New European Commission Report: VAT Gap

Accounting News

In 2017, Value-Added Tax (VAT) accounted for 62.3 percent of consumption tax revenues in the OECD on average, making it an important source of government revenue.

The European Commission (EC) recently published the latest version of their annual report on the “VAT Gap” in 2018 for the 28 Member States of the European Union at that time.

The VAT Gap refers to the difference between the VAT Total Tax Liability (VTTL) and the VAT revenue that is actually collected. The gap is a measure that reflects VAT avoidance, gaps in enforcement, and unpaid VAT due to bankruptcies.

The report provides VAT Gap estimates for 2018, simplified estimates for 2019, and revised estimates for 2014-2017. It also forecasts the VAT Gap for 2020 and 2021.

In order to estimate the 2018 VAT Gap, the report breaks down the change in nominal VAT revenues into three categories: the change in VTTL (tax base), the change in the VAT rate applied to the base, and the change in compliance with the tax. As can be seen in the table below, VAT revenues grew in 2018 from 2017. This change should be primarily attributed to an increase in the tax base, to which the EC attributes 78 percent of growth.

Increased compliance with the VAT contributed to approximately 10 percent of revenue growth, which contributes to a 0.4 percent increase in overall VAT revenue in aggregate.

Change in VAT Revenue Components (2018 over 2017)
Member State Change in Revenue Change in VTTL Change in Base Change in Effective Rate Change in Compliance

Austria

3.6% 4.1% 3.2% 0.9% -0.5%

Belgium

4.3% 3.1% 3.6% -0.5% 1.2%

Bulgaria

9.3% 7.5% 8.0% -0.4% 1.7%

Croatia

6.8% 4.5% 4.3% 0.2% 2.1%

Cyprus

10.5% 9.1% 8.0% 1.0% 1.3%

Czechia

6.5% 6.6% 7.8% -1.1% -0.1%

Denmark

4.3% 3.1% 3.2% 0.0% 1.2%

Estonia

8.5% 7.5% 8.8% -1.2% 0.9%

Finland

4.7% 3.1% 3.8% -0.7% 1.6%

France

3.5% 3.8% 2.2% 1.6% -0.3%

Germany

3.8% 3.6% 3.3% 0.2% 0.2%

Greece

4.4% -0.2% -0.6% 0.5% 4.6%

Hungary

13.9% 7.5% 9.4% -1.8% 5.9%

Ireland

8.5% 8.2% 7.4% 0.8% 0.3%

Italy

1.6% 1.3% 2.0% -0.7% 0.3%

Latvia

13.2% 7.7% 8.4% -0.7% 5.1%

Lithuania

6.4% 7.5% 7.5% 0.0% -1.0%

Luxembourg

8.6% 11.4% 5.9% 5.2% -2.5%

Malta

13.5% 10.1% 9.8% 0.3% 3.1%

Netherlands

5.6% 4.9% 5.2% -0.3% 0.7%

Poland

11.4% 6.0% 6.4% -0.4% 5.1%

Portugal

6.3% 4.7% 4.0% 0.6% 1.5%

Romania

12.7% 12.0% 14.3% -2.0% 0.7%

Slovakia

6.8% 7.3% 7.0% 0.3% -0.5%

Slovenia

8.1% 7.5% 6.1% 1.3% 0.6%

Spain

4.9% 4.4% 3.8% 0.5% 0.4%

Sweden

4.8% 3.5% 4.2% -0.6% 1.3%

United Kingdom

4.6% 5.0% 4.0% 1.0% -0.3%

EU-28 (total)

4.2% 3.6% 3.3% 0.4% 0.5%

Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report,” Sep. 2020, https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2020_en.pdf.

The report estimates that in 2018, VTTL was €1,272 billion (US $1,424 billion) while VAT revenues were €1,132 billion ($1,268 billion), amounting to a €140 billion ($157 billion) loss of VAT revenues.

In 2017, the median VAT Gap in EU countries was 10.9 percent, which decreased to 9.2 percent in 2018.

Only the Czech Republic, France, the United Kingdom, Slovakia, Austria, Lithuania, and Luxembourg experienced growth in the VAT Gap between 2017-2018.

The EC finds downward trends in both the percentage of VTTL left unpaid as well as in the nominal VAT Gap. Hence, the VAT Gap has consistently improved overall.

VAT Gap by Year in the EU 2014-2019
Year % of VTTL EUR billion USD billion
2014 14.3 162 181.411
2015 13 154 172.4524
2016 12.1 143 160.1344
2017 11.5 141 157.8947
2018 11 140 156.7749
2019 (simplified estimate) 9.6 125 139.9776

Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report.”

The EU Member States with the greatest percentage of VAT left unpaid are Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). The smallest VAT Gaps occurred in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent).

VAT Gap by Member State in 2018
Member State VAT Gap % VAT Gap (in €mn) Member State VAT  Gap % VAT Gap (in €mn)

Belgium

10.4% 3,617

Lithuania

25.9% 1,232

Bulgaria

10.8% 614

Luxembourg

5.1% 199

Czechia

12.0% 2,187

Hungary

8.4% 1190

Denmark

7.2% 2,248

Malta

15.1% 164

Germany

8.6% 22,077

The Netherlands

4.2% 2,278

Estonia

5.2% 127

Austria

9.0% 2,908

Ireland

10.6% 1,682

Poland

9.9% 4,451

Greece

30.1% 6570

Portugal

9.6% 1,889

Spain

6.0% 4,909

Romania

33.8% 6,595

France

7.1% 12,788

Slovenia

3.8% 148

Croatia

3.5% 252

Slovakia

20.0% 1,579

Italy

24.5% 35,439

Finland

3.6% 807

Cyprus

3.8% 77

Sweden

0.7% 306

Latvia

9.5% 256

United Kingdom

12.2% 23,452

Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report.”

The report also forecasts that VAT non-compliance will rise as a result of the COVID-19 pandemic. This will coincide with the current contraction in consumption, which is depressing VAT revenues. The report estimates an economic contraction of 7.4 percent of GDP in 2020, followed by GDP growth of 6.1 percent in 2021.

The recession is expected to increase the VAT Gap by 4.1 percent, from 9.6 percent in 2019 to 13.7 percent. The EC estimates an incomplete economic recovery in 2021, meaning that the VAT Gap is unlikely to return to 2019 levels.

Just as COVID-19 is putting pressure on other sources of revenue, the loss of VAT revenues resulting from the crisis will force governments to evaluate their VAT systems.

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