tax authorities against shadow traders in Latvian car services

Such is life – a used car, which is looked at with a wry smile at the official dealership, is joyfully greeted in the left garages. Demand creates supply, and the average age of a car in Latvia is 15 years!

Billion turnovers

According to data shared at a meeting of the Saeima subcommittee on combating the shadow economy by MP Andris Kulbergs (Joint List), the country’s automotive industry generates 2.33% of gross domestic product, which is comparable, for example, to Latvia’s defense spending. Of this amount, car trade is 1.31 billion euros, maintenance and repairs are 336 million. Over the biennium, these subsections increased by 18 and 10 percent, respectively.

There are 4,697 car service companies in Latvia, of which 66% are owned by legal entities, another 28% by business entities and 6% by individual merchants.

At the same time, there is a low intensity of work – on average, one service accounts for regarding 500 serviced machines per year, that is, a couple per working day. At the same time, the birthplace of cars, Germany, boasts by this indicator more than 1,400 cars per year. Although there are shock workers in Latvia – according to the Automobile Association, individual services make over 2,500 cars a year, that is, ten per working day.

In our country, according to A. Kulbergs, there are more than 9.4 thousand car service workers, with two thirds actually being repairmen. On average, repairing one vehicle takes 10 hours. Your author can only partially agree with this – because the shortest, from personal experience, was the replacement of process fluids and filters last year (within half an hour), and the negative record was set by a four-day stay without a steering wheel – when removing/painting/installing a bumper.

Mr. Kulbergs believes that there are too many car service companies in Latvia and too few workers. Of course, within the framework of a market economy, we cannot prohibit certain types of economic activity, or, on the contrary, send labor to sectors by a strong-willed decision of the party. We have to look for indirect methods, primarily fiscal ones.

Less is more

A car is not only a means of transportation, but also a continuously operating financial mechanism. Even when standing, the insurance clock mechanism is ticking. However, our advantages and disadvantages are connected: the trade in spare parts and accessories for cars is one of the industries where the shadow economy in Latvia feels very at ease.

According to the State Revenue Service, at the beginning of April, 906 taxpayers were registered in the country – legal entities associated with the retail sale of auto parts of all types, and 395 – with wholesale sales. Over the past four years, the number of the former has decreased by 94, and the latter by 112.

However, in value terms, taxes administered by the State Revenue Service are constantly growing – if in 2020 the spare parts industry brought 48.52 million to the budget, then in 2023 it will already be 64.39 million:

* 65% of this amount is value added tax;

* 19.5% – contributions to mandatory state social security;

* 10% – income tax, and 5% – other taxes.

It cannot be said that companies engaged in this type of business were so numerous in terms of personnel: last year, for example, 2,638 people worked in retail, and 2,292 in wholesale. That is, a little more than two people per legal entity. However, the official level of gross wages is quite decent, for wholesalers 1420 euros, for retail sellers – 1045.

Meanwhile, the State Revenue Service considers this particular area of ​​the national economy as very obscure – the amount of undeclared taxes is estimated at 70 million euros, or 29%. In Latvia, this is the 5th item of shadow income following retail and wholesale trade, ground transport, construction and computer programming. In terms of informal earnings, the automotive sector exceeds such significant areas of economic activity as real estate transactions, woodworking and agriculture.

The State Revenue Service has placed 45.5% of legal entities at risk of fulfilling their tax obligations. According to taxpayer ratings, the situation is even more complicated – only 29.7% of registered enterprises are rated as “good fulfillment of obligations.” But 27.2% of firms in the automotive parts and repair sector are suspected of paying “envelope wages.” However, it cannot be said that the state has a repressive attitude towards the industry – only 1.5% of car repair workers, or 71 enterprises, have had their business activities stopped over the past three years, and only two have been excluded from the Commercial Register.

Stop the machine!

But what then to do with the gray sector? A. Kulbergs proposed a whole package of measures. First of all, it is necessary to carry out widespread certification, establishing a uniform standard of services. Each workplace must be accompanied by a patent for the relevant activity. In the field of auto repair, a unified wage policy should be implemented. The State Revenue Service is to begin inspections together with colleagues from Lithuania and Poland, monitoring the accompanying documents for each spare part.

The deputy proposed to start by ensuring that only officially certified car services might repair electric vehicles, as well as restore vehicles in insurance cases.

Meanwhile, the proposed measures rest on what is called administrative capacity in bureaucratic language. You can’t make everything in the Republic of Latvia like in the Federal Republic of Germany at the snap of your fingers. And where can we get qualified experts who might take on the control and certification of services? It is quite possible that their main place of work will be some large company tied to a Western automaker. So we will see a classic, straight from Marx, example of the concentration of capital – combined with rising prices. And goodbye, Uncle Janis with the sledgehammer.