The European Commission has published a new report on the VAT gap in the EU. This latest report looks at numbers for the year 2016.
The “VAT gap” can be reasonably summarised as the overall difference between the expected VAT revenue and the amount actually collected. The VAT gap is sometimes used as an indicator of the efficiency of a country’s VAT policy but also of each national tax office’s capacity to manage taxpayers and collect revenue.
For 2016 the European Commission have calculated there was a VAT gap of 12.3% percent. This would equate to around EUR 147.1 billion in revenue that could have been collected by tax authorities in the European Union but was not.
Whilst the gap is still high it has actually decreased from 13.2% in 2015 and currently is at its lowest level of the past five years. However, when looking at the numbers in detail it can be seen that six countries actually saw an increase in their VAT gap: Romania, Finland, the UK, Ireland, Estonia and France. The increases though were marginal and the VAT gaps in five of the six countries listed are either below or close to the EU average.
Romania stands out in this current report for registering both an increase in its VAT gap of 2% and also holding the title of the country with the biggest VAT gap as a percentage, with a staggering 36%. In pure cash terms however, the country with the worst record is Italy, with the European Commission estimating a total loss in VAT revenue of EUR 35.9 billion.
If there was an award for the lowest VAT gap in Europe it would go to Luxembourg, with just 1% of estimated revenue lost. It is also worth pointing out that Spain only has a VAT gap of 3% (and this was before the introduction of SII real time reporting).
There are also two interesting observations on the fiscal policy front:
- Romania suffered an increase in its VAT gap of 2% in the same year when its VAT rate went down from 24% to 20%;
- Whilst on the other hand Scandinavian countries with higher standard VAT rates and a limited number of reduced rates and exemptions (such as Denmark) have a very low VAT gap.
This seems to indicate that the VAT rates applied in a country won’t have a majority impact in making a VAT system more efficient. But rather, to manage VAT gaps an emphasis should be put on the measures taken by the tax authorities to enforce the rules and/or encourage compliance.
For example, the introduction of SAF-T reporting in Poland (which requires details on all transactions to be reported by taxpayers) seems to have been the main driver for a reduction of the VAT gap by 3%, even though it only applied during the second half of 2016.
Next year’s report should be interesting as 2017 marked the introduction of the SII reporting system in Spain and several measures aimed at tackling VAT evasion in Italy. If these measures have proved to be effective then it might give a lead to other countries and help direct how VAT compliance obligations evolve in the future.
Full report on the VAT gap here.