Salaries ‘in envelope’ come from illegal sources and are dangerous not only for budget

[Analysis by Nicolae Platon for Info-Prim Neo] Addressing the phenomenon of salaries paid unofficially or ‘in envelope’ separately from other frauds committed in the business sector is a wrong approach. It is important to realize that the salaries ‘in envelope’ come from illegal, hidden sources. The state budget is prejudiced as the salary-related taxes, contributions and premiums and the taxes on hidden revenues from entrepreneurial activities, from which these salaries are covered, are not paid. It is not hard to establish if an economic entity employs such a scheme. There are a number of methods for assessing the risk criteria, including the analysis of the average salary paid to an employee, according to the official data possessed by the Tax Service, and of the average salary on the labor market at present, examination of the specific features of the business, determination of the necessary number of employees and comparison of the given figure with the number of persons employed officially as well as unplanned inspections to establish the actual number of working persons. It is yet more difficult to prove that such a scheme is used given that it involves both of the sides – the employer who proposes such a salary payment method and the employee who accepts it. In essence, both of the sides pursue certain goals. The employer does not fulfill the obligations towards the budget and hides the incurred costs, which are covered from undeclared incomes. Thus, they avoid paying the related taxes. On the other hand, the employee who accepts such a remuneration scheme erroneously believes that this way he gets a higher salary. When the salary is large, the person accepts such a scheme in order to hide the incomes. Given the damage caused to the state budget, the initiative to impose punishments on the employer and employee is absolutely reasonable. [Salaries ‘in envelope’ represent a direct danger for salary earners] The salary paid unofficially represents a danger not only for the state budget, but also for the employee. When the entire salary is declared, the rights of the employee and of the employer are protected by the Labor Code and other normative documents. It is known that the employees can benefit from a pension calculated on the basis of the salary contributions paid officially. On the one hand, the payment of unofficial salaries does not contribute to stability in the long term. On the other hand, it prevents the salary earner from enjoying certain rights such as allowances in the short term. As any other tax evasion scheme, the payment of salaries ‘in envelope’ creates conditions for disloyal competition between honest and dishonest economic entities. Such an illegal salary payment method is used in practically all the sectors of the national economy. Discovering and annihilating such schemes is not the duty of only the State Tax Service. The competent bodies should cooperate effectively so as to establish all the components of the scheme, such as the diminution of taxes/tax evasion (the Tax Service, Anticorruption Center), the violation of the labor legislation (the Labor Inspectorate), illegal activities (investigation bodies), money laundering and property obtained illegally (the investigation bodies, customs service). [A new tax inspection approach] As a result of the inspections carried out by the Tax Service in 2010, irregularities were identified at 1,660 economic entities. There were calculated additional taxes of 13.8 million lei that were to be paid into the budget. The main efforts are yet aimed at identifying the undeclared sources of income of the employers, from which the salaries are paid unofficially, and the illegal entrepreneurial activities. This is currently the main concern of the State Tax Service, which is implementing a series of long- and short-term measures in this respect. They include the implementation of a new inspection approach centering on the examination of all the components of the transaction, not on separate parts as until now, so as to identify those who employ and benefit from tax evasion schemes, penalize them and eradicate the illegal methods. Other measures include the permanent updating of the risk criteria for identifying the tax evasion indices so as to select the economic entities and take the required measures, and the amendment of the legislation so as to remove the shortcomings allowing employing illegal schemes and to toughen up penalties. A bill to increase the fines for performing illegal entrepreneurial activities from 200-700 lei to 6,000-8,000 lei was submitted to the interested institutions for examination. The fiscal legislation does not envision specific penalties for the unofficial payment of salaries. As the given fraud involves the non-payment of taxes and contributions to the budget, the penalties imposed in such cases are similar to those for the diminution of the obligations to the budget (30% of the decreased sum for taxes and 100% for reducing the obligatory health insurance premiums and social insurance contributions). [Steps aimed at minimizing illegal labor] The amendments made to the Tax Code specify the reasons and conditions for using indirect sources and methods for assessing the fiscal obligations for private individuals who incur costs that exceed 300,000 lei and/or own property of over 1 million lei. It is evident that the salary earners who accept unofficial pays also fall within the remit of the given provisions. Given the size of this phenomenon and the dangers posed by it, on June 28 the Government approved the plan of action for minimizing the practice of illegal payment of salaries and illegal labor. The short- and medium-term steps include carrying out of campaigns to raise awareness of civil society and business community of the risks posed by the given schemes. The efficient cooperation between the state bodies and the business community and salary earners will enable to reduce this phenomenon. The absence of fiscal discipline affects first of all society. It is thus important that the pecuniary measures taken by the inspection bodies should be accompanied by actions by civil society aimed at promoting human rights, in the given case the right to a salary paid officially. [Nicolae Platon, head of the State Main Tax Inspectorate]