Economist: 64% of employees of small businesses in Latvia receive unofficial bonuses

Approximately 64% of employees of small businesses with up to 20 employees receive different kinds of unofficial bonuses, as concluded in a study by the Bank of Latvia, which was presented by the bank’s economist Konstantīns Beņkovskis on Monday, 13 December.
In medium-size businesses envelope wage percentage is below one-third and in large businesses it is at 8.2% among employees, says Beņkovskis.
The study of the Bank of Latvia indicates that in small businesses envelope wages compose about 21% of official wages. In large and medium-sized businesses this index is much lower.
The consequences of envelope wages are not limited to lost taxes, said Beņkovskis, adding that another side-effect of envelope wages is distortion of competition. Tax avoidance allows businesses to reduce the prices of goods and services and gain an advantage over competitors that do not avoid paying taxes.
According to estimates from the Bank of Latvia, small businesses (one to seven employees) are able to save 6.9% on labour force costs with envelope wages.
For medium-sized companies this index is 2.4% and for large businesses it is 0.8%. Beņkovskis explains that this way envelope wages cause major labour force cost differences between groups of businesses, as well as distort competition.
The percentage of envelope wage recipients is far more apparent among small wage recipients, says Beņkovskis.
Bank of Latvia estimates suggest – if an employee officially receives minimal wage (or slightly more) in approximately 70% of cases people also receive unofficial envelope bonuses.
State Revenue Service’s director general Ieva Jaunzeme admitted at the discussion that available data suggests tax avoidance among small businesses is relatively more expressed when compared to the large businesses segment.
Jaunzeme said the undeclared tax debts of small businesses are relatively small. However, most businesses fit this category.
Both honest taxpayers and those who have risks have received state aid to overcome Covid-19 crisis, says Jaunzeme. She also reported that based on data from VID on downtime benefits suggest the following – from 12 March 2020 until 30 June 2020, when aid was paid regardless of tax payments, for 21% the benefit amounts were below EUR 200 and for 35.8% benefits ranged from EUR 200 to EUR 430. For another 23.2% benefits ranged between EUR 430 and EUR 690.
Between 9 November 2020 and 30 June 2021, when the government appointed a minimal benefit amount of EUR 500, 56.2% of downtime benefits paid to businesses ranged between EUR 430 and EUR 690.
«This also means benefits were paid to many employees of businesses for whom taxes were not paid in appropriate amounts,» said Jaunzeme.
In total VID has paid businesses and residents benefits worth EUR 693.314 million for the period until 30 June 2021, as reported by Jaunzeme.