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E-payments can tackle shadow economy

The shadow economy cost the EU €160 billion in 2014 but the onward march towards electronic payments is one of the main ways countries are tackling the problem.

Shadow economies (or black markets) exist in all countries and walks of life, where people trade goods or services in exchange for cash payments, not paying the taxes due and not necessarily adhering to relevant regulations. But not all businesses operating in the shadow economy are criminal activities; many produce goods or services frequently used by the general public, including illegally sold street food or unlicensed building work.

It's a big problem in some countries in particular – the graph below shows that almost 10 per cent of the UK economy is done through the shadow economy, while the black market in Greece, Italy and Spain is much bigger as a percentage of the country's overall GDP. The black market in some South American countries is as high as 60 per cent of the country's GDP and as high as 50 per cent in some Asian countries, according to Professor Cristina Terra, professor of economics at Essec Business School in France, quoted in the Wall Street Journal

The cost of shadow economies

There are several problems with unregulated, untaxed and unmonitored payments. One is that governments have difficulties in raising sufficient tax revenues and also businesses in the shadow economy may have difficulty in growing.

In fact, the shadow economy can cost governments billions in tax revenues, with a significant impact on public spending in those countries. According to the latest EU Commission VAT Gap Study, around €160 billion was lost in the EU in 2014, showing the extent of the problem. The EU is taking steps to tackle the undeclared profits and yesterday it adopted EU Country Specific recommendations, which stress the importance of better fiscal management and the need to counter the shadow economy due to its burden on tax and public finances. According to an article in Euractiv, however, there is still not enough public awareness on how to combat the shadow economy. A study by Mastercard/IPSOS in Central and Eastern Europe found that 81 per cent of people want their government to tackle the shadow economy but one of the biggest contributing factors towards it is passive acceptance by consumers of businesses who pay in cash and/or don't provide receipts.

Writing in Euractiv, Mastercard's George Simon states: “Cash is one of the main culprits in the shadow economy as it reduces registration of transactions thus enabling tax avoidance. Electronic payments can counter this by guaranteeing that the transaction is registered but consumers are often not aware that cashless payments can decrease the shadow economy.”

This item appears in the following sections:
Payments - Collecting at POS
Card Payments at POS
Collecting Payments on the Internet
Collecting Payments via Mobile

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