Tackling the Undeclared Economy in Bulgaria A baseline report 2014 Rositsa Dzhekova and Colin C Williams GREY Working Paper No. 1 Sheffield University Management School University of Sheffield 1 | Page Contents List of abbreviations ...................................................................................................................................................................... 3 List of figures ...................................................................................................................................................................................4 List of tables ..................................................................................................................................................................................... 5 Acknowledgements ....................................................................................................................................................................... 5 Executive Summary.......................................................................................................................................................................6 1. Introduction ......................................................................................................................................................................... 10 2. Economic, social and political context ...................................................................................................................... 12 3. Extent of undeclared work in Bulgaria ...................................................................................................................... 13 3.1. Availability of data on the size of undeclared work .................................................................................... 13 3.2. Cross-national studies ........................................................................................................................................... 14 3.3. Indirect measurement approaches.................................................................................................................. 17 Monetary method .............................................................................................................................................................. 17 Electricity consumption method ................................................................................................................................. 18 System of National Accounts ........................................................................................................................................ 19 Tax gap estimates ............................................................................................................................................................. 20 3.4. Direct measurement approaches ..................................................................................................................... 21 Hidden Economy Index ................................................................................................................................................... 23 White Economy Index ..................................................................................................................................................... 26 3.5. Summary .................................................................................................................................................................... 26 4. Nature of the undeclared economy .......................................................................................................................... 27 4.1. Sectorial and business variations..................................................................................................................... 28 4.2. Supply and demand of undeclared work ....................................................................................................... 31 Supply side .......................................................................................................................................................................... 32 Demand side ....................................................................................................................................................................... 37 4.3. Types of undeclared economic activity ......................................................................................................... 40 Overview ............................................................................................................................................................................... 40 Primary work without contract .................................................................................................................................. 42 Undeclared secondary employment ......................................................................................................................... 43 Envelope wages ................................................................................................................................................................. 45 Tax evasion / underreported turnover .................................................................................................................... 48 4.4. Undeclared economy and criminal markets ............................................................................................... 49 Undeclared production and trade in excise goods .............................................................................................. 51 5. Barriers to formalization ............................................................................................................................................... 52 5.1. Business environment barriers ......................................................................................................................... 55 2 | Page 5.2. Tax and regulatory systems ................................................................................................................................ 59 5.3. Labour market barriers ........................................................................................................................................ 61 5.4. Government efficiency, corruption and public trust ............................................................................... 62 5.5. Conclusion................................................................................................................................................................. 63 6. Institutional framework for fighting undeclared work ...................................................................................... 63 6.1. State institutions .................................................................................................................................................... 64 6.2. Role of social partners .......................................................................................................................................... 67 7. Policy approach and measures to tackle undeclared work............................................................................. 69 7.1. Typology of policy approaches .......................................................................................................................... 69 7.2. Overview of the policy approach in Bulgaria ............................................................................................... 69 7.3. Types of measures ................................................................................................................................................. 70 Prevention (deter entry) ................................................................................................................................................ 71 Deterrence measures (pursue and punish) .......................................................................................................... 76 Curative measures ........................................................................................................................................................... 79 Fostering commitment ................................................................................................................................................... 80 7.4. Evaluation of existing policy measures........................................................................................................... 82 References ..................................................................................................................................................................................... 86 List of abbreviations BCCI - Bulgarian Chamber of Commerce and Industry BIA - Bulgarian Industrial Association BICA – Bulgarian Industrial Capital Association BSMEPA – Bulgarian Small and Medium Enterprises Promotion Agency CEIBG - Confederation of Employers and Industrialists in Bulgaria CITUB – Confederation of the Independent Trade Unions in Bulgaria CSD – Center for the Study of Democracy CT Podkrepa – Confederation of Labour “Podkrepa” ESC – Economic and Social Council EVS – European Values Study FTR – Formalization Tax Rate Eurofound – European Foundation for the Improvement of Living and Working Conditions GLI – General Labour Inspectorate ILO – International Labour Organisation IMD – Institute for Management Development IME – Institute for Market Economics LARACEAA – Act on Limiting Administrative