The promotion of job creation is a European Employment Guideline under the Europe 2020 Strategy. In this context the move from informal or undeclared work to regular employment was highlighted. The European Employment Package adopted in April 2012 carries this combat against undeclared work forward by presenting policies to promote a job creation favourable environment. The measures are put in place to reach the Europe 2020 target of 75% of employment level of the 20-64 year olds.

Economic growth from 2000 to 2007 resulted in employment rates above the EU-15 average. After entering in an economic recession in 2008 and with the following world economic and social crisis Estonia’s unemployment rate escalated from 4.1% in 2007 to 19.8% in June 2010 – one of the highest levels in the EU. Even though the GDP grew thereafter, the unemployment rate remained in 2011 at 13% and lately decreased in early 2013 to 10.1%. It is mainly low-skilled workers that are affected by unemployment. Employment levels in particular in non-tradable sectors such as real-estate and construction decreased which led policymakers to re-train and allocate workers to more productive sectors while mitigating fiscal and social costs.

Although the share of undeclared wages is fluctuating the problem of undeclared wages is however persistent in the Estonian labour market. According to the Estonian Institute for Economic Research in 2011, 8% of employees received at least partly undeclared wages, which is estimated to be translated into a 100 billion Euro tax loss for the state budget.

The rapid economic growth from 2000 to 2007 led to a decrease of “envelope wages” which are wages that employees receive on top of their regular income. Since 2007 “envelope wages” continue to decrease however not in a linear way and fluctuations can be observed. The Estonian state still loses out of estimated 1.7-2.9% of its total state budget due to undeclared wages. The problem affects mainly the construction sector and other non-tradable sectors such as catering and accommodation.

Alongside random on-site inspections and control activities the TCB followed another objective namely the prevention of infringement of tax laws and increase of law-abiding behaviour among taxpayers. Thus, instead of burdening employers with tax audits and offence procedures at the first instance, they are given the opportunity to revise their business activities and change them in accordance with the law. This is done via notice letters sent to enterprises that are at risk of tax evasion or where pay of employees seems significantly lower than average wages of the market.

Other objectives of preventive methods of control include:

• Reduce time spent on controls in a long term
• Induce companies to pay “voluntarily” taxes and enlarge the target group of control – not only suspects

The main activity of the letter project consisted of sending notices to selected companies to remind them to adjust their tax behaviour without inspection and possible punishment for tax fraud. A pilot project had been first developed in 2003 and further waves were implemented in 2004 and 2005 and the latest action in 2011.

However the letter project was embedded in a number of measures taken by the TCB. Other measures are:

• The interconnection of ICT systems of relevant authorities such as the Unemployment Insurance Fund (Public Employment Service) and the Labour Inspectorate to create and manage coordinated information registries;
• The development of e-services and telephone hotlines reducing administrative burdens to declare taxes;

• Document control to detect tax evasion;
• monitoring of everyday activities of companies and counselling of firms considered to be at risk of tax evasion;
• Coordinated unannounced on-site inspection by the TCB and the Labour inspectorate – after control companies are kept under surveillance and data is monitored and shared;
• Information campaigns raising awareness on good tax behaviour, employment rights and consequences of none-paid taxes for the state’s budget on social security.

At each wave more than 1000 notices had been sent to companies asking to revise their accounting and tax related information and give feedback to the tax authority on the results of their business activities. This preventive measure led six months after the notice that had been sent out by the TCB to an adjustment of tax behaviour of about half of the companies addressed. The measure is seen as extremely cost effective and very successful in awareness raising.

• The most successful campaign was the one in 2005 when 1000 notices were sent. Tax adjustments six months after the campaign resulted in a state budget increase by 2.7 million Euro, 2.3 million Euro of social security contributions and 421,000 Euro of personal income tax. This can be regarded as extremely good direct results.
• In 2005 the TCB received the Public Relations Prize awarded by the Estonian Public Relations Association as it had established a strategy that included over 10 administration institutions and changed public attitude towards envelope wages.

• Latest letter campaign was launched in November 2011 addressing more than 1300 companies. If companies did not reply in a satisfactory manner, additional targeted on-site controls of 500 companies have been carried out in February 2012.These included 278 construction companies of which 125 improved their tax behaviour. Tax officials identified undeclared wages and unpaid taxes of 780 000 Euro.
• All information gathered during preventive measures and controls enrich a database which can be closely monitored in the years to come leading in the long-term to more efficient tax controls.