EU Study Demonstrates Urgent Need For VAT Rethink
The European Commission has published a new report on the VAT Gap across 26 member states in 2011, revealing that 18 percent of member states' theoretical value-added tax-take goes uncollected owing to fraud and evasion, legal tax avoidance, bankruptcies, financial insolvencies, miscalculations and the poor performance of tax administrations.
The study, funded by the Commission, has been released to back up its efforts to win support for a substantial reform of the VAT system in Europe, as well as its wider campaign to clamp down on tax evasion.
The VAT Gap is defined as the difference between the amount of VAT that could theoretically be collected, and the actual VAT collected by member states. Prior to this study, the most recent estimates for the VAT Gap dated back to 2006. The study newly includes statistics from Bulgaria and Romania, but not Croatia, which wasn't a member state when the statistics were collated. Figures from Cyprus are not included in the study either, due to ongoing data-collection reforms.
The research shows that the VAT Gap across 26 member states in 2011 amounted to EUR193bn (USD261bn), or 1.5 percent of these states' combined gross domestic product (GDP).
Italy (EUR36bn), France (EUR32bn), Germany (EUR26.9bn) and the UK (EUR19bn) contributed over half of the total VAT Gap in quantitative terms, owing to the size of their economies. Relative to the size of their economies, Romania (EUR10bn), Greece (EUR9.7bn), Lithuania (EUR4.4bn) and Latvia (EUR0.9bn) were the countries with the largest VAT Gap in 2011.
The study shows a marked upward trend in the VAT Gap in many member states since 2008 as a result of the economic crisis. This was especially the case in Spain, Greece, Latvia, Ireland, Portugal and Slovakia. On average, the VAT Gap across the EU increased by 5 percentage points once the economic crisis hit.
Commenting on the figures, Algirdas Semeta, Commissioner for Taxation, said: "The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances. However, there is also a positive message to be drawn from today's findings. Our ambitious reform of the VAT system, the EU measures to combat tax evasion and our recommendations for national tax reforms, are all targeted in the right direction. We know the problem; we have identified solutions to it, and now it's time for member states to act. Today's figures will serve as a baseline to assess their progress in improving VAT compliance in the years ahead."
Critically, the study also assesses the Policy Gap, looking at the difference between the yields member states could achieve if they applied uniform taxation to all consumption, compared with the revenues actually received due to the various tax expenditures in their systems. The study shows considerable dispersion in the Policy Gap across member states, ranging from the lowest in Romania (14 percent) to the highest for Spain and Poland (48 percent).
The Commission underscored that the Policy Gap is a significant figure to take into account when considering how member states could use their VAT systems to better effect for fiscal consolidation. In fact, the average Policy Gap (36 percent) is approximately twice as high as the average VAT Gap (17 percent) across the EU. The Commission pointed out that this shows that the most important loss of VAT revenue is not due, in fact, to non-compliance but due to policy choices which have resulted in multiple rates and exemptions in national tax systems.
"This confirms the Commission's consistent position that member states should broaden their tax bases and minimize exemptions and reductions in order to improve the efficiency of their tax systems. This would not only result in substantial new revenue, but it would also create simpler tax systems for businesses to work within, thereby facilitating greater compliance," the Commission said.
"Today's report also suggests that complicated tax systems with multiple rates can contribute to non-compliance. Therefore, the Commission's repeated call to member states to broaden national tax bases and to limit tax exemptions and reductions, should be given particular attention. Not only would this help simplify tax systems, but it may enable member states to avoid standard VAT rate hikes."
Discussing recent measures taken to tackle fraud, including the Quick Reaction Mechanism, and also its ongoing review of the EU VAT regime, the Commission highlighted the importance of the forthcoming Brussels Tax Forum, which will bring together high level tax experts from across the EU on November 28, 2013, to focus specifically on how VAT can be made more efficient.