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Project “Non Financial Assistance to SMEs in Serbia” The Informal Economy in Europe The Serbian SME Conference Belgrade October 2003 An EU funded project.

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Presentation on theme: "Project “Non Financial Assistance to SMEs in Serbia” The Informal Economy in Europe The Serbian SME Conference Belgrade October 2003 An EU funded project."— Presentation transcript:

1 Project “Non Financial Assistance to SMEs in Serbia” The Informal Economy in Europe The Serbian SME Conference Belgrade October 2003 An EU funded project managed, by the European Agency for Reconstruction

2 Project “Non Financial Assistance to SMEs in Serbia” Definitions of Informal Economy “that part of economic activity, which totally or partially evades taxes or social security contributions” “Commercial activities that may be legal in themselves, but are not declared for tax”

3 Project “Non Financial Assistance to SMEs in Serbia” Reasons for Informal Economy Desire to avoid taxes Hostility towards bureaucracyHostility towards bureaucracy Poor value in government spendingPoor value in government spending CorruptionCorruption Inefficient tax administrationInefficient tax administration Wide scale participation – suppliers and customersWide scale participation – suppliers and customers Public acceptance and traditionPublic acceptance and tradition

4 Project “Non Financial Assistance to SMEs in Serbia” The Main Sectors of Informal Economy Activity Services: garages and vehicle repairs, services to individuals e.g. hair dressing, restaurants, transport, distribution, hotel servicesServices: garages and vehicle repairs, services to individuals e.g. hair dressing, restaurants, transport, distribution, hotel services CraftsCrafts Construction: renovations and repairsConstruction: renovations and repairs Retail businessRetail business AgricultureAgriculture

5 Project “Non Financial Assistance to SMEs in Serbia” Who participates? Sole traders and craftsmenSole traders and craftsmen BuildersBuilders Registered workers having a second or third undeclared activityRegistered workers having a second or third undeclared activity Unemployed peopleUnemployed people Women (housewives) with part-time jobsWomen (housewives) with part-time jobs FarmersFarmers Seasonal workersSeasonal workers

6 Project “Non Financial Assistance to SMEs in Serbia” Forms of Tax Evasion Undeclared turnoverUndeclared turnover Undeclared work in registered companies (double jobbing)Undeclared work in registered companies (double jobbing) Undeclared work for unregistered enterprisesUndeclared work for unregistered enterprises Unregistered sole tradersUnregistered sole traders Transactions are usually in cash

7 Project “Non Financial Assistance to SMEs in Serbia” Scale of Informal Economy All countries have “informal” economies.All countries have “informal” economies. In 1998, the European Commission estimated the size of the informal economy in Member States as ranging from 7% to 16% of total EU GDP.In 1998, the European Commission estimated the size of the informal economy in Member States as ranging from 7% to 16% of total EU GDP.

8 Project “Non Financial Assistance to SMEs in Serbia” Europe's Black Economy at home... UNTAXED EARNINGS - SHARE OF GDP* ITALY $250 billion (23% of GDP)ITALY $250 billion (23% of GDP) GERMANY $268 billion (15% of GDP)GERMANY $268 billion (15% of GDP) FRANCE $125 billion (11% of GDP)FRANCE $125 billion (11% of GDP) SPAIN $78 billion (17% of GDP)SPAIN $78 billion (17% of GDP) EURO-ZONE $859 billion (14% of GDP) * Year 2000 Data: European Commission, Interpol, Informal Economy Research Centre Source: Business Week, 17 September 2001EURO-ZONE $859 billion (14% of GDP) * Year 2000 Data: European Commission, Interpol, Informal Economy Research Centre Source: Business Week, 17 September 2001

9 Project “Non Financial Assistance to SMEs in Serbia” …… and abroad MONEY STASHED ILLEGALLY OFFSHORE* MONEY STASHED ILLEGALLY OFFSHORE* ITALY $320 billionsITALY $320 billions GERMANY $250 billionsGERMANY $250 billions FRANCE $104 billionsFRANCE $104 billions SPAIN $105 billionsSPAIN $105 billions EURO-ZONE $759 billionsEURO-ZONE $759 billions *Year 2001 Data: National central banks, Bank for International Settlements, Informal Economy Research Center, Business Week Source: Business Week, 17 September 2001 *Year 2001 Data: National central banks, Bank for International Settlements, Informal Economy Research Center, Business Week Source: Business Week, 17 September 2001

10 Project “Non Financial Assistance to SMEs in Serbia” Consequences 1 Reduces government revenues for infrastructure and social expenditureReduces government revenues for infrastructure and social expenditure Unfair competition for tax compliant enterprises, affecting economic competitiveness and jobs Locks up entrepreneurial talent in local service activities, which could often make a greater contribution in the official economy

11 Project “Non Financial Assistance to SMEs in Serbia” Consequences 2 Consequences 2 Reduction in general acceptance of regulation and taxation. If some firms can successfully evade tax, why not others? A higher tax burden for compliant enterprises than would be the case if all enterprises were paying their fair share. An erosion of quality and standards – no consumer protectionAn erosion of quality and standards – no consumer protection

12 Project “Non Financial Assistance to SMEs in Serbia” Tackling the Informal Economy Legal, institutional and regulatory reform: An efficient client oriented public service, free from corruption Fair, simple and transparent tax laws and regulations – introduce Value Added Tax Consistency, even handedness and efficiency in enforcement Value for money in public expenditure – “No” to “Tax and spend”


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