Apr 14, 2016

How is Shadow Economy Controlled in Moldova

At the recent knowledge exchange initiative that provided participants with insights into what action tax administrations in SEE can take to reduce the shadow economy by acting within the law using modern compliance risk management methods, Mr. Gheorghe Zgherea, Head of legal assistance section of legal department, and Mr. Andrei Balan, Chief of legal department, at the Moldovan Ministry of Finance, shared Moldovan experience in managing shadow economy.

One of the most important problems that the Republic of Moldova continues to have since obtaining independence is the shadow economy, especially its extreme negative consequences for the national budget. There are several commonly used definitions that describe the shadow economy as "economic activity that it is not registered in official records". Most of the economic dictionaries define it as "all undeclared economic activities to the institutions charged with the establishment of taxes and social contributions, which escape from the statistical records and national accounting".

Basically, the shadow economy is generated mostly by:

  • avoidance of payment of fiscal and other taxes;
  • carrying out activities without having a license;
  • black labor.

According to the National Bureau of Statistics of the Republic of Moldova, during the years 2000–2014 the share of the shadow economy in GDP was:































To combat the shadow economy, Moldova has been drafting and amending its fiscal, criminal and contraventional legislation for years. For example, the Fiscal Code was amended with stipulations that allow fiscal authorities to use more indirect methods of estimating the taxable income:Of course, these are estimate data; some of the reports prepared by experts in the field show that the shadow economy is between 35–70% of the national economy.

  • expenditure method;
  • cash flow method;
  • the method of property.

Selecting the indirect methods of estimating the taxable income is based on the situation, sources of information and documents identified and/or documents obtained. The Contravention Code introduced a new rule that sanctions tax evasion by individuals not engaged in economic activities by avoiding the submission of income tax declaration or by declaring distorted data, if the income tax which had to be paid does not exceed 2,500 euro. Practical application of this rule is often difficult because the prescription period for attracting the contravention liability is restricted (limited).

Moldova’s Criminal Code has been improved too. According to the current edition, tax evasion by individuals not engaged in economic activities by avoiding the submission of income tax declaration or declaring distorted data, if the income tax which had to be paid exceeds 2,500 euro, is punishable by a fine of 1,000 to 2,000 euro or by community service for 180 to 240 hours or by imprisonment for up to one year. In this case, the prescription period of attracting accountable is apparently very short. Therefore, considering the date of the offense and the period of the trial that it is long enough for a case in court, there is a risk that the guilty person escapes from criminal punishment. However, with the initiation of criminal proceedings by criminal investigation, the Ministry of Finance as the administrator of the state budget is drawn into the process to support a civil action in order to recover the damage. For example, in one case, the defendants were not attracted to criminal liability for the acts of tax evasion because the prescription period for attracting accountable expired. The civil action of the Ministry of Finance was admitted with proceeds from the accounts of persons guilty of tax evasion of the damage caused to the state with the title of tax evasion, applying also appropriate penalties. 

In 2013, a proposal was made to provide the tax authorities with the competences of criminal investigation, but the draft law was not accepted and was finally rejected by the authorities who examined it. It was said that increasing the competencies of tax authorities will inevitably lead to abuses and influence negatively the activity in this field. However, this issue remains open for future discussions. I personally believe that granting competences of criminal prosecution to tax authorities is extremely useful to combat tax evasion, considering that qualified staff would first identify the cases of tax evasion, followed by close external monitoring to raise the level of transparency of their activity.

Finally, I would like to bring out certain factors that generate the shadow economy in our country:

  • The tax burden –  a tax system too complex and with high tax rates directly contributes to increased tax evasion;
  • The complexity of the regulatory legal framework – with a clear, simple and stable law in place, tax-payers are more prone to form a tax culture, which will have a positive effect on the legislation. People often violate the law unconsciously because they do not know about the changes that have occurred in the legislation. In the Republic of Moldova, the regulatory tax framework is extremely complex (the Tax Code, laws implementing the Tax Code, government decisions, instructions of the State Tax Inspectorate, etc.);
  • Fiscal morality – involves citizens’ perception of the quality of public institutions and services, fairness of the tax system, level of corruption, etc. To increase tax morality, it is first necessary that every citizen realizes the importance of respecting the laws of a state of law and the importance of their financial contribution to the society. In this regard, there is a need to ensure transparency in managing public money, so that everybody would know the final destination of their contribution;
  • The effectiveness of sanctions – to be effective sanctions must be proportionate to the infringements committed. At the same time, it is imperative that the legislation sanctions drastically repeated violations. To the extent that the law does not comply with the principle of proportionality, it is not effective and loses the two most important functions: to educate and to prevent further infringements of the law.

Not only the statistics presented by the National Bureau of Statistics but also the economic reality attests that in order to combat the shadow economy in Moldova, it is necessary to revise (i.e. improve and simplify) the existing normative framework.

The event was delivered under the under the Supporting Capacity Development of Tax Administrations in South East Europe (SEE) project on March 8-10, 2016.