Shadow economy analysis

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Shadow economy is a complex phenomenon comprising of wide range of activities, such as illegal, hidden, underground and informal production/sales/trade. In all cases the shadow economy can be approximated by unreported transactions made by both unregistered and registered entities. Shadow economy results in distortions in market competition, where companies not registering or underreporting their revenues gain a competitive advantage over entities that comply with a law. Since activities in the shadow economy are not taxed, they reduce government revenues and often account for a significant share of the tax gap. Another important source of the tax gap may be tax frauds (in particular, VAT frauds). In this case, however, the fraudulent mechanisms use the registered (sometimes artificial) transactions, backed by invoices, while in the shadow economy transactions remain unreported.
 

The shadow economy/tax frauds, by definition, are not captured by official statistics. Hence, their analysis requires adequate knowledge of economic theory and usage of advanced statistical/econometric methods and techniques. EY EAT has vast experience in this area.