Employers denounce unfair competition due to grey economy

In the wake of Bulgaria’s accession to the EU in January 2007, the leading employer organisation – the Bulgarian Industrial Association – identifies exposure to the grey economy as one of the main problems facing the country. The association argues that insufficient measures are taken to fight unfair competition and to strengthen the social insurance system**. The Minister of Labour and Social Policy and the trade union confederations support the employers in their demand to stamp out the grey economy.**

BIA denounces grey economy

As surveys conducted by employer organisations show, it is increasingly difficult for businesses operating entirely above board to withstand unfair competition resulting from the grey economy. The official economic growth rate for 2006 amounted to 6.5%, while real growth which takes into account the grey economy was about 7.8%, according to the Bulgarian Industrial Association (Българска стопанска камара, BIA).

Furthermore, some indirect indicators show that income growth is higher than the official figure presented for 2006, namely 13%. Consumption growth stood at 12% in 2006, savings growth reached 22% (€2.6 billion), growth of sales of new cars amounted to 26%, and growth of fuel consumption (physical volumes) totalled 7.9%.

It seems that there is a significant amount of hidden income as a result of activities in the grey economy. In the opinion of the President of the Economic and Social Council, Lalko Dulevski, about a third of the income earned by people in Bulgaria is paid unofficially. According to BIA experts, about BGN 9 billion (€4.6 as at 11 June 2007) of undeclared income is currently in circulation. As a result, this large amount of income paid in cash creates an environment of unfair competition, which is becoming more prevalent in the country. Workers accepting incomes higher than those officially declared and unpaid social insurance contributions are contributory factors in the fraudulent schemes to conceal total income.

According to BIA, various forms of fraudulent behaviour exist in relation to income, especially ‘cash in hand’ and fraud through the issuing of documents with incorrect details. This includes:

• not issuing pay slips, or invoicing at prices below the actual price of goods and services;

• reduced prices for the sale of assets, companies, stocks and shares.

These types of behaviour lead to:

• tax fraud in relation to the payment of value-added tax (VAT), excise duties and corporate taxes;

• fraud which affects company shareholders in terms of profit distribution.

BIA proposes legislative amendments

According to BIA, one way to overcome this difficult situation is to amend the existing legislation with new and more efficient instruments, guaranteeing the fulfilment of employers’ obligations. The main proposals put forward by BIA include:

• amnesty for violations of tax and social insurance legislation, related to the concealment of real incomes. This will not apply to unpaid taxes and social insurance contributions revealed during the audits of controlling authorities. BIA proposed an amnesty only for taxes and social insurance contributions related to that part of the wages which have not been paid as part of the payroll and which the controlling authorities were unable to uncover during their audits; in other words, amnesty only for incomes successfully hidden so far. Amnesty is regarded as a compulsory element that will favour future declarations of real wages from both employers and workers, since the controlling authorities will be legally obliged to backdate and collect any outstanding income tax and social insurance contributions;

• introducing a fine for workers receiving remuneration higher than what has been agreed in the employment contract;

• exempting the workers from having to pay fines if they inform the National Revenue Agency (Национална агенция за приходите, NRA), the National Social Security Institute (Национален Осигурителен Институт, NSSI) and the Economic Police about the fact that their employer is paying additional wages, which are not legally accounted for. By offering protection for such workers – being fired only on the approval of the General Labour Inspectorate Executive Agency (GLI-EA) – and guaranteeing the worker’s privacy allows for anonymous declarations and inspections thereof and other appropriate measures to be carried out;

• privatising the control functions. Due to the limited capacity of the controlling authorities, the employers suggest that NRA could provide licences to private certified public accountants (CPAs), who would then be assigned to carry out audits in companies that have been reported and will be paid a percentage of the amounts of financial offences uncovered. NRA would take on the role of issuing statements of violations revealed during these audits.

Reactions

Considering Bulgaria is already an EU Member State, the employers propose stringent measures in order to reduce the level of the grey economy to the average levels in the EU. Otherwise, they warn, Bulgaria will diverge from the rest of the EU Member States and will be a source of social dumping for a long time to come.

To highlight this issue, a good example is the difference in income levels between Bulgarian workers and their European counterparts. For instance, the average hourly wage in the Bulgarian production sector is about €1.39, whereas the same indicator in the other EU Member States averages about €26 an hour.

According to BIA, the expected results from the proposed measures will include the following:

• gross domestic product (GDP) growth;

• increased revenues from VAT, excise duties and corporate taxes;

• increased revenues of the social insurance system and a possibility to increase pensions;

• opportunities to allocate an increased share of GDP to education, healthcare and other funds.

According to the Chair of BIA, Bojidar Danev, the proposed measures might be considered radical but they will create a competitive environment for Bulgarian businesses. As the economy is currently suffering, the situation is aggravating and cannot be treated only on the surface; more extreme measures are required to get the economy back on track.

Both the trade union confederations and the Minister of Labour and Social Policy, Emilia Maslarova, also demanded strong measures against paying social insurance contributions on amounts lower than the real wages. According to the Confederation of Independent Trade Unions in Bulgaria (CITUB), the responsibility must be jointly distributed between the employer and the employee.

Ivan Neykov, Balkan Institute for Labour and Social Policy (BILSP)