This year’s report of the “Study and Reports on the VAT Gap in the EU-28 Member States” revealed that in 2019 there was a loss of €134 billion in Value-Added Tax (VAT) revenues across EU countries.
Though still extremely high, the ‘VAT Gap’ – the difference between expected revenues and the revenues actually collected – has been improving between 2015 and 2019. The full extent of the COVID-19 pandemic on consumer demand and therefore on VAT revenues in 2020 remains yet unknown, but a reversal of this positive trend may be expected.
In nominal terms, the overall EU VAT Gap decreased by almost €6.6 billion to €134 billion in 2019, a marked improvement on the previous year’s decrease of €4.6 billion. This downward trend was expected to continue, though the coronavirus pandemic is likely to revert the positive trend.
As the following graph illustrates, in 2018 and 2019 VAT Gaps ranged from 1% to 34.9%.
Furthermore, in 2019, Romania recorded the highest national VAT compliance gap with 34.9% of VAT revenues going missing in 2019, followed by Greece (25.8%) and Malta (23.5%). The smallest gaps were observed in Croatia (1.0%), Sweden (1.4%), and Cyprus (2.7%). In absolute terms, the highest VAT compliance gaps were recorded in Italy (€30.1 billion) and Germany (€23.4 billion).
In addition to Croatia and Cyprus, the most significant decreases in the VAT Gap occurred in Greece, Lithuania, Bulgaria and Slovakia (between –3.2 and -2.2 percentage points in these four countries). Sweden, Finland and Estonia were successful from a different perspective: in these countries, fiscal authorities have for years succeeded in limiting the loss in VAT revenues to less than 5% of the VAT due. The biggest increases in the VAT Gap were observed in Malta (+5.4 percentage points), in Slovenia (+3 percentage points) and in Romania (+2.3 percentage points).
The results of the econometric analysis confirmed that the VAT Gap is influenced by a group of factors relating to the current economic conditions, institutional environment, and economic structure as well as to the measures and actions of tax administrations. Out of a broad set of tested variables, GDP growth and general government balance appeared to explain a substantial set of VAT Gap variation. Within the control of tax administrations, the share of IT expenditure and the application of additional information obligations for taxpayers proved to have the highest statistical significance in explaining the size of the VAT Gap.
Although recent years have been showing an improvement on the VAT Gap, this positive trend may yet be reversed by the COVID-19 pandemic effects on the economy.