Shadow economy analysis
EY Economic Analysis Team (EY EAT) estimates the size of the shadow economy in various sectors and economies, assesses its consequences, and develops recommendations for fighting the shadow economy.
What EY can do for you
Shadow economy is a complex phenomenon comprising of wide range of activities, such as illegal, hidden, underground and informal production/sales/trade. In all cases the shadow economy can be approximated by unreported transactions made by both unregistered and registered entities. Shadow economy results in distortions in market competition, where companies not registering or underreporting their revenues gain a competitive advantage over entities that comply with a law. Since activities in the shadow economy are not taxed, they reduce government revenues and often account for a significant share of the tax gap. Another important source of the tax gap may be tax frauds (in particular, VAT frauds). In this case, however, the fraudulent mechanisms use the registered (sometimes artificial) transactions, backed by invoices, while in the shadow economy transactions remain unreported.
The shadow economy/tax frauds, by definition, are not captured by official statistics. Hence, their analysis requires adequate knowledge of economic theory and usage of advanced statistical/econometric methods and techniques. EY EAT has vast experience in this area.
Depending on the Client’s needs, EY EAT can deliver:
- Estimate of the size of the shadow economy/tax frauds in the economy or in a given sector
- Insights into main factors and mechanisms leading to the expansion of the shadow economy/tax frauds in a given market
- Assessment of the consequences of the shadow economy/tax frauds existence, incl. calculation of the reduced tax base
- Solutions aimed at decreasing of the shadow economy/tax frauds
- Quantitative impact assessment of the proposed regulations to fight shadow economy/tax frauds
- Provides reliable estimates and insights on the actual size of the shadow economy/tax frauds
- Raises public awareness of the problems related to the existence of the shadow economy and tax frauds
- Delivers an important input to a discussion on sources of the shadow economy and tax frauds, their consequences and regulatory solutions that can be used to combat them
- Supports communication with stakeholders on potential benefits from the reduction of the shadow economy and tax frauds – both for the companies affected by this problem and for the public sector
- There is no universal approach to measure the shadow economy or tax frauds. At the economy level, the commonly used methods of measuring the shadow economy/tax frauds are based on the currency demand analysis (CDA), multiple indicators multiple causes model (MIMIC), and other econometric techniques. EY EAT introduces innovative solutions that allow us to exploit the strengths of the methods used in the literature, while addressing many of their weaknesses.
- At the sectorial level, the measurement of the shadow economy/tax frauds requires a sector specific approach, tailored to the characteristics of the industry
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