MTA chief: Growth in shadow economy may follow tax hikes

Tax and Customs Board (MTA) logo.
Tax and Customs Board (MTA) logo. Source: Siim Lõvi/ERR

Planned changes to the government's tax regime will spell new developments at the Tax and Customs Board (MTA), the authority's director, Raigo Uuukkivi, says, while the "shadow economy" may well also grow as a result.

The MTA will require software upgrades, Uukkivi said, given that declaring and paying taxes in Estonia is practically wholly digitized.

Uukkivi said: "Any change in the regulations usually translates to quite a major change to our systems. If we take look at what we already know [about the proposed tax hikes], changes to VAT will certainly affect many different areas, meaning improvements to systems is needed."

"Naturally, there are many details in respect to the land tax too, with much to be developed," he went on.

Uukkivi said he would not venture to predict how far the new tax changes and rises will contribute to a growth in the shadow economy, the black market in other words, adding that they will all have their effects.

"Generally speaking, it could be stated that the greater the impact on individual areas, the greater the opportunities for tax evasion to grow," he continued.

But as for the pressure on fair tax competition and the shadow economy, it is certain already increased, because inflation and wage growth also affect tax behavior, not only tax changes."

The coalition announced, on the eve of its entry into office and long after the March 5 election, that it would be hiking VAT and income tax by 2 percentage points each, as well as bringing in a new tax on cars, which is still to be clarified.

While complex, the changes need not be particularly labor-intensive to implement, Uukkivi went on, the past experience with excise duty hikes led to both a rise in black market activity and in losing sales to a neighboring country, principally Latvia in this case.

"This type of logic has always been valid, and will continue to be so," Uukkivi went on.

The VAT hike, from 20 percent to 22 percent, will be the first to be implemented and is planned for a January 1, 2024 in-force date.

This means that the legislative amendments required must be approved by July 1 (the Riigikogu breaks up for summer on June 15, though it can be reconvened on an extraordinary basis-ed.), leaving six months for the necessary system and other changes by the MTA and other relevant authorities to be put in place.


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Editor: Andrew Whyte, Mait Ots

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