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Unofficial Taxation: An Evil in Full Progress in the Republic of Moldova

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22.01.2007   www.azi.md  615 
MUNTEANU Igor
Gradul ştiinţific: President of Border of Directors, Dr. in Law, MA in Political Sciences

Unofficial Taxation: An Evil in Full Progress in the Republic of Moldova


There is almost no authority in the Republic of Moldova that would not "do" private fund-raising for different purposes that they set themselves. This happens under the conditions when there is no act that would regulate the relations between public and private sectors. Most often, the result of this situation generates corruption, increase of non-fiscal burden and political pressure on business, and, at the same time, increases the tendency of the private sector to conceal its income. Well, this factor is one of the most significant ones when we talk about a healthy business environment. The reports developed by Transparency International show that the Republic of Moldova came 114th out of 145 in 2006. Other indicators have decreased in the recent years as well. For instance, the study "business administration costs" carried out by the World Bank in 2006 shows a fall by 13 places within in a year describing some variables related to business environment, transparency and legal framework predictability, as well as relations with public authorities.

What is this "tax" and why is it "unofficial"? First of all, we should mention that this phenomenon represents a form of receiving payments from businesses in exchange for certain services provided by public authorities. The payments are taken from businesses in the name of certain objectives defined by these authorities as "necessary" but not binding, unless the private sector wants to be sanctioned by these authorities. In this respect, there are several problems when describing prejudices, which are direct and indirect. On the one hand, there is an increased non-fiscal pressure on private business: it forces this business to operate on half-legal terms resorting to double-entry accounting or, in general, give up paying taxes, otherwise they cannot survive. On the other hand, the authorities that come to realize they can easily abuse of their attributions in order to draw out money from the private sector might consider that this position is quite "profitable" and will extort money from any procedure that falls under their incidence placing other barriers that will make the business "controllable" and "obedient".

This money paid by businesses for different more or less credible projects are money that cannot be allocated to be reinvested in business and development in order to import modern technologies and create new workplaces. Very little has been written about this phenomenon in the recent years. The reason is that the public has drawn its attention rather to measurable / visible aspects of conventional corruption manifested by means of corruption scandals, flagrant bribery, or other cases of tax evasion, and less to a phenomenon as widely spread in the society, but with a more complex manifestation form called "unofficial taxation". According to some recent estimates, private sector "unofficially" pays about 2 billion lei for different purposes specified by public authorities. Let us take them one by one. The Republic of Moldova has the biggest number of official holidays in the world: 65 holidays are marked in the calendar as official, professional and religious holidays, to which the same number of church holidays specific to certain localities are added (patronal festivals, days of localities), annuals declared by authorities and dedicated to abstract entities (year of local communities, year of peace, year of the child), which in their turn lead to certain expenses that should be covered somehow.

The phenomenon of charity meals (for veterans, elderly people, poor children, etc.), as well as the phenomenon of ideological projects (monuments and monasteries build at the initiative of authorities) are added to official holidays and the list is very long. Most frequently, public authorities do not have money to cover the costs of these projects and in this case the only solution they have is to exert pressure upon the private business to cover these costs. Nolens volens, the private business is forced to make financial contributions monthly or even weekly, usually cash, without a cash desk, invoices or expenditure records. Thus, they lose important and vital resources necessary to develop their business or reinvest under the conditions of a limited access to the resources of Moldovan banks. We mention that the money business is forced to pay adds to the large volume of taxes officially established by the state, which flagrantly contradicts the official policy of simplifying and rationalizing the business regulation framework.

At the same time, this money serves certain actions and behaviours that lead to corruption within political and administrative systems, although the biggest part of these resources circulate within the administrative system without being monitored by control bodies or even in cash. The pomp, with which different memorials, monasteries supported by the Government, or "Badea Mior"- type candles are built, give evidence of the use of an entire arsenal of pressure instruments to collect the money necessary to satisfy these political "whims". The official statistics for the past years (2003-2005) show that although the private sector covers about 93.7% of the number of companies registered in Moldova, it accounts for only 57% of the GDP and contributes to the creation of only 71% of workplaces sought on the market. I can assure you that these "unofficial taxes" contribute mostly to discouraging private businessmen from managing their businesses in an open, transparent and modern way. In the context when management does not have sufficient confidence in the state, they try by all means to hide their income keeping a double-entry accounting.

In this respect, I would like to mention that authorities are inclined to present the contributions they regularly collect as "voluntary manifestations", but even a high-school student knows what can happen to a big or small business if it evades these payments. Keep in mind that the Republic of Moldova still has fine collection plans and the existing 56 control bodies are evaluated according to the number of monthly registered offences, perhaps, similarly to the way, in which traffic police is evaluated according to the number of fines imposed on car drivers. In this situation, public authorities can impose certain fines or not when they have to impose them anyway, also using "unofficial taxes" to ensure the funds lacked by the public budget and, at the same time, "loyalty and money" for different political purposes. Under these conditions, the phenomenon of "unofficial taxation" represents a parallel taxation system, because it forces economic entities to plan and provide for financial or materialized payments for different purposes stated by authorities with the risk of losing their business if not complying with the received requests immediately.

Charity, which is currently practiced in the Republic of Moldova, has absolutely nothing in common with the charity practiced in the civilized world, because "public collection" in the Republic of Moldova is not initiated at the philanthropist's good will (grant-giving), but at the instinct of not being punished by rentier authorities that request these payments. As a consequence, different public authorities and not the business that has provided the resources assume the role of "philanthropists" or "founders of sacred establishments". This inverted pyramid of charity merit almost automatically determines the non-participation of businesses in different projects launched by public authorities as an "offence indicator" that has to be punished immediately or in the future. Obviously, we are not talking about the natural, genuine philanthropy justified by social demand, but about a rudimentary "usurpation" of private sector money by the political power. Finally, business contributions have nothing in common with the general charity rules eligible for further deductions, but create a paralegal situation, by means of which authorities withdraw funds without being held liable for spending this money, and certain business representatives obtain an instrument of corrupting and, thus, influencing administrative and political decision-makers.

In this context, we should mention that this paradoxical situation is also maintained by political parties, which in their turn, subsist thanks to certain funding through "unofficial taxation". There are almost no political parties that would have integrally financed their activities from their official accounts, without resorting even once to anonymous contributions received from economic groups with no legal identity. We should also remind you that we are not talking about disparate and individual cases, but about the manifestations of a system, which functions according to certain rules, mechanisms and principles that have nothing to do with the legal framework. Here are just a few examples. The first unwritten rule is that the big business (turnover exceeding 100 million lei) can be "disturbed" only by the most top-ranking state authorities, the requests of which are rapidly accepted, because this is also a sign of loyalty to the regime. The second unwritten law is that one should not contradict authorities under any form. It is because, most often, tax authorities that check the compliance of the business with the legal framework are "transmitters" of the requests coming from authorities. This phenomenon develops by rapid steps particularly at the level of rayon administrations and it can hardly be stopped. There are other unwritten laws, about which we will talk later. But we should stress here that many officials ("servants" of public interest!) are quite favoured by the existing system, because they can take advantage of uncontrolled resources and combine their own interests with the interests of political parties, which protect them, in a pleasant and useful manner.

A part of resources collected within the "unofficial taxation" system is demanded as "social contributions". Either it is about the administration of certain schools, tax, customs or healthcare authorities, local, central or rayon powers, the search for extra budgetary resources is regarded as an activity, which is legitimized by means of exercising public authority and, thus, certain public authorities cannot even imagine working under the conditions when this system might cease its existence.

Penalties imposed by controls and payment of certain additional state fees against official taxes can differ in courts, but - as entrepreneurs state - lawsuits do not help at all and only make the fate of those who might plead against the abuses committed by state inspectors more difficult. There are many suspicions among entrepreneurs that justice is not free and independent and that decisions are imposed by authorities. Officials demand these contributions during carried-out controls, so that entrepreneurs have nothing else to do but pay these retributions under the threat of penalties. Most often, such contributions are made in cash, forcing the corresponding firms to violate the law, which they must obey. The opinion of authorities inquired within this study is that business has to pay certain "social obligations".

The private sector also admits the fact that its representatives have certain responsibilities and are ready to contribute most of the time, but insist on the fact that these payments should comply with a legal framework that would make their contributions purposeful. The fact that discourages businessmen is related to the lack of transparency regarding the use and appropriation of these resources, usually collected in cash, the punitive nature and the frequency of demands from public authorities. Unofficial taxes represent a complex set of unofficial rules, which feed the deficiencies of the political-administrative system. This phenomenon, which we have called conventionally and neutrally "unofficial taxation", has become a feature of the administrative and political system operating in the Republic of Moldova and represents, in the context of frailness of Moldovan state of law institutions, the most eloquent example of command economy and administered democracy.

A recent study on "unofficial taxation" initiated by our institute aimed at identifying the amplitude of this phenomenon, its impact on the economic growth and decision-making process, and at identifying solutions that can put an end to this tendency. Evidence collected within personalized interviews and focus groups organized for this purpose, analysis of other indirect evidences provided us sufficient materials, which we will offer to interested people at the right time. We hope that on the basis of recommendations and lex ferenda initiated at the end of this study, the civil society together with Moldovan business community representatives and democratic political forces will be able to interfere from the legislative point of view in order to adjust the normative framework and existing practices to standards and norms that would ensure a democratic and prosperous development of the country.



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