The VAT Gap Report 2020 | Estimated €164bn to be lost in VAT due to COVID-19
European Union countries lost an estimated €140 billion in Value-Added Tax (VAT) revenues in 2018 according to a new report released by the European Commission on 10th September 2020. It is also estimated, that due to the impact of Covid-19 on revenue in the EU, this will increase to €164 billion of VAT lost.
What is the VAT Gap?
The VAT Gap is the difference between the expected revenue collected by a tax authority and the actual amount collected. The annual VAT Gap report measures the effectiveness of VAT enforcement and compliance measures in each EU Member State. It provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. (‘VAT Total Tax Liability’ or VTTL)
The VAT Gap measures the effectiveness of VAT enforcement and compliance measures in each Member State, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations.
A relatively positive trend in 2018
The overall VAT Gap in EU Member States fell from €140.9 billion in 2017 to €140.0 billion in 2018. Due to the higher increase in revenues, in relative terms, the EU-wide gap dropped to 11.0%, down from 11.5% in 2017. In 2018, the overall VTTL for the EU Member States increased by 3.6% to €1.272 billion, whereas VAT revenue increased by 4.2% to €1,132 billion.
What is the expected effect of the Covid-19 pandemic on the VAT Gap?
This year’s VAT Gap report forecasts a pronounced increase in VAT revenue losses in the EU to €164 billion in 2020 due to the effect of the coronavirus on the European and global economy. The methodology is based on the econometric model and on the historical observation of the VAT Gap evolution for each Member State from 2000 through 2017.
Disparities between the Member States remain
In 2018, the estimated VAT Gaps among the Member States ranged from 0.7% in Sweden, to 33.8% in Romania.
Variations in the VAT Gap reflect the differences in the Member States in terms of the scale of tax compliance, fraud, avoidance, bankruptcies, insolvencies and the performance of the tax administration, among others. The estimates also reflect structural differences in national economies and other variables. Indirect circumstances such as the organisation of national statistics could also have an impact on the size of the VAT Gap.
What can be done at EU level to improve the VAT Gap?
There are five major causes of the VAT Gap. VAT fraud results from weaknesses in the current VAT system and the way in which tax administrations manage VAT collection. As VAT is a major revenue source for the Member States, VAT losses, including those due to VAT fraud, have a big impact on Member State budgets.
“The Coronavirus pandemic is having a huge impact on the expected VAT revenues in Europe,” reports Lisa Dowling, Global VAT Director at Taxback International. “The EU should continue to push hard with its fight against VAT fraud, and with its plans for simplification of VAT compliance obligations. This will help decrease the VAT gap and offset some of the expected losses in VAT revenue due to the economic downturn. “
The EU has already agreed and begun to implement ambitious rules to increase cooperation and information sharing among the Member States and with law enforcement agencies, as well as to tackle specific issues such as VAT fraud in the second-hand car market. The Commission’s recent Fair and Simple Taxation package (July 2020) also details a number of upcoming measures to make VAT obligations and information sharing much smoother for businesses and administrations, thereby helping to boost VAT compliance and revenues alike.
Contact the Taxback International today
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