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Assessment of the volume of informal economy in Kosovo

In the presentation of the report drafted by the European Union Office on the Extension of Informality in Kosovo, it was stated that reforms should be extended to the judiciary system, in order to do more in confiscating the proceeds obtained through illegal roads.

‘Fighting the informal economy is a matter of high relevance for EU and it's hard to fight an enemy without finding the cause, so we are committed to finding the cause of this phenomenon in the report, 'said the EU Special Representative.’ She also said there was a decrease in the informal economy in Kosovo and this is due to the reforms received by the Ministry of Finance, namely Customs and TAK.

The Ministry of Finance and its revenue agencies have undertaken and continue to take concrete actions that greatly influence the formalization of business activities, 'said Minister of Finance Bedri Hamza at  meeting organized by the Ministry of Finance and the EU Office, in Kosovo, through the EU-funded project ‘Further Support to Kosovo Institutions in the Fight Against Organized Crime, Corruption and Violent Extremism‘, which presented the Assessment of the volume of informal economy in Kosovo.

The relatively high level of informal economy is a challenge for public finances on the one hand and damages fair competition on the market. Moreover, informal employment and systematic avoidance of employee contribution payments are greatly affecting employees' interests when we know that the unemployment rate is still a challenge for our economy- added Minister Hamza.

He also stressed that 'We will work on updating and modifying the National Strategy for the Prevention of Informal Economy in order to establish a better monitoring and enforcement mechanism for reducing the tax gap.'

The assessment report on the extent of informal economy in Kosovo aims to further support Kosovo's institutions against organized crime, corruption and violent extremism. The report presents an overview of the country's economic situation and is focused on certain areas where there is stagnation and no progress.

According to the report, the Stabilization and Association Agreement has brought positive effects on investment and consumption growth, while construction services are seen as major growth drivers.

Kosovo's trade deficit has been financed by foreign direct investment and high remittances from the diaspora (more than € 600 million a year) and also accounted for the largest financing lines for the country's balance of payments with the world. The public debt according to the report is also in a positive trend, not exceeding the 45% positive gold threshold for developing countries.

Even the escalation of VAT has brought positive effects to Kosovo, with a scaling of 16% to two scales: 8% for basic goods and 18% for other goods and services. This escalation in 2015 has led the country to a higher rate of Gross Domestic Product for direct taxes.

An indicator that shows the level of poverty in Kosovo according to the report is the unemployment rate, which had risen to 28% in 2016 compared to 25.2% in 2015.

But by comparing employment with the growth of the investments that had occurred in 2016 according to the report it is seen that the economy's formalization had a greater increase in 2015.

Despite the downsizing of the informal economy for the period 2013-2015, according to the report, the majority of black economy activity remained largely present.

From the perspective of employment, the report reflects the state of the ground, estimating that 45 Thousands of employees work full time in the informal sector where 11 to 15% are in the agriculture sector, followed by the construction sector and finally commercial activities.

According to the calculations it emerges that Kosovo has a loss of 60.1 million euros annually from non-payment of personal income tax and corporate income tax.

Knowing that most small and medium businesses in Kosovo are family businesses , according to the report this situation shows that 33.2% of personal income for households is informal.

This figure is evidenced by the fact that the total revenue per consumption does not match any legitimate legal source and this revenue is likely to be generated by activities held permanently hidden.

EU Office when compared to the actual rate of return on assets, they identified several hot spots that indicate which economic activities have high profit rates, namely construction, real estate, professional activities, trade and services and hotels.

The high rates of return on assets compared to the low sales rates that these activities have according to the report do not coincide with global and regional features for the same assets evaluated on the basis of the asset price theory.

By sectors, hotspots where there is informality in the report are the agriculture sector, the construction sector, the wholesale and retail sector, the real estate sector, the financial activity sector, the insurance sector, and freelancers.

Agriculture as a main activity in Kosovo is characterized by the high number of small farms with less than 2 hectares, with an area of ​​70% of arable land. According to the findings in this sector there are minimal payment of personal and corporate income tax (not more than 2 million euros per year), while the income from consumption for this category is high.

The construction sector is ranked among the sectors with the highest rates of return on assets. The period of asset return in Kosovo is shorter than 3 years, and this number is at least 2 times higher than the global trend and the EU trend. A surprising discrepancy in the financing of construction according to the calculations presented in the report is the low lending rate of this sector and this suggests the presence of alternative means of financing the economic activity. The sale of residential buildings or sales in the exchange of land according to the report shows that they are paid according to own findings bypassing the financial sector, and this shows that the gains cannot be prevented from illegal activity entering to the sector through familiar back door schemes.

Also in this sector, the number of informal workers is 9,978 with a loss of € 3.2 million in personal income tax and € 5.2 million in corporate income tax, which means that informality falls four times higher than in the agricultural sector.

The wholesale and retail sector according to the report is also a source of informality, increasing the level of credit in order to overcome the inadequacy of financial means to meet tax obligations. Commercial activities according to the EU report are used as 'back door' to finance other economic activities and according to schemes investigated in the construction sector, the presence of money laundering activity should be highly probable.

Also, the collection of rental tax according to the report is very poor. Taxes of this category are not paid either by individuals or by other categories. TAK does not keep correct records for this category of tax.

To reach the information, the EU Office has used the information contained in the payment of taxes, such as personal income tax, rental tax, interest and profit, as well as consumption taxes. The assessment follows the same methodology as previous assessments made in 2007 and 2014 to enable comparing data and to draw conclusions about trends related to the informal economy in Kosovo.