Study and Reports on the VAT Gap in the EU-28 Member States: 2016 Final Report

Abstract

This analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, and 2015. In this report, we present estimates of the VAT Gap and the Policy Gap for the year 2014, as well as revised estimates for the years 2010-2013 due the transmission of Eurostat national accounts from the ESA95 to the ESA10. This update covers Croatia, which was not included in the previous updates. While it was hoped that the update would also cover Cyprus, it has not been possible due to incomplete national accounts data.The VAT Gap is a measure of VAT compliance and enforcement that provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as miscalculations. It is defined as the difference between the amount of VAT collected and the VAT Total Tax Liability (VTTL), which is expressed in the report in both absolute and relative terms. The VTTL is the theoretical tax liability according to tax law, and is estimated using a “top-down” approach. As the capacity and willingness to pay taxes is affected by economic cycles, the reviving 2014 economic situation in the European Union (EU) has, therefore, provided good conditions for narrowing the VAT Gap in EU Member States. The year 2014 saw numerous changes in tax enforcement and monitoring, such as anti-smuggling measures, electronic reporting functionalities, limits on cash transactions and the extension of lists of goods applicable to the reverse VAT charge mechanism. On the other hand, only three EU Member States implemented significant changes in their VAT regimes. Positive economic tailwinds, stable VAT regimes, and measures introduced against tax non-compliance led to a decrease in the relative size of the VAT Gap. In nominal terms, in 2014, the VAT Gap in the EU-27 Member States amounted to EUR 159.5 billion. The VTTL accounted for EUR 1,136.3 billion, whereas the revenue was EUR 976.9 billion. Expressed as a percent of VTTL, the VAT Gap reached 14.06 percent. As a result, the overall VAT Gap as a percent of the VTTL marked its first decrease since 2011. The EUR 2.5 billion decline of the VAT Gap in 2014 compared to 2013 was equivalent to the decrease of the ratio of the Gap and the VTTL by approximately 0.69 percentage point (in the EU-26).The smallest Gaps were observed in Sweden (1.24 percent), Luxembourg (3.80 percent), and Finland (6.92 percent). The largest Gaps were registered in Romania (37.89 percent), Lithuania (36.84 percent), and Malta (35.32 percent). Overall, half of the EU-27 Member States recorded a Gap below 10.4 percent.