New EU study confirms billions lost in VAT Gap
An estimated €193 billion in VAT revenues (1.5% of GDP) was lost due to non-compliance or non-collection in 2011, according to a new study on the VAT Gap in Member States.
The study was funded by Commission as part of its work to reform the VAT system in Europe, as well as its wider campaign to clamp down on tax evasion.
The study sets out detailed data on the gap between the amount of VAT due and the amount actually collected in 26 Member States between2000-2011. The main factors contributing to the VAT Gap are also presented, along with an overview of the effect of the economic crisis on VAT revenues
Algirdas Šemeta, Commissioner for Taxation, said:
"The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances. However, there is also a positive message to be drawn from today's findings. Our ambitious reform of the VAT system, the EU measures to combat tax evasion and our recommendations for national tax reforms, are all targeted in the right direction. We know the problem; we have identified solutions to it, and now it's time for Member States to act. Today's figures will serve as a baseline to assess their progress in improving VAT compliance in the years ahead."
The VAT Gap is the difference between the expected VAT revenue and VAT actually collected by national authorities. While non-compliance is certainly an important contributor to this revenue shortfall, the VAT Gap is not only due to fraud. Unpaid VAT also results from bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, amongst other things.
Therefore, effectively tackling the VAT Gap requires a multi-pronged approach.
First, a tougher stance against evasion, and stronger enforcement at national level, are essential. The VAT reform launched in December 2011 has already delivered important tools to ensure better protection against VAT fraud (see IP/11/1508).
For example, the Quick Reaction Mechanism, adopted in June 2013, will allow Member States to react much more swiftly and effectively to sudden, large-scale cases of VAT fraud (see IP/12/868).
Secondly, the simpler the system, the easier it is for taxpayers to comply with the rules. Therefore, the Commission has focussed intently on making the VAT system easier for businesses across Europe.
For example, new measures to facilitate electronic invoicing and special provisions for small businesses came into force at the start of the year (see IP/12/377), and a standard VAT declaration form for the entire EU will be proposed in the coming weeks.
From 1 January 2015, a One Stop Shop will enter into force for e-services and telecoms businesses, which will promote more compliance by greatly simplifying VAT procedures for these businesses and enabling them to file a single VAT return for their activities across the EU (see IP/12/17).
Finally, Member States need to reform their national tax systems in a way that facilitates compliance, deters evasion and avoidance, and improves the efficiency of tax collection. The Commission has given clear guidance in this respect through the country specific recommendations (see SPEECH/13/480).
Today's report also suggests that complicated tax systems with multiple rates are two main contributors to non-compliance. Therefore, the Commission's repeated call to Member States to broaden national tax bases and to limit tax exemptions and reductions, should be given particular attention. Not only would this help simplify tax systems, but it may enable Member States to avoid hikes in the standard VAT rates.
The last study on the VAT Gap in the EU was published in 2009, with figures for 2000-06 (see IP/09/1655)
For more info, see MEMO/13/800
The full report
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.