«Grey economy ruins Latvia’s reputation in the international business environment,» – foreign investors say, adding that the main causes behind grey economy include weak control and incomplete application of legal measures, corruption and political games, insufficient motivation to pay taxes, high income tax and social inequality and comparatively low tax-paying culture in the country.
«In Latvia companies often think: if you know how to cheat and have opportunities to do that, there is no reason not to. This is largely because the country cannot properly protect itself. And this is because there is no certainty that paid taxes will be rationally used. At the same time, it serves as a form of protest: the general understanding of the reason to pay taxes is very low,» – as mentioned in the report presented by the Foreign Investors Council in Latvia on Thursday, 26 May.
«Grey economy creates unfair competition between those who pay taxes and those who do not. All this creates a snowball effect – taxes are not administered in full amount, which results in decisions to raise them and again impact the companies that honestly pay taxes, worsening the competition in the process. Companies that pay taxes may last for a little while, but it is only a matter of time until taxes become unbearable,» – investors say.
Foreign companies offer proposals to help combat grey economy in Latvia, including the improvement of the transparency and predictability of the country’s tax system, tax collection system, investment into proper training of employees, increase of fines for involvement in grey economy, reduction of the labour force tax burden, simplification of the tax system for small and micro enterprises, use of electronic documents in communication and make efforts to reduce the abundance of transactions involving cash.
At the same time, businessmen note that «it is important to consider not only fines and punishments, but also ways to motivate people and companies to be honest and create inconveniences for those who operate in the grey economy. Unless there is no appropriate reaction to illegal activities, it is impossible to change anything».
In general, it is concluded in the report that in order to achieve any success in the fight about grey economy, a complex approach is necessary. «Grey economy is not just tax avoidance or profit omission. It also consists of non-compliance with different rules and regulations, including those that govern the transport sector, construction sector, overtime and other aspects, which only serves to distort competition. In addition, combating grey economy is not the duty of only the State Revenue Service. It should be the main objective of the entire government, a priority for all ministries and institutions. In order to reduce the impact of grey economy, there has to be a transparent and predictable tax policy. Society needs to be educated why they should pay taxes and how those taxes are used, as well as introduce simple and comprehensive rules that would help companies to work responsibly and sustainably,» – notes Girts Greiskalns, CEO of Foreign Investors Council in Latvia.
«A smaller degree of grey economy is not an abstract benefit. It provides tangible benefits: smaller queues when going to the doctors, state funded catering for children in schools and kindergartens, good roads and more well-paid jobs, because investors acquire wider opportunities to work in conditions of fair competition, which motivates them to increase their investments. It is also worth keeping in mind that the fight against grey economy is like a marathon – it is long and hard work. It is also important to focus on long-term improvements for the economy, rather than sort-term benefits and bigger tax revenue,» – notes KPMG Baltics partner Armine Movsisyan.