Why haven’t we closed the VAT\GST gap?

September 25, 2019

In the last few years, the EU has been losing as much as €150 billion every year in unpaid VAT\GST – most of it due to VAT\GST fraud like missing trader fraud and carousel fraud. Countries have been doing their best to clamp down on unpaid VAT\GST, with little success.

The VAT\GST Gap is Narrowing, But Not Fast Enough

The most recent annual VAT\GST gap study, in 2017, brought news of mixed success for EU-wide VAT\GST payments. In 2017, the EU as a whole lost €137 billion in VAT\GST revenue. This reveals a drop of €8 billion from 2016, and the 2016 VAT\GST gap was itself €7.8 billion less than the year before. The VAT\GST 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\GST fraud in order to fund infrastructure and services for citizens, so it’s not a victimless crime.

A Closer Look at the VAT\GST Gap

The 2017 VAT\GST gap report reveals interesting variations between the VAT\GST gap of different EU member states. Across Europe, Italy lost the most money to VAT\GST fraud and miscalculations, with a VAT\GST gap of around €33.5 billion, but Romania’s VAT\GST gap is the largest in percentage terms, at 36%. Other points to note include:

  • Greece and Lithuania have the next highest VAT\GST gaps, of 34% and 25% respectively

  • Sweden, Luxembourg, and Cyprus have VAT\GST gaps of only 1% on average

The VAT\GST gap report reveals that member states are doing their best to cut down on the loss of VAT\GST revenues. 25 states succeeded in reducing their VAT\GST gap, and only 3 saw the VAT\GST gap increase.

  • Malta, Poland, and Cyprus shrank their VAT\GST 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\GST gap by 2% or more.

  • The VAT\GST gap grew in Greece by 2.6%, and in Latvia by 1.9%.

  • Germany saw a very small rise in the VAT\GST 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\GST revenue, there’s only so much they can do. Even the biggest reduction of the VAT\GST gap was only by 7%. This is because the vast majority of missing VAT\GST 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\GST reclaim requirements to hide their VAT\GST obligations from every government

Another significant cause of missing VAT\GST revenue comes from eCommerce VAT\GST fraud. Often this occurs in all innocence, because cross-border eCommerce traders don’t know about their VAT\GST 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\GST fraud, EU member states can’t be effective when they act alone. They are all waiting for new EU-wide VAT\GST 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\GST refunds. For all the details about filing successful VAT\GST reclaims in the EU and other countries around the world, download our eBook.

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