The 'VAT Gap', which is the overall difference between the expected VAT revenue and the amount actually collected, again demonstrates the need for serious reform so that Member States can make full use of VAT revenues for their budgets. While the collection of VAT revenues shows some signs of improvement, the missing amounts remain unacceptably high. The report comes just ahead of proposals by the Commission to overhaul the VAT system.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: "Member States should not accept such shocking losses of VAT revenues. While the Commission is supporting efforts to improve collection throughout the EU, current VAT rules date from 1993 and are outdated. We will soon propose to revamp the rules governing VAT on cross-border sales. Our reform will help cut cross-border VAT fraud by 80% and get badly-needed money back to Member State coffers."
While average EU figures are improving, individual VAT collection performances vary significantly amongst Member States. The largest VAT Gaps were reported in Romania (37.2%), Slovakia (29.4%) and Greece (28.3 %). The smallest gaps were observed in Spain (3.5%) and Croatia (3.9 %). In absolute terms, the highest VAT Gap of €35 billion was in Italy. The VAT Gap decreased in most Member States, with the strongest improvements in Malta, Romania and Spain. Seven Member States saw small increases: Belgium, Denmark, Ireland, Greece, Luxembourg, Finland and the UK.
This October, the European Commission will set out proposals for the most far-reaching update to the EU's VAT rules in 25 years. VAT fraud should become easier to tackle and VAT collection made more efficient. Recent media reports have also linked large-scale VAT fraud with organised crime including terrorism. Solutions to this problem can only be found by Member States working together.
While Member States have already made efforts to reduce the VAT Gap, modernising the VAT system and adapting it to the challenges posed by massive fraud is the best way to secure the future of the single market. The reform of the current VAT system should also help the development of the digital single market and complement the agenda set by the Commission to achieve a fairer and more efficient tax system in the EU.
The VAT Gap study is funded by the Commission. The VAT Gap measured in this study includes for the first time revenues emerging from new VAT rules for cross-border sales of e-services which came into force on 1 January 2015, following a Commission proposal.
The Commission adopted the Action Plan on VAT – Towards a single EU VAT area in April 2016. The plan sets out immediate and urgent actions to tackle the VAT Gap as well as strategic long term solutions to overcoming VAT fraud and improving VAT collection across the EU. It describes the steps that need to be taken towards a single EU VAT area, and how to adapt the VAT system to the realities of the internal market, the digital economy and the needs of SMEs.
The Commission will table legislative proposals this autumn to re-establish the principle of charging VAT on cross-border trade within the EU. Cross-border fraud accounts for €50 billion of the VAT Gap each year in the EU and the new system should reduce cross-border fraud by 80% (about €40 billion). The Commission also hopes for quick agreement by Member States on new rules to improve VAT for e-commerce, proposed in 2016. As with all initiatives in the area of taxation, unanimous agreement between Member States will be necessary before the proposed changes can come into force.
The full report is available here.
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