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The annual ‘VAT Gap’ measures the effectiveness of VAT enforcement and compliance measures in the European states. It provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies and financial insolvencies. The VAT Gap is an important financial indicator as it shows the states’ contribution to both the EU and the national budgets. The EU analysis shows a “top-down” methodology using national accounts data to produce estimations of the VAT Gaps. Recent EU’s estimates have also shown an econometric analysis of the VAT Gap determinants and a projection of the potential impact of the coronavirus recession on the VAT Gap’s evolution.
According to a new report released recently by the European Commission EU countries have lost about €140 billion in Value-Added Tax (VAT) revenues in 2018. Though still extremely high, the overall ‘VAT Gap’, which is the difference between expected revenues in a EU state and the revenues actually collected, has revealed a slight improvement during last decade.
The overall EU VAT Gap slightly decreased in 2018 compared to a year before; the downward trend was expected to continue for another year, though the coronavirus pandemic is likely to revert the positive trend: figures for 2020 forecast a reversal of this trend, with a potential loss of €164 billion in 2020 due to the effects of the coronavirus pandemic on the economy.
In nominal terms, the largest gaps were recorded in Italy (€ 35.4 billion), the United Kingdom (€ 23.5 billion), and Germany (€ 22.1 billion).
Vat in the EU: background
Value Added Tax (VAT) is a consumption tax charged on most goods and services produced and consumed in the EU states. The tax is levied on the ‘value added’ to the product/service at each stage of production and distribution. This means that VAT is charged when VAT-registered businesses sell to other businesses (B2B) or to the final consumer (B2C).
The EU’s VAT “golden rule” is that it has to be ‘neutral’: e.g. in the sense that local products and those from other EU states are subject the same VAT. Besides, businesses are being able to reclaim any VAT that they pay on goods or services: thus, ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and they have to show the VAT amounts charged to customers on their invoices.
The VAT system in the EU is governed by a common legal framework, i.e. several VAT Directives and the Commission is responsible for ensuring the correct application of the VAT Directives.
However, each EU state is responsible for the transposition of these provisions into national legislation and their correct application within its territory. Furthermore, VAT is a traditional own resource of the EU and therefore contributes to the EU budget as a source of revenue. It is therefore fundamental to work towards improving VAT collection and reducing the VAT Gap. More on the evolution of VAT Gap in: https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_1580
VAT fraud results from weaknesses in the current VAT system and the way in which tax administrations manage VAT collection. As soon as VAT is a major revenue source for the EU member states, VAT losses, including those due to VAT fraud, have a big impact on any state’s budget.
Commission’s opinion
The VAT Gap analysis for 2018, coupled with the forecasts for 2020 (which will be impacted by the coronavirus pandemic) highlighted again the need for a comprehensive reform of the EU VAT rules and those in the states, to put an end to VAT fraud and showing an increased cooperation among the states to promote VAT collection while protecting legitimate businesses. The Commission’s “Fair and Simple Taxation” package adopted in July 2020, detailed a number of upcoming measures.
Commenting on the recent VAT report, Commissioner for the EU economy, Paolo Gentiloni underlined that the collected data showed that the states’ efforts to shut down opportunities for VAT fraud and evasion have been making gradual progress; though much work is needed. The coronavirus pandemic has drastically altered the EU’s economic performance and is expected to exert a serious blow to VAT revenues.
This is why both the EU and the states need to take adequate measures to step up the efforts to combat VAT fraud while simplifying procedures and improving cross-border cooperation.
Situation in the member states
As in 2017, Romania recorded the highest national VAT Gap with 33.8% of VAT revenues going missing in 2018, followed by Greece (30.1%) and Lithuania (25.9%).
The smallest gaps were in Sweden (0.7%), Croatia (3.5%), and Finland (3.6%); in bold in the table below.
In absolute terms, the highest VAT Gaps were recorded in Italy (€35.4 billion), the United Kingdom (€23.5 billion) and Germany (€22 billion); figures in bold in the table below.
|
Member State |
VAT Gap, % |
VAT Gap (in € mn) |
Member State |
VAT Gap, % |
VAT Gap, € mn |
|
Belgium |
10.4 |
3,617 |
Lithuania |
25.9 |
1,232 |
|
Bulgaria |
10.8 |
614 |
Luxembourg |
5.1 |
199 |
|
Czechia |
12.0 |
2,187 |
Hungary |
8.4 |
1190 |
|
Denmark |
7.2 |
2,248 |
Malta |
15.1 |
164 |
|
Germany |
8.6 |
22,077 |
The Netherlands |
4.2 |
2,278 |
|
Estonia |
5.2 |
127 |
Austria |
9.0 |
2,908 |
|
Ireland |
10.6 |
1,682 |
Poland |
9.9 |
4,451 |
|
Greece |
30.1 |
6570 |
Portugal |
9.6 |
1,889 |
|
Spain |
6.0 |
4,909 |
Romania |
33.8 |
6,595 |
|
France |
7.1 |
12,788 |
Slovenia |
3.8 |
148 |
|
Croatia |
3.5 |
252 |
Slovakia |
20.0 |
1,579 |
|
Italy |
24.5 |
35,439 |
Finland |
3.6 |
807 |
|
Cyprus |
3.8 |
77 |
Sweden |
0.7 |
306 |
|
Latvia |
9.5 |
256 |
United Kingdom |
12.2 |
23,452 |
Individual performances by the EU states still vary significantly: if, for example, generally in 2018 half of EU states recorded a gap above the median of 9.2 percent, though 21 country saw significant decreases (compared to a year before) – most significantly in Hungary (- 5.1%), Latvia (- 4.4%), and Poland (- 4.3%). However, the biggest increase was recorded in Luxembourg (+ 2.5%), followed by marginal increases in Lithuania (+ 0.8%), and Austria (+ 0.5%).
High coronavirus impact is expected
The VAT Gap in 2020 is going to increase: if the EU economy contracts by about 8 percent in 2020 with the increase in the general government deficit, the Gap could increase by over 4 percent compared to previous year up to 13.7 percent and €164 billion in 2020.
The latest forecast points to a rapid decline in GDP growth and a deterioration of general government balances in 2020.
A relatively smaller increase of the nominal VAT Gap is related to the sudden decline in the tax base over the forecasting period.
Fast estimates indicate that the VAT Gap will likely continue its downward trend and fall below €130 billion and 10 percent of the gat in 2019, though the effects of the coronavirus pandemic are expected to cause a sharp reversal in 2020. https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_1580
More information in the following links: – the full report with detailed information per Member State is available here; – Commission Action Plan for fair and simple taxation supporting the recovery; – Commission proposals for far-reaching reforms of the EU VAT system. General source: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1579 – 10.09.20