The submerged economy

The submerged economy

Over one million people in Spain work without a contract and pay no tax or Social Security. This type of fraud means that 250 billion euros a year escapes the taxman. “If I declared it, I wouldn't have enough to live on,” is just one of the reasons given


Tuesday, 22 May 2018, 14:49


Spain is starting to recover after a decade of economic asphyxiation. The recovery can be seen from official statistics, but is not so noticeable in the street. The labour market continues to expel many people and ill-treat others with insecure jobs and low wages. With an unemployment rate of around 16 per cent, twice the European average, how are long-term unemployed people who do not receive benefits, or those with contracts for very few hours a day, surviving? Part of the answer lies with the so-called submerged or 'black economy'.


  • euros is the minimum fine for business owners who employ a worker without a contract adn it can be as high as 10,000 euros. If a worker is employed illegally and is also claiming unemployment benefit the fine can be between 10,000 and 187,000 euros.

  • is the percentage the submerged economy represents of Spanish GDP. It means 250 billion euros a year escape tax and employment controls, according to the Tax Inspectors Union.

Manuel (not his real name), is an accountant. He is currently very busy, doing seven mini-jobs. In January, at the age of 52, he registered as self-employed, taking advantage of a special rate of 50 euros a month for Social Security contributions, but he doesn't declare all his income for tax. If I did, it wouldn't be worth me working so hard, he says. He does the accounts for five companies. I bill three of them properly. The fourth one pays me without an invoice, and the fifth one is half and half, he explains.

He also works as a salesman for a law firm, earning 50 per cent commission for every client he brings in with toxic bank products, and with a construction company, for which he is paid three per cent for every new project. Hacienda, the tax authority, doesn't see a single euro of this money.

Manuel earns twice as much as the 1,000 euros a month the authorities think he receives. I'm not paying as much Social Security as I should, but I'm not that worried about my retirement. I know when it happens I'll manage somehow, he says. He is paid cash in hand and takes measures to ensure that there is no sign of the irregularity on either side.

More than a million people in Spain work in the black economy. Manuel has been one of them for eight years, since the construction company for which he was head of administration went into liquidation and closed down. He doesn't hide the fact that he was earning and claiming unemployment benefit at the same time for a while, although it is a very serious offence which could have left him with no benefits whatsoever. But this isn't all.

During the ten years he worked for the construction firm, at the height of the property boom and with 90 workers under him, there were also irregularities. The pay slips only showed the amount we were supposed to earn, according to the employment terms and conditions. Expenses and overtime were paid in cash separately, in an envelope, he says. If a company declares everything its employees earn, it can forget about being competitive, and that isn't just in the construction industry; everyone does it.

Undeclared earnings is just one part of the submerged economy, which the European Commission defines as any remunerated activity which, being legal in nature, is not declared to the public authorities and remains outside their control and taxation.

Social Security fraud

When a company doesn't register its workers with Social Security, or does so but fails to pay the right amount, it is committing fraud. This is not only illegal, but encourages unfair competition, means the staff will not receive as much retirement pension as they should, and, above all, affects the income of the State.

The submerged economy in this country represents 24.6 per cent of GDP, and means that 250 billion euros escape fiscal and employment controls. According to our estimations, the money the State is not receiving in tax and Social Security contributions is between 60 billion and 70 billion euros a year, says José María Mollinedo, the general secretary of the Ministry of Finance Technicians Union (Gestha).

Tax havens and dividends

There are several reasons people work in the black: to make sure they have a bit of extra money to make ends meet; to carry on receiving unemployment benefit, or to receive a higher salary because the firm won't have to retain a percentage for tax purposes, as they do for a worker with a contract and registered with Social Security.

For Mollinedo, those involved in this type of fraud always have an excuse to justify it. It makes no difference whether times are good or bad. When there is an economic crisis they try not to pay tax, because if they do they won't have enough money to get them through the month. But in a period of growth, they say, 'I'm not going to work 12 hours a day, six days a week, just so that Hacienda can take half of what I earn.' That is when they try to hide part of what they earn, and commit fraud. If they are big companies, they put their money in tax havens; if they are medium-sized they give dividends 'in the black' to their shareholders, and if they are small the partners spend it, he explains.

A report drawn up by these tax experts four years ago contained a warning about this situation. In Spain there is a serious morality problem with regard to paying tax. It makes it even more complicated for us to reduce our level of tax fraud to that of other European countries, where the culture of fraud is not as deep-rooted, it said. Mollinedo is in no doubt: If we could reduce it by ten points we could recover 38 billion euros, and that would bring us closer to the average of other EU countries, he says.

To do that, it would be necessary to employ more tax and work inspectors (there are currently 1,797 in total) and redirect the checks towards the biggest sources of tax fraud. In his opinion, that is the only way to discover more cases of submerged employment.

In 2015, which was a record year for the tax authorities, they still only managed to uncover 19.1 per cent (15.6 billion euros) of estimated tax evasion. That means the remaining 80.9 per cent went undiscovered in a year that was historic in terms of the fight against tax fraud, says Mollinedo.

Examples of the social permissiveness which exists in Spain about tax fraud are to be found every day. For example, when self-employed workers go to someone's house to do a job and ask Do you want an invoice, or not? It also occurs on the internet, where you only have to type work in the black into a search engine to find dozens of advertisements from people offering to do so in different trades and for different reasons.

No documents

Some, like Luis, have had no alternative. He came to Spain four months ago from Venezuela. He has applied for political asylum, but for the moment he is not here legally. I have no residence documents and I have to work without a contract, but what I have found so far is abusive: they were paying me between 15 and 20 euros a day in the construction industry, working from seven in the morning till ten at night. I'm not in a situation to apply for anything, and I don't want to be a burden for Spain, but these conditions are unacceptable, he says.

Ángel's case is very different. The crisis put an end to the family business in which he had worked for 15 years as a printer. He did temporary jobs for a while, but then they were hard to find or they paid very badly. He offered to work in the black and now, aged 45, he takes home everything he earns as a forklift truck driver for a company in Murcia.

They pay me 13 euros an hour and I'm doing five hours a day until August. It's not ideal, because I'm worred I'm not contributing towards my pension, but there is no alternative. I have a mortgage to pay and a family to feed. They have to be my priority, he says.

However, employing someone without registering them with Social Security can result in major problems for a business owner. They should think twice, says Javier Martín-Gavero, a specialist in Labour Law at the Gómez-Villares & Atencia legal firm.

It is normally considered a serious offence, and can result in a fine of between 3,000 and 10,000 euros, but it can be considered very serious if the person who is working without a contract is also claiming unemployment benefit. In that case, the fine can be between 10,000 and 187,000 euros. The worker could also be obliged to pay back the benefits he or she has received while working.

In this situation, if the company decides to dismiss the worker, they can claim compensation and cause trouble for the business even though they were employed illegally.

Sometimes, companies decide it is just a question of costs and it's worth the risk of being found out, but the problem is that they all think 'it can't happen to me' and that's a mistake, says Javier Martín-Gavero.

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