Salaries in envelopes

The Bulgarian National Revenue Agency (NRA) in managing risk related to more than EUR 220 million annually. Or how communication achieves what audits can't.
Salaries in envelopes is where the remuneration in relation to which taxes and social security contributions are paid is different from the real one. The remainder is received in an envelope or in another illegal way, with both the employer and the employee benefitting from this in the short term, while society (and its most vulnerable members) loses the amounts not paid to the exchequer.
Unpaid taxes and social security contributions of EUR 220 million annually

Since 2011, the risk management unit of the Bulgarian tax administration has been measuring this risk, which is estimated at more than EUR 220 million annual losses and almost 50% risky employers. The two types of risky behaviour are a) paying social security contributions for salaries lower than the real ones, and b) half-day work (4 hours) on paper, while in reality it is a lot more. In Bulgaria, there is a high level of social tolerance towards this behaviour, which, added to the mutual financial interest of both parties, makes addressing the risks significantly more difficult. In addition, the level of trust in public institutions in Bulgaria is relatively low (a common experience in post-communist countries), and most people are not inclined to think about the long-term when they will not be able to work.

Checks and audits – the usual instrument of the tax authorities
The usual ways in which the tax authorities influence non-compliant behaviour are through control measures – checks, audits, and, in the end, imposing sanctions in the hope that this will change the behaviours of the persons being checked or audited, but also everybody else. For years, NRA’s approach has been the same – more checks, more audits, and aiming to reduce the significant losses from salaries in envelopes. In fact, however, it turned out that the thousands of control measures had little effect on the behaviour of risky persons – the damages to the budget remained unchanged, and often the checked/audited persons changed their behaviour briefly and then returned to their illegal practices. Moreover, checks and audits are expensive – to NRA itself and, in fact, also to taxpayers, who with their taxes provide for the expenses of the tax administration. The NRA team examined in depth the psychological motivation of employers and employees. We contacted hundreds of fired employees, for whom the data indicated that they had possibly received salaries in envelopes, and asked them to assist us, since they no longer had anything to do with this employer. However, a deeply rooted attitude of distrust led to only 3 of them being willing to cooperate with the tax authorities, even though their former employer was no longer a threat.

From audits to communication measures
When it became clear that control measures had almost no influence on the behaviour of risky employers, the NRA Risk Management Board decided to suspend them completely for a certain period, and proposed instead that a communication campaign be conducted to influence attitudes and behaviour. The main psychological focus of this campaign was to illustrate what people who had agreed to receive their salaries in envelopes were losing. The idea was to use an electronic calculator to calculate exactly how big the loss was, and what damage the employee actually suffered in the long run.

“Salaries in Envelopes” Campaign – strategy, target groups, communication channels, and partners
The campaign’s target groups were defined as the economically active employees who received salaries in envelopes, as well as the new entrants to the labour market. Numerous partnerships were concluded with other state bodies, employers’ organisations and trade unions, supporting the initiative. The key eye-catching tool is the loss calculator, developed as part of a specialised website www.zaplatavplik.bg for attracting public attention and provoking interest. The calculator allows people to enter their actual and official salaries and calculates the losses that they would suffer in the form of non-received benefits for sick leave, maternity, unemployment, and pension. If the actual salary is €1,000 and the official one is €500, the total loss for one person would be almost €35,000. In addition, the site has an information section that explains how everyone loses, and it also provides the opportunity to submit a signal or a means for the employee to get a consultation. The campaign used communication channels such as TV spot broadcasting — https://www.youtube.com/watch?v=kQIHw43HSLo and PR activities, NRA’s YouTube channel, the websites of the campaign’s partners, media publications and TV interviews, including a round table discussion with the main opinion leaders.

Effects. Cost-benefit analysis
The direct effect of the campaign, for the period of its duration, is the reduction of the “salaries in envelopes” risk by more than €22 million, and of the share of risky employers by about 5%. The total value of the communication programme is €60,000.

Lessons Learned
Our experience with the “Salaries in Envelopes” campaign taught us some useful lessons that we will use in the future:
- Communication is often more efficient and cheaper than audits. Nevertheless, control measures are almost always necessary because the society expects to see those who do not comply punished.
- People’s attitudes are something that the tax authorities have to take into consideration, because we strive to encourage the compliant behaviour of thousands of people, and not the larger number of checks and audits.
- We need a reliable model for measuring what we do – in Bulgaria we use the risk management model, and assess dozens of risks annually, and all measures for their treatment are described in a programme that we implement together. In this way, we have a quantitative assessment of the results.
- Creativity helps “selling” even unpopular messages – for example, the calculator is something that attracts the attention initially so that we can talk about less attractive topics.
- Changing attitudes takes time and methodical targeted action, but the results are really worth it.