Bill would allow state to collect social tax on undeclared 'envelope wages'

A bill under preparation at the Ministry of Finance would give the Tax and Customs Board (MTA) the ability to demand labor taxes from a company, even if the MTA cannot prove how much was paid and who to.
The move aims to crack down on "envelope wages," ie. undeclared payments made in cash.
Officials say they hope the change will bring the state approximately €1.7 million in additional revenues.
According to the MTA, approximately 5,500 employers in Estonia engage in paying envelope wages.
As things currently stand, if the agency can prove how much envelope wages were paid and to whom, it can demand both income tax and social tax from the company.
However, it is often the case that the recipient of an envelope wage cannot be identified, for instance, if the employee is a temporary worker.
Lia Parve, head of the MTA's tax audit department, said: "For example, if during proceedings someone says that a person worked here, but no one knows their surname, plus if that person was a temporary worker who might also be a foreigner, it then becomes very difficult to establish their identity."

However, social tax must be linked to a specific individual, Evelyn Liivamägi, deputy secretary general at the Ministry of Finance, noted.
Liivamägi said: "In cases like these, sums paid out by a company without supporting expense documents are taxed only as income tax for non-business-related expenses."
For example, the MTA found that a catering company had failed to declare €300,000 worth of cash transactions.
The agency was fairly certain that the money had gone on envelope wages, but it was not possible to get evidence establishing the facts of the matter.
Unidentified envelope wages would be treated as fringe benefits
Under the terms of the bill, sent for its consultation round in December, the Ministry of Finance proposed that any financial payment typically considered a wage but with an unidentified recipient would be classified as a fringe benefit going forward.
This is because fringe benefits are also subject to labor taxes, Liivamägi noted.

The Chamber of Commerce and Industry (X) however has voiced concerns that the MTA does not too automatically interpret company cash withdrawals as envelope wage payments under the planned changes if they come into effect.
Impact of bill will be evident in court
"Ultimately, it will be determined in court which evidence is admissible and which is not," Liivamägi said.
If the draft bill becomes law, it is likely that courts will start hearing disputes where companies that have evaded taxes try to argue that they only broke the law to a small extent, and withdrew money from the company for other reasons.
The MTA would still then have to prove that the money was withdrawn to pay envelope wages.
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Editor: Madis Hindre, Andrew Whyte