European Union countries lost an estimated €140 billion in Value-Added Tax (VAT) revenues in 2018. Though still extremely high, the overall ‘VAT Gap’ – or the difference between expected revenues in EU Member States and the revenues actually collected – has improved marginally in recent years. However, 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.
What is the VAT Gap?
Member States in the European Union are losing billions of euros in VAT revenues because of tax fraud and inadequate tax collection systems. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.
What are the main findings of the 2020 Report on the VAT Gap?
In nominal terms, the overall EU VAT Gap slightly decreased by almost €1 billion to €140.04 billion in 2018, slowing down from a decrease of €2.9 billion in 2017. This downward trend was expected to continue for another year, though the coronavirus pandemic is likely to revert the positive trend.
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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 absolute terms, the highest VAT Gaps were recorded in Italy (€35.4 billion), the United Kingdom (€23.5 billion) and Germany (€22 billion).
Individual performances by Member States still vary significantly. Overall, in 2018 half of EU-28 Member States recorded a gap above the median of 9.2%, though 21 countries did see decreases compared to 2017, most significantly in Hungary (-5.1%), Latvia (-4.4%), and Poland (-4.3%). The biggest increase was seen in Luxembourg (+2.5%), followed by marginal increases in Lithuania (+0.8%), and Austria (+0.5%).
What causes such differences in the VAT Gap between the Member States?
The variations of VAT Gap estimations between the Member States reflect the existing differences in Member States in terms of tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. It offers an indication about the performance of national tax administrations, but should not be looked at in an isolated way.
Other circumstances could have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.