Estimates on the shadow economy and tax gap
On methods of researching the grey economy1
The grey economy has been the subject of research from many different perspectives. One indicator of the wide range of possible approaches is that there are more than 40 related terms in the English language that have roughly the same meaning. The three most frequently used terms in the EU have been undeclared work, underground economy and shadow economy. The subject of research and the choice of terminology has been largely affected by whether the research in question approaches the subject matter from the perspective of macroeconomics, taxation or labour use. It is also possible that the same term is given different definitions in different studies.
There are many different measurement methods that can be used. The primary classification is between direct and indirect methods. The former try to establish a concrete measurement of the occurrence of the grey economy through methods such as questionnaires, interviews or the results of tax audits. Indirect methods try to estimate the occurrence of an invisible phenomenon, i.e. the grey economy, through one or more visible indicators, such as the demand for cash or the consumption of electricity. One variation of this is the MIMIC method (short for Multiple Indicators, Multiple Causes), in which the value of the grey economy is estimated, on the one hand, based on several presumed causes of the grey economy and, on the other hand, based on indicators that are presumed to reflect its occurrence.
In addition to actual studies on the grey economy, reports have been written regarding tax gaps. Although the tax gap involves many other factors besides the tax losses caused by the grey economy, the magnitude of the tax gap can be assumed to have some correlation with the size of the grey economy. The EU has commissioned studies regarding the effectiveness of VAT collection and the VAT gap in various Member States.
1On the methods used in researching the grey economy and the results obtained in EU Member States. Report 4/2013, Grey Economy Information Unit
Estimates of the size of the grey economy
The grey economy is difficult to evaluate, which is why the number of available estimates is substantially lower than for the tax gap, for example. Nevertheless, some studies have been published on the subject. The information below summarises some of the recent results published in Europe. There is significant variance in the research methods and the results obtained. Rather than expressing any opinion on the suitability or reliability of the results from the Finnish perspective, this website simply presents the results obtained by the studies. Interestingly, even though the grey economy is included as part of the tax gap, the estimates of the size of the tax gap presented in the studies are, for the most part, smaller than the estimates of the size of the grey economy.
Research results – grey economy
A study published in 2015 estimated the size of the grey economy in Finland at 12.9% of GDP. The estimates for other countries ranged from 6.9% in Switzerland to 31% in Bulgaria.
Journal of Money Laundering Control, Shadow economy and tax evasion in the EU
The EU’s surveys of the grey economy have been focused on labour and undeclared work. The European Commission estimated that the size of the grey economy in Finland was 13.7% of GDP in 2011. The figures are available in the following publication, among others: The Shadow Economy in Europe 2013.pdf p. 23
The average estimate for EU Member States is that 11.6% of work in the private sector was undeclared in 2013 (Finland 9.3%) and the undeclared work represents 16.4% of gross value added (GVA) in the private sector on average. The figure for Finland was 11.8%.
Undeclared work in the private sector as % of total GVA, LIM estimates for 2013
In a study commissioned by the Finnish Parliament, the size of the grey economy was estimated at EUR 10–14 billion, or 5.5–7.5% of GDP. => Annual loss of taxes and payments totalling EUR 4–6 billion.
Finland’s increasingly international grey economy (in Finnish only)
According to a study of the grey economy in 162 countries, the size of the grey economy in Finland is 17% of GDP (in 2007). The estimates were substantially higher than in more recent studies.
Shadow Economies All Over the World
The aggressive tax planning of corporations, facilitated by tax service companies, is a significant phenomenon in society. According to an estimate by Finnwatch, the annual loss of corporate taxes due to aggressive tax planning in Finland is EUR 430–1,400 million. Globally, the annual losses in corporate taxes arising from aggressive tax planning amount to EUR 75–180 billion according to a cautious estimate by the OECD. The figures do not include tax losses arising from illegal tax evasion or financial crime.
The architects of tax avoidance (in Finnish only)
Research results – tax gap
The tax gap is the difference between the theoretical total taxes owed and the actual taxes collected. Measuring the tax gap indicates the extent to which payment obligations are fulfilled.
- The EU estimates that the VAT gap amounted to EUR 1,418 million in Finland in 2015, or 6.95% of the theoretical amount of VAT accrued. This represents a slight increase from the previous years. In 2014, the figure was 6%.
Study and reports on the VAT gap 2017.pdf
- In 2015, the University of Warsaw published an estimate according to which the total tax gap in Finland was 5.2% of GDP in 2014. Using the same method, the average for all European countries was 10.7%.
Measuring the tax gap in the European economy
- The International Monetary Fund (IMF) estimates: the Finnish VAT gap was 5% in 2014, equal to approximately EUR 1 billion.
The tax administration and international monetary funds value added tax gap report.pdf
- The tax gap in the UK is estimated at approximately GBP 34 billion, or 6% of the theoretical taxes owed in 2015–2016.
HMRC measuring tax gaps
Domestic estimates (in Finnish only):
- Tax Administration report: for VAT in 2010 the tax gap was EUR 1.4 billion, or approximately 7% of the computational value added taxes owed.
Developing tax gap estimation methods, final report of the working group
- Audit Committee 2010: The tax gap in Finland is estimated to be EUR 4–8 billion, or 4–6% of GDP and 7–9% of the total taxes accrued.
Shadow areas in the grey economy (Finland’s increasingly international grey economy)
- In 2008, the VAT gap amounted to at least EUR 2 billion, or 10% of the total VAT reported to the Tax Administration.
Finland’s increasingly international grey economy
- The tax gap for taxes and duties collected by the Finnish Customs was estimated at approximately EUR 341–346 million in 2015, which represents about 3–4% of the total taxes collected by the Finnish Customs (EUR 10.4 billion).
The Finnish Customs is effective in controlling the tax gap