From envelope wages to fictitious deals: How Latvia evades taxes

Fictitious transactions worth hundreds of thousands of euros, envelope wages and VAT fraud schemes worth millions remain part of Latvia’s shadow economy. Andrejs Grišins, head of the Tax and Customs Police, says organized crime is often involved as well, offering businesses ways to launder money.

Latvia’s shadow economy accounts for more than 20% of economic activity, with unpaid taxes making up a substantial share. The most common problem involves personal income tax. Business-related taxes follow, while VAT evasion ranks as the third most widespread form of non-compliance.

One familiar scheme involves hiring people without officially registering them as employees. In other cases, workers are formally employed but receive only part of their salaries through declared payrolls. The rest arrives in “envelopes,” allowing employers to avoid paying the full amount of tax.

Another scheme places a company in another European Union country while formally employing Latvian workers through that foreign entity. The foreign company then supplies the workers to Latvian businesses. Grišins said authorities can prove such arrangements and work closely with counterparts in other countries.

Cash is often needed to pay envelope wages, creating a connection with money laundering. The article presents the issue through questions about where the risks are greatest, how cash reaches employees, why cash-payment queues can be longer and how labor-leasing schemes operate. It also recalls the controversy nearly 20 years ago over former Latvian President Valdis Zatlers’ admission that he had accepted undeclared cash from patients as a “thank-you” while running a hospital. The episode initially appeared to signal a tougher fight against undeclared income, but the problem persisted.

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