The Strategist

The World Bank proposes a new approach to fight tax evasion and the shadow economy

04/02/2018 - 10:33

The tax authorities of various countries are increasingly concerned with the problem of tax shortfall and falling revenues from the shadow activities of market participants, the World Bank (WB) report says. The organization believes that one of the effective mechanisms to combat it is the access of tax authorities to banking data, as well as reduction of the share of cash payments in the economy through online cash registers and the encouragement of denunciation. At that, the WB says that transparency should ideally become part of culture.

Alexas_Fotos via pixabay
Alexas_Fotos via pixabay
According to researchers, the shadow sector accounts for about a third of the world economy. This figure is the highest in sub-Saharan Africa (37.6% of GDP). In European and Central Asian countries with an transition economy, it averages 36.4% of GDP, and reaches 13.4% in OECD countries with high incomes. The WB’s definition of the shadow economy means all market legal production of goods and services, deliberately concealed from the authorities for evading taxes, social charges, execution of labor and other legislation.

Informality in the economy is determined by factors such as complexity of the tax system, weak or inefficient work of tax services, lack of incentives for conducting business transactions and making payments through banking channels, as well as level of trust of taxpayers to the authorities (all this can be regulated by fiscal policy and administrative measures) . General issues, such as the state of the official economy, the labor market and the quality of public services, lie outside the competence of tax authorities. At the same time, society's tolerance towards the shadow sector, its unfair competition with law-abiding players, obstacles to entering the "white" economy not only reduce fiscal fees, but also negatively affect taxation's fairness and quality of management. Any "anti-shadow" strategy should be the fruit of joint efforts of monetary, financial and economic authorities, the World Bank notes.

A separate call for tax policy is a cash turnover that facilitates underground business. Non-cash turnover is one of the most effective ways to combat the problem, the document says, but the process is long-term, and the willingness of market participants to use non-cash instruments directly depends on the availability of technology, the reliability of the banking system and the amount of costs. New payment opportunities (like mobile payments) increase the share of non-cash payments, but their per capita volume remains low, especially in retail and in emerging economies.

Fiscal policy can both stimulate the transition to non-cash settlements, and limit cash. The simplest method actively used in OECD countries is the limit on the amount of cash transactions, but the World Bank believes that its effectiveness is controversial. The best approach may be to establish a higher tax rate for cash transactions, especially in combination with the stimulation of non-cash payments (it may be about canceling deductions for business expenses when paying income tax or refusing VAT refunds in cash settlements). For households, such measures may include tax deductions and loans for non-cash settlements in the housing and communal sector, actively included in the informal economy, and encouragement when buying goods and services through cards and bank payments. It is necessary to encourage voluntary compliance with requirements and reduce the opportunities to evade them, but this requires expanding the access of tax services to banking information, which is opposed by the banking sector.

The researchers warn that in the fight against shadow cash turnover, tax officials should not rely excessively on electronic tools, such as online cash registers. Technologies alone do not affect the willingness of the business to play fair, and a short burst of the number of fixed transactions does not necessarily increase its conscientiousness. Mass frauds with electronic cash registers testify to the vulnerability of an isolated technological approach, the WB noted.

Willingness of buyers to collude with unscrupulous sellers and their disinterest in receiving a receipt remains another problem, which makes it difficult to cross-check business transactions. The decision (albeit expensive) can be the organization of lotteries on the basis of checks, but the key task should be the education of consumers. They should monitor registration of their purchases and reliability of information, and report violations to the tax authorities.