Undeclared Economic Activities of Croatian Companies: Findings from a Representative Survey of 521 Companies

Abstract

This report presents the findings of a survey on undeclared economic practices undertaken by Croatian companies. In order to obtain the rigorous evidence on undeclared work in Croatia, we previously investigated citizens’ experiences with undeclared work and the practice of envelope wages. With this representative survey of 521 companies, we focus on frequency of company engagement in the undeclared economy.

Four out of ten survey respondents estimate that 20% to 50% of trade in their sector is undeclared, while more than one quarter (21.8%) believe that this percentage is higher than 50%. Only one sixth of survey respondents state that the percentage of trade in their sector conducted through the undeclared economy is less than 10%.

40% of respondents believe that 20% to 50% of employees in their sector are working without a contract, while 11.8% estimate that this percentage is greater than 50%. One quarter of the company representatives (26.12%) think that less than 10% of employees in their sector do not have contracts.

More than half of the survey respondents (59.3%) believe that the extent of envelope wages in their sector is between 20% and 50%, while 17% deem that underreporting of salaries is higher than 50%. A little less than one quarter (23.8%) of respondents evaluated that envelope wage practices are not widespread in their industry and that they represent less than 20% of salaries. Administrative and support service and accommodation and food service activities are at the top of the list of sectors that always apply the practice of envelope wages. On the other side, such a practice is never applied in a significant number of companies in arts, entertainment and recreation and in education. Regarding the characteristic years in business, mentioned behaviour is less prevalent in companies with business activity from one to three years and from four to ten years.

Almost a half (47.28%) of survey respondents believe that the proportion of the total wage payments that are paid unofficially is in the 20-50% range of the total wage payments, while around 16% state that this percentage is greater than 50% and another 16% stated that the range is between 10% and 20%. A little over one fifth (21.2%) of respondents evaluate that such undeclared payments represent less than 10% of total wage payments. According to views of the surveyed firm representatives, the most important reason for companies in Croatia underreporting salaries of their employees is the intention to keep labour costs down, followed by longer working hours.

All different types of misbehaviour among the competitors, except illicit exporting/importing of goods, false documentation or no documentation, happens in 50% to 60% of the cases. In addition, 42.64% of the interviewed representatives think that illicit exporting or importing never happens, while 17.16% assessed that this behaviour happens in almost all cases. Regarding the VAT fraud, almost half of the interviewed representatives (49.39%) stated that it happens sometimes, while 28.61% never observed such behaviour. This similar structure of responses was found for hiding, not paying taxes, duties and/or excises - more than a half of the interviewed representatives stated that this happens sometimes, while 23.4% believed that it never happens.

Overall, the survey respondents widely agreed with the majority of measures for tackling undeclared economic activities undertaken by companies, therefore supporting a combination of various policies and measures. The majority of the interviewed representatives (53.73%) supported the notion that companies, which employ undeclared workers, under-report salaries or have outstanding social security payments should be banned from participation in public tenders and should not receive subsidies. Furthermore, 44.05% of companies believe that by simplifying the processes for hiring workers on small or occasional jobs would reduce undeclared work. In contrast, less than 20% of the surveyed participants think that public exposure of undeclared work and/or awareness campaigns about the negative consequences of operating unregistered would result in significant reduction in the undeclared economy.

Keywords: informal economy, shadow economy, tax evasion, labor economics, informal sector

JEL Classification: H26, J46, J48, K34, K42, O17, P37