ANALYSIS
Smart Policies and
Enforcement Reduced the
Shadow Economy in Macedonia
Author: Borce Smilevski, President of the Assembly of CEA and
Tax Manager, Deloitte Office Skopje
The Center for Economic Analyses’ study on Macedonia’ shadow
economy1 shows a declining trend during the 2000 – 2010 period,
with a breakout starting in 2006-07. This trend is explained by the
2006-07 introduction of the flat tax that replaced progressive tax
rates of personal income tax with a single rate of 10%, aligned with
the corporate income tax rate.
While flat taxes are often criticized for being unfair, the introduction of the flat tax in Macedonia was an important step forward, since
it boosted the economy with meaningful tax relief and reduced the
shadow economy. The general perception among foreign experts
and local officials was that the tax policy change was only partly to be
credited for these positive effects, however it clearly was the most
important factor.
Along with reducing statutory tax rates, tax incentives that had
eroded the tax base and provided more room for the shadow economy were also abolished. This closed the door on many non-compliant taxpayers in the shadow economy and rapidly increased the tax
base, which more than compensated for the revenues “lost” with the
tax reduction. This was a textbook move to “reduce tax rates and
broaden the tax base” that successfully reduced the shadow economy.
In addition to the flat tax, another very important measure helped
reduce the shadow economy in the country: the adoption of the Law
on Registering Cash Payment. Given that one of the main anchors of
shadow economies is the so-called cash economy, this law hindered
companies’ ability to use the cash economy to avoid payment of taxes
such as VAT and CIT. The Law was introduced 2001, when no other
country in the region was even considering a similar move; for example, Croatia adopted a similar law in late 2012. Naturally, consistent
implementation of the Law took several years. Various groups of citizens resisted the Law (e.g., lawyers), however its stricter enforcement
coincided with a period in which the shadow economy started to
decline. It should be recognized that the Public Revenue Office carried
out internal reforms that increased its agility in enforcing the Law on
Registering Cash Payment. This was a strong hit to the shadow economy and remains this way to this day.
1 The full study is available at: http://cea.org.mk/tsea-studija-za-sivata-ekonomija-vomakedonija/
Continued on page 32
Winter 2016
Issue 48 9