VAT revenue collection has failed to show significant improvement across EU Member States according to the latest figures released by the European Commission on 4 September.
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What is VAT?
VAT is a consumption tax, charged on most goods and services traded for use or consumption in the EU. It is levied on the “value added” to the product at each stage of production and distribution. The “value added” means the difference between the cost of inputs into the product / service and the price at which it is sold to the consumer. VAT is charged when VAT-registered (taxable) businesses sell to other businesses (B-2-B) or to the final consumer (B-2-C). VAT is intended to be “neutral” in that businesses are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and have to show the VAT charged to customers on the invoices.
The VAT system in the EU is governed by a common legal framework – the VAT Directive. In the EU, there is a minimum standard VAT rate of 15%, above which Member States are free to set their own national VAT rates. VAT is one of the main sources of government revenue for all Member States and one of the three “own resources” of the EU.
What is the VAT Gap?
The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations. The study calculates the VTTL for each country on the basis of national accounts by mapping information on standard, reduced rates and exemptions onto data available on final and intermediate consumption, along with other information provided by Member States. This means that the quality of the VAT Gap estimates depends on the accuracy and completeness of national accounts data.
The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. As the VAT Gap in the study is based on a top-down approach, it does not readily lend itself to being deconstructed according to industrial sectors or other criteria (territorial, professional), and can be best used as a diagnostic tool in the context of its evolution over time.
Why did the Commission sponsor this study?
The study to quantify and analyse the VAT Gap in the EU Member States (hereafter: the 2015 Report) provides estimates for the VAT Gap for 26 EU Member States for 2013 as well as revised estimates for the period 2009-20012. It is a follow-up to the report Study to quantify and analyse the VAT Gap in the EU-27 Member States[1], published in September 2013 (hereafter: 2013 Report), and to the report 2012 Update Report to the Study to Quantify and Analyse the VAT Gap in the EU-27 Member States[2], published in October 2014 (hereafter: 2014 Report). The aim of the study and the reports is to quantify the VAT Gap and to better understand the trends in the EU in the field of VAT collection. This can then help to address (policy) measures to improve VAT compliance and enforcement, and the figures can serve as a yardstick against which progress in this field can be assessed.
What are the main findings of the 2015 Report on the VAT Gap?
During 2013, the overall VAT Total Tax Liability (VTTL) for the EU-26 Member States grew by about 1.2 percent, while collected VAT revenues rose by 1.1 percent. As a result, the overall VAT Gap in the EU-26 saw an increase in absolute values of about Euro 2.8 billion, to reach Euro 168 billion. As a percentage, the overall VAT Gap stayed constant at 15.2 percent. The median VAT Gap rose by 1.6 percentage point and was 13.9 percent.
In 2013, Member States estimated VAT Gaps ranged from the low of 4 percent in Finland, the Netherlands and Sweden, to the high of 41 percent in Romania. While 15 Member States including Latvia, Malta and Slovakia saw an improvement in their figures, 11 Member States such as Estonia and Poland saw deterioration.
Study to quantify and analyse the VAT Gap in the EU Member States – full text
