VAT Gap Research Articles

FURTHER STUDIES ON THE PHENOMENON OF TAX OPTIMISATION VERSUS TAX EVASION - THE SCOURGE OF CONTEMPORARY SOCIETY

In this paper we aim to study the phenomen of tax evasion and tax optimization at the European Union level, in particular on value added tax, in order to outline the concept of the VAT revenue shortfall and to identify its determinants. Tax evasion is a complex and persistent problem faced by most countries around the world. This harmful practice affects the budgets of countries, reducing their revenues and jeopardising the sustainability of tax systems. Either tax evasion or tax optimisation both have the same strategic objective, namely to reduce through legal or illegal means the financial resources allocated to the state budget as taxes or duties. In order to ensure that we achieve the above-mentioned goal, we have set ourselves the objective of carrying out a study in EU member countries on the determinants of the VAT gap.

A Multifactor VAT Gap Comparative Analysis in the European Union

A Multifactor VAT Gap Comparative Analysis in the European Union

Czech VAT Gap Progress

Abstract The article aims to estimate the VAT Gap amount development from 2010 to 2016 in the Czech Republic. The methodology of the VAT Gap identification was based on the indirect top-down method for each year of the reporting period, using the authors’ calculation of the weighted average VAT rate in the Czech Republic. The results of the years under review show a VAT gap of more than CZK 100,000 million per year. The breakdown of the VAT Gap into individual parts shows that it is mainly due to the intentional misrepresentation of data by business entities. The VAT Gap associated with this factor ranged from CZK 40,004 to CZK 52,765 million in the monitored years. Only 3.53%–7.03% of the VAT Gap of unlawful tax evasion is subject to prosecution for the tax evasion offense.

Determinants of the VAT Gap in EU Member States from 2000 to 2016

Determinants of the VAT Gap in EU Member States from 2000 to 2016

Analysis of the Decisive Factors of the VAT Gap

This paper aims to identify the possible factors that influence the value added tax gap – the VAT gap. The VAT gap is an estimate of the unpaid VAT in the economy, calculated as the difference between the theoretical obligation for the value added tax that can be collected in respect with all the transactions in the economy and the actual VAT paid to the state budget. A high value of this indicator may highlight issues related to tax evasion and the inefficiency of the tax system. The article summarizes existing studies that quantify the VAT gap and aims to identify the relationship between the VAT gap or the VAT revenues and various economic, fiscal and social factors present in EU member countries. The panel regression and clustered regression models have been used in this paper in order to determine the statistically significant variables that have an impact on the VAT gap.

An Analysis of the Value Added Tax (Vat) Gap in Zambia

The aim of this study was to empirically examine the effect of the Zambian VAT administrationon tax revenue by analyzing the VAT gap in Zambia. The study attempted to assess from empirical evidence if there is room for the revenue authorities to enhance VAT revenue collection without increasing the rate. The data used in this study was time series data sourced from the Zambia Revenue Authority database of 2020. The research used a data collection guide that sought to collect data on VAT and any other relevant information regarding VAT gaps and VAT administration. This study used a population of the totality of the Zambian economy which included all the existent revenue streams of the Zambian government. The study employed the multiple regression model and used descriptive statistics and correlation analysis. Data collected was reviewed for a period of over 10 years (2009 to 2019).The study concludes that deferring VAT and Penalties on VAT for non-compliance had no effect on the VAT collected under the period of review. Indicating that low willingness by taxpayers to pay correct taxes on time. Additionally, the study concludes that the VAT policy gap has no effect on VAT revenue in the period under review. Indicating that ZRA should improve measures of VAT enforcement. Thus, the study recommends that ZRA should make deliberate efforts to improve its enforcement by having a dedicated Enforcement Unit for Domestic taxes just like the one assigned to customs. Further, since the payer of VAT is the final consumer, ZRA should encourage voluntary tax compliance among final consumers by intensifying the demand a receipt campaign as well as increasing the education on the benefits of tax compliance to the nation’s development. Further, ZRA should expedite the process of fiscalization i.e. the mandatory issuance of fiscal receipts by all VAT registered suppliers.

Analysis of the Decisive Factors of the VAT Gap

This paper aims to identify the possible factors that influence the value added tax gap – the VAT gap. The VAT gap is an estimate of the unpaid VAT in the economy, calculated as the difference between the theoretical obligation for the value added tax that can be collected in respect with all the transactions in the economy and the actual VAT paid to the state budget. A high value of this indicator may highlight issues related to tax evasion and the inefficiency of the tax system. The article summarizes existing studies that quantify the VAT gap and aims to identify the relationship between the VAT gap or the VAT revenues and various economic, fiscal and social factors present in EU member countries. The panel regression and clustered regression models have been used in this paper in order to determine the statistically significant variables that have an impact on the VAT gap.

VAT gap determinants in the European Union and Poland

Motivation: VAT revenues constitute a significant part of the budgets of EU countries and Poland. Both the EU and Poland are taking steps to reduce the VAT gap. To define the areas influencing the size of the VAT gap, its determinants should be indicated.
 Aim: The study aims to identify the determinants of the VAT gap in the EU and Poland. By comparing the impact of individual determinants on the VAT Gap in the EU and Poland, it will be possible to identify common factors shaping the VAT gap in the EU and Poland.
 Results: Based on the econometric study, it was indicated that growth, trade, consumption, and corruption are significant determinants of the VAT gap in the EU and Poland. However, it has been shown that the impact of consumption and corruption on the VAT gap in Poland is different from that in the EU.

The Role of The Supreme Audit Institutions in Counteracting VAT Gap in the European States. A Cross-Country Comparative Study

This study follows the research conducted so far on the multi-dimensional role of supreme audit institutions (SAIs) in strengthening social capital and improving the functioning of public organisations. It has been found that international organisations established by SAIs, should include the problem of the VAT gap in their audit strategies. In addition, they should tighten international cooperation, including training cooperation, considering that irregularities in VAT settlements occurring in all Member States of the European Union are favoured by the specific nature of intra-community transactions. Institutional weaknesses in tax collection prove the low potential of the state. Due to the lack of publicly available information, it has not been established whether the SAIs from the studied countries with the largest size of the VAT gap – Malta and Greece – analysed the reasons for its creation. SAIs from other countries – Great Britain, Germany, Romania and Italy analysed the reasons for the ineffective reduction of the VAT gap by national tax systems. However, there is no information about audits involving human resource management in tax offices. Meanwhile, this issue is crucial not only from the point of view of the effectiveness of tax prevention but, more broadly, to strengthen the social capital necessary to create an organisational domestic and international environment based on reliability that will bring tax accountability. The formulated directional proposals for examining the tax system in terms of the effectiveness of reducing the VAT gap, due to their universality, can be applied in various countries.

2-step Gradient Boosting approach to selectivity bias correction in tax audit: an application to the VAT gap in Italy

The revenue loss from tax avoidance can undermine the effectiveness and equity of the government policies. A standard measure of its magnitude is known as the tax gap, that is defined as the difference between the total taxes theoretically collectable and the total taxes actually collected in a given period. Estimation from a micro perspective is usually tackled in the context of bottom-up approaches, where data regularly collected through fiscal audits are analyzed in order to provide inference on the general population. However, the sampling scheme of fiscal audits performed by revenue agencies is not random but characterized by a selection bias toward risky taxpayers. The current standard adopted by the Italian Revenue Agency (IRA) for overcoming this issue in the Tax audit context is the Heckman model, based on linear models for modeling both the selection and the outcome mechanisms. Here we propose the adoption of the CART-based Gradient Boosting in place of standard linear models to account for the complex patterns often arising in the relationships between covariates and outcome. Selection bias is corrected by considering a re-weighting scheme based on propensity scores, attained through the sequential application of a classifier and a regressor. In short we refer to the method as 2-step Gradient Boosting. We argue how this scheme fits the sampling mechanism of the IRA fiscal audits, and it is applied to a sample of VAT declarations from Italian individual firms in the fiscal year 2011. Results show a marked dominance of the proposed method over the currently adopted Heckman model in terms of predictive performances.

The impact of the VAT gap on the degree of taxation of an economy-analisis with panel data

"In this article we use econometric methods to identify and analyze the intensity of potential causality links between the VAT gap and the ability or the performance of a state to collect taxes and, consequently, to finance public projects and programs. This capacity or performance is assessed by the share of tax revenues to GDP, which also reflects the degree of taxation of an economy. On the other hand, the determinants of the VAT gap were investigated. The data set used is of the panel type, consisting of values ​​with an annual frequency, for the period 2014-2019, for 26 Member States of the European Union. The methods used in the analyzis are single and multiple linear regressions on panel data with fixed effects. Based on the results obtained for the mentioned sample, the existence of a statistically significant linear link between the mentioned variables is confirmed, but it was also found that, in general, the performance of tax revenue collection in a certain period depends on the performance of the previous period. Therefore, the influence of other exogenous, economic and non-economic variables is visible, which must be identified and analyzed. However, it was found that the level of government spending, confirming to some extent the Keynesian growth model, significantly influences the level of tax revenue. At the same time, the following variables were found to have an overwhelming influence on the VAT gap: the share of people exposed to the risk of poverty or social exclusion, the level of employees’ compensation, the final household consumption and the level of gross value added created in the economy. All these variables significantly determine the formation of the VAT tax gap, in a proportion of 95%."

VAT Listings within the EU Member States and Their Impact on Tax Evasion

Abstract VAT represents one of the most important taxes in the EU; however, this tax is highly affected by tax evasion. To combat these frauds, almost all the member states have implemented anti-fraud measures. This article focuses on the regular reports required from VAT payers in some EU member states. This tool is called differently in various countries; this article adopts the name VAT listing. The main aim of this article is to find out whether these measures contribute to a better collection of VAT. The level of VAT collection is within the analysis expressed by the VAT gap. In the panel regression model, the effect of the introduction of VAT listings on the size of the VAT gap was determined using control variables potentially affecting the VAT gap. The results were then verified using an alternative difference-in-differences design with multiple time periods. The results showed that VAT listings reduce the value of the VAT gap, as does using of credit cards for payments and low corruption in the country. On the other hand, the implicit rate of consumption taxes, the final consumption, imports from EU countries, and the number of items in the reverse charge increase the VAT gap. (JEL codes: C33, H26)

Parliament

This overview highlights the Parliament’s (i) resolution on the impact of national tax schemes on the EU economy, (ii) recommendation on Mutual Recognition of Tax-Exempt Organizations, and (iii) call for action to reduce the EU VAT gap.

Parliament

This overview highlights the Parliament’s report on how to reduce the EU VAT gap.

VAT gap determinants in the European Union

Background: The VAT gap is a key topic in the context of state budget revenues. The European Union introduced measures to support the member states in reducing the VAT gap. However, if such support is to be effective, it must be applied in the areas that are directly related to the VAT gap.
 Research purpose: The study aims to identify significant determinants of the VAT gap in EU countries. The present study identifies factors that the EU as a whole can deal with to suport member states in reducing the VAT gap.
 Methods: The study concerns the analysis of descriptive statistics of selected variables and the econometric model with the GMM system, based on which it was possible to identify significant determinants of the VAT gap in the group of EU countries.
 Conclusions: The key determinants of the VAT gap in the group of EU countries are economic growth and efficiency of governance. As a consequence, the EU policy aimed at reducing the VAT gap should focus mainly on those aspects that have a significant impact on the states’ revenue and are under the jurisdiction of the EU. The most important aspects that the EU as a whole should focus on are the economic growth and the efficiency of the administration’s activities. Indicating the directions of EU action fills the current research gap in this area.

THE RELATIONSHIP BETWEEN VAT GAP AND ECONOMIC OR INSTITUTIONAL VARIABLES

VAT evasion reduces significantly the budget revenues and is often approximated by way of VAT Gap, which refers to the difference between the total VAT that should have been collected according to the applicable VAT Law (VTTL) and VAT actually collected by public budgets. The phenomenon of VAT Gap, to a greater or lesser extent, is an acute problem in all countries of the European Union (Member States), regardless of their level of economic development. Over the past two decades, the volume of VAT evasion has had an alarmingly upward trend. Therefore, the VAT Gap should be placed in a broader context than the economic one, also taking into account economic structure, institutional variables, legal, ethical and other dimensions that affect the business environment, respectively the society. Moreover, according to the World Economic Outlook „Growth and Institutions” (2003) IMF report, the institutional factor, as a general and defining arrangement for any economic system, it is the primary “responsibility” of gap development. The objective of this study is to analyse the strength and direction of the relationship between the VAT Gap and the following economic structure and institutional variables: Fiscal Freedom (FF), Government Effectiveness (GE), Human Development Index (HDI), Corruption Perceptions Index (CPI) and People at risk of poverty or social exclusion (AROPE). Our study is consolidated on a 2009 – 2018 database, for the EU-26 Member States, including United Kingdom, divided into four groups. Within the study, we developed a Spearman Correlation between VAT Gap and each variable, aiming to point up whether these variables have a strong positive or negative influence on the VAT Gap.

Tax evasion in the EU countries following a predictive analysis and a forecast model for Slovakia

Research background: Tax evasion is an urgent challenge for governments, as reaching sufficient level of tax revenues enable adequate sustainable economic development. The motivation for the research was thus the identification of the situation in the EU countries. 
 Purpose of the article: The main research objective was to identify the extent of tax evasion in the EU countries, with a subsequent specific focus on the econometric predictive models and a forecast of their future development in the case of Slovakia as the poorest performing country of the V4 in this area. 
 Methods: The research was primarily based on testing selected statistical indicators in the field of tax evasions expressed on the basis of the VAT gap. The data for the research was obtained from the EUROSTAT database and the international system VIES for the period between 2000 and 2017. In addition to panel graphs, the research hypotheses were tested primarily using a cluster analysis, t-test, time series analysis, and an analysis of the time series trend with 4 basic models: linear trend, quadratic trend, growth curve model, and S-curve model. On the basis of the Mean Absolute Percentage Error (MAPE), the S-Curve model was selected as the determining model of predicting tax evasion. 
 Findings & value added: Based on the results of the cluster analysis, the EU countries were divided into five reference groups by the VAT gap value, using the VAT gap percentage share on the overall GDP value. The research also provides a unique methodological framework and a unique econometric model for predicting the future VAT gap in Slovakia as the poorest performing country of the V4 in this area, which is applicable to other V4 and EU countries. The research results also enable policy-makers in the EU countries and specifically also in Slovakia and other V4 countries to compare themselves explicitly with the reference countries of the EU in terms of tax evasion and subsequently adopt adequate measures to improve the effectiveness and performance in this field.

COVID-19 and its Impact on VAT Gap in the EU: Lessons from and for Poland

COVID-19 and its Impact on VAT Gap in the EU: Lessons from and for Poland

Fiscal Effect of VAT Control Statement - Case Study of the Czech Republic

This article first aims to identify the final fiscal amount of the VAT control statement in the selected region and then to transform it to determine the theoretical fiscal amount in the entire Czech Republic. The second goal is to identify a possible impact of VAT control statements on tax evasion. For this purpose, the following tools have been used: calls for submission of control statements, reasons to initiate inspection arising from matching the control statements, tax audits, and the process to remove tax doubts. Using the foregoing tools, the theoretical fiscal revenue is quantified and then compared with the VAT gap from 2015 to 2016. The VAT gap is measured by adjusting the gross domestic product; the data from the national accounts database published by the Czech Statistical Office are used as the basic data source. The authors have arrived at the conclusion that once the financial administration implemented the selected tools for total tax collection, then right after implementing the VAT control statements in 2016 the VAT gap slightly decreased in comparison with the previous year (and in proportion to year-on-year comparison of GDP), which resulted in the increase in the overall VAT collection.

VAT Efficiency in Developing Countries of the European Union

Abstract Value added tax (VAT) is an important source of income for European Union countries. The developing countries of the European Union are encouraged to step up their efforts to comply with European legislation for the purpose of sustainable economic development. Knowing that these states are susceptible to corruption, this paper investigates the relationship between the efficiency of VAT collection, the VAT gap and the level of the corruption index in the developing countries of the European Union.