Trade Union News from Finland (19.01.2003 - Erkki Laukkanen*) The Finnish State Auditors’ report on State finances in 2001, published in late November 2002, includes an estimate that about EUR 5 billion circulates annually in the grey economy in Finland. The corresponding loss in tax revenues is approximately EUR 2.5 billion. This makes the grey economy a significant threat to the welfare state.
SAK favours more effective measures to combat the grey economy in order to reduce these losses. This requires more human and other resources to be allocated in the State budget to the fight against the grey economy and economic crime. Both domestic and foreign experience indicates that the rewards to be gained from investing in measures to combat the grey economy exceed the costs of so doing many times over.
One of the principal domestic tax leaks arises over receipts in, for example, the construction and shipbuilding industries. Such leaks could be reduced by introducing the system of reversed value-added tax already proposed a few years ago. The reversed system would involve selling subcontracts tax-free within the subcontracting chain, with the main contractor and client rendered ineligible for tax deductions. Liability for tax would thus be transferred to the main contractor or client. Such a system is already applied in the Netherlands and in Belgium, and its introduction is being prepared in Sweden, where approximately one-fifth of the grey economy is estimated to originate in VAT fraud.
Leakage of the tax base arises not only from the grey economy, but also results from globalisation of the economy. Various international arrangements by large enterprises and transfer pricing cause tax revenue losses that are at least as significant as those of the grey economy. In recent years public authorities have exercised a loose grip on the grey economy, but it is now once again time to take serious measures in this area and give public authorities all of the resources and powers that they need to tackle economic crime.
*Erkki Laukkanen is an economist working at the Central Organisation of Finnish Trade Unions – SAK