Why haven’t we closed the VAT gap?
In the last few years, the EU has been losing as much as €150 billion every year in unpaid VAT – most of it due to VAT fraud like missing trader fraud and carousel fraud. Countries have been doing their best to clamp down on unpaid VAT, with little success.
The VAT Gap is Narrowing, But Not Fast Enough
The most recent annual VAT gap study, in 2017, brought news of mixed success for EU-wide VAT payments. In 2017, the EU as a whole lost €137 billion in VAT revenue. This reveals a drop of €8 billion from 2016, and the 2016 VAT gap was itself €7.8 billion less than the year before. The VAT gap has been shrinking for 5 years in a row, and it’s predicted to drop another €7 billion to under €130 billion in 2018.
However, it’s moving very slowly. Even if it continues to decrease by €8 billion each year, it will still take another 17 years before ‘only’ €10 billion goes missing. EU member states need the revenue lost to VAT fraud in order to fund infrastructure and services for citizens, so it’s not a victimless crime.
A Closer Look at the VAT Gap
The 2017 VAT gap report reveals interesting variations between the VAT gap of different EU member states. Across Europe, Italy lost the most money to VAT fraud and miscalculations, with a VAT gap of around €33.5 billion, but Romania’s VAT gap is the largest in percentage terms, at 36%. Other points to note include:
Greece and Lithuania have the next highest VAT gaps, of 34% and 25% respectively
Sweden, Luxembourg, and Cyprus have VAT gaps of only 1% on average
The VAT gap report reveals that member states are doing their best to cut down on the loss of VAT revenues. 25 states succeeded in reducing their VAT gap, and only 3 saw the VAT gap increase.
Malta, Poland, and Cyprus shrank their VAT gap by the most percentage points, with drops of 7%, 6%, and 4% respectively.
Slovenia, Italy, Luxembourg, Slovakia, Portugal, the Czech Republic, and France managed to reduce their VAT gap by 2% or more.
The VAT gap grew in Greece by 2.6%, and in Latvia by 1.9%.
Germany saw a very small rise in the VAT gap of 0.2%.
Without EU Reforms, Options are Limited
Although it’s clear that countries are doing all they can to improve their VAT revenue, there’s only so much they can do. Even the biggest reduction of the VAT gap was only by 7%. This is because the vast majority of missing VAT revenue is due to fraud, specifically cross-border missing trader fraud and carousel fraud. These fraud rings take advantage of the complicated cross-border VAT reclaim requirements to hide their VAT obligations from every government
Another significant cause of missing VAT revenue comes from eCommerce VAT fraud. Often this occurs in all innocence, because cross-border eCommerce traders don’t know about their VAT obligations in different EU member states, but the result is the same. Individual tax authorities are unable to investigate eCommerce fraud, because the payment transaction information is entirely online, and often hosted on platforms that fall outside of the tax authorities’ jurisdiction.
When it comes to cross-border VAT fraud, EU member states can’t be effective when they act alone. They are all waiting for new EU-wide VAT reforms that will give them greater ability to share information, and introduce a simpler system that leaves fewer places for fraudsters to hide.
A simpler system may also make things easier for honest companies who genuinely deserve VAT refunds. For all the details about filing successful VAT reclaims in the EU and other countries around the world, download our eBook.