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European Commission - Fact Sheet

The VAT Gap: Questions and Answers

Brussels, 4 September 2015

Questions and Answers concerning the VAT Gap.

See also press release here.

What is VAT?

VAT is a consumption tax, charged on most goods and services traded for use or consumption in the EU. It is levied on the "value added" to the product at each stage of production and distribution. The "value added" means the difference between the cost of inputs into the product / service and the price at which it is sold to the consumer. VAT is charged when VAT-registered (taxable) businesses sell to other businesses (B-2-B) or to the final consumer (B-2-C). VAT is intended to be "neutral" in that businesses are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and have to show the VAT charged to customers on the invoices.

The VAT system in the EU is governed by a common legal framework - the VAT Directive. In the EU, there is a minimum standard VAT rate of 15%, above which Member States are free to set their own national VAT rates. VAT is one of the main sources of government revenue for all Member States and one of the three "own resources" of the EU.

What is the VAT Gap?

The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations. The study calculates the VTTL for each country on the basis of national accounts by mapping information on standard, reduced rates and exemptions onto data available on final and intermediate consumption, along with other information provided by Member States. This means that the quality of the VAT Gap estimates depends on the accuracy and completeness of national accounts data.

The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. As the VAT Gap in the study is based on a top-down approach, it does not readily lend itself to being deconstructed according to industrial sectors or other criteria (territorial, professional), and can be best used as a diagnostic tool in the context of its evolution over time.

Why did the Commission sponsor this study?

The study to quantify and analyse the VAT Gap in the EU Member States (hereafter: the 2015 Report) provides estimates for the VAT Gap for 26 EU Member States for 2013 as well as revised estimates for the period 2009-20012. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States[1], published in September 2013 (hereafter: 2013 Report), and to the report “2012 Update Report to the Study to Quantify and Analyse the VAT Gap in the EU-27 Member States” [2], published in October 2014 (hereafter: 2014 Report). The aim of the study and the reports is to quantify the VAT Gap and to better understand the trends in the EU in the field of VAT collection. This can then help to address (policy) measures to improve VAT compliance and enforcement, and the figures can serve as a yardstick against which progress in this field can be assessed.

What are the main findings of the 2015 Report on the VAT Gap?

During 2013, the overall VAT Total Tax Liability (VTTL) for the EU-26 Member States grew by about 1.2 percent, while collected VAT revenues rose by 1.1 percent. As a result, the overall VAT Gap in the EU-26 saw an increase in absolute values of about Euro 2.8 billion, to reach Euro 168 billion. As a percentage, the overall VAT Gap stayed constant at 15.2 percent. The median VAT Gap rose by 1.6 percentage point and was 13.9 percent.

In 2013, Member States’ estimated VAT Gaps ranged from the low of 4 percent in Finland, the Netherlands and Sweden, to the high of 41 percent in Romania. While 15 Member States including Latvia, Malta and Slovakia saw an improvement in their figures, 11 Member States such as Estonia and Poland saw deterioration.

 

Table 2.1 VAT Gap Estimates, 2012-2013 (million Euros)

 

2012

2013

Country

Revenues

VTTL

VAT Gap

VAT Gap %

Revenues

VTTL

VAT Gap

VAT Gap %

Austria

24,563

27,629

3,066

11.1%

24,953

28,170

3,217

11.4%

Belgium

26,896

30,272

3,376

11.2%

27,226

30,412

3,186

10.5%

Bulgaria

3,828

4,697

869

18.5%

3,775

4,560

785

17.2%

Czech Republic

11,377

14,883

3,506

23.6%

11,694

15,070

3,375

22.4%

Denmark

24,296

26,563

2,267

8.5%

24,360

26,850

2,489

9.3%

Estonia

1,508

1,740

232

13.3%

1,558

1,873

315

16.8%

Finland

17,987

18,524

537

2.9%

18,848

19,660

812

4.1%

France

142,526

157,360

14,834

9.4%

144,414

158,510

14,096

8.9%

Germany

194,034

216,984

22,950

10.6%

197,005

221,878

24,873

11.2%

Greece

13,712

20,595

6,883

33.4%

12,593

19,090

6,497

34.0%

Hungary

9,084

11,963

2,879

24.1%

9,073

12,003

2,930

24.4%

Ireland

10,219

11,508

1,289

11.2%

10,371

11,596

1,225

10.6%

Italy

96,170

141,332

45,162

32.0%

93,921

141,437

47,516

33.6%

Latvia

1,583

2,391

808

33.8%

1,693

2,414

721

29.9%

Lithuania

2,521

3,971

1,450

36.5%

2,611

4,192

1,580

37.7%

Luxembourg

3,093

3,269

176

5.4%

3,485

3,672

187

5.1%

Malta

536

777

241

31.0%

586

796

210

26.4%

Netherlands

41,699

43,598

1,899

4.4%

42,424

44,276

1,852

4.2%

Poland

27,783

37,175

9,391

25.3%

27,780

37,911

10,131

26.7%

Portugal

13,995

15,330

1,335

8.7%

13,710

15,068

1,358

9.0%

Romania

11,212

19,634

8,422

42.9%

11,913

20,209

8,296

41.1%

Slovakia

4,328

7,054

2,726

38.6%

4,696

7,209

2,513

34.9%

Slovenia

2,889

3,180

291

9.1%

3,045

3,232

186

5.8%

Spain

56,652

68,262

11,610

17.0%

61,350

73,444

12,094

16.5%

Sweden

37,834

39,762

1,928

4.8%

39,091

40,867

1,776

4.3%

United Kingdom

142,943

159,695

16,752

10.5%

141,668

157,099

15,431

9.8%

 









Total EU-26

923,269

1,088,147

164,879

15.2%

933,843

1,101,498

167,654

15.2%

Median




12.3%




13.9%

Sources: Eurostat (revenues); Own calculations. Figures in million Euros unless otherwise indicated. National currency figures for countries not using the Euro converted at the average Euro exchange rate (source: Eurostat).

 

What is the Policy Gap?

The 2015 Report also provides new and expanded evidence on the Policy Gap for the EU-26. The Policy Gap is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied standard rate to all consumption of goods and services supplied for consideration.

The Policy Gap as defined above can in turn be broken down into the Rate Gap and the Exemption Gap. As the terminology suggests, the Rate Gap represents the potential revenue loss due to the existence of reduced rates, whereas the Exemptions Gap represents the potential revenue loss due to the existence of exempted supplies of goods and services.

What are the main findings of the 2015 Report on the Policy Gap?

The Policy Gap in 2013 was higher than the VAT Gap, continuing a well-established trend. The Policy Gap ranges from the low of 27 percent in Slovakia and Bulgaria, to the high of 54 percent for Spain and Belgium. The EU-26 average Policy Gap is 42 percent, the median 43 percent.

The Policy Gap, in turn, can be broken down into the Rate Gap and the Exemption Gap. The latter, in all countries, is the larger of the two, ranging from the high of 43 percent for Finland, to the low of 22 percent for Lithuania. The EU-26 average Exemption Gap is 33 percent, as is the median. The Rate Gap, on the other hand, ranges from the low of 1 percent in the case of Denmark, to the high of 19 percent in Portugal. The average is 10 percent, and the median is 11 percent.

The results moderate views of the relative importance of reduced rates and exemptions in reducing the revenue potential of VAT, and suggest that better enforcement remains a key component of any strategy of improvement of the VAT system.


[1] http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf

[2] http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2012.pdf

MEMO/15/5593


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