust the legal framework, to increase the direct investments in the real sector of the economy, to provide pertinent tax concessions and to take other programmatic measures that would make the rules of the game clearer and would make the avoidance of the legal framework useless. It is also important to raise juridical awareness among salary earners by explaining the disadvantages of accepting unofficial pays. In its program, the PL envisions the improvement of the fiscal administration by restructuring the tax base, combating fiscal frauds and reducing tax evasion and by implementing coherent fiscal compliance strategies.

Law exists, but it must be applied

The Green Ecologist Party (PVE) said Moldova has a law on the combating of the illegal payment of salaries, but it is not applied because its implementation is not monitored. The State Tax Inspectorate should only obey the law. The fines must not be raised. It is enough to make sure that the law is implemented. The employees who accept the unofficial pays should be liable to punishment.

The PVE considers the European practice according to which the state grants tax concessions to companies that pay salaries higher than the average official salary cannot be used in Moldova because there are not so many economic entities here that would be able to do this.

Inspection bodies should be paid better so that they do not look for illegal incomes

According to independent candidate Oleg Brega, the taxes should be low enough for the economic entities not to resort to tax evasion, but the inspection bodies should also be remunerated appropriately so that they do not look for illegal incomes. Each case of corruption must be examined in accordance with the law and punished promptly and exemplarily. The people must be educated to avoid corruption so that they known that they steal from the own pocket or from the pension of their parents.

Oleg Brega said that until there is no certainty that the fines are imposed and paid in accordance with the law, there is no use raising the fines as this will stimulate corruption. As in any case of corruption, those who offer and those who take untaxed money are accomplices and deserve to be punished. The State Main Tax Inspectorate and the Labor Inspectorate should accept anonymous complaints from employees or should guarantee confidently. Any form of stimulating the legalization of businesses that turned out to be efficient in other countries should be tested in Moldova as some of them could work here.

Use of differentiated tax rates at small steps

The Centrist Union of Moldova considers the non-declaration of the real salaries is a consequence of the inappropriate policy to tax the incomes of salary earners and derives from the companies’ distrust in the state authorities. This problem can be solved by several ways. One of them is to exempt the employees with an income lower than the minimum subsistence level from paying income tax. Another one is to reduce the income tax in general and to impose a differentiated income tax rate gradually, depending on the size of income.

The party also thinks that the employers should be obliged to present the employment and salary orders to the National House of Social Insurance and the State Tax Service. The penalties should be toughened up for employers who pay salaries ‘in envelope’ so that the imposed fines exceed the undeclared incomes and taxes at least five times. This would effectively discourage such practices.

Note: IPN News Agency asked all the election runners to state their views on the given issue. The article contains the answers provided by the agreed date. The IPN series of materials produced before the November 30 parliamentary elections will continue with other issues classed by the public opinion as important.

Irina Ţurcanu, IPN

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