The EU VAT gap is forecast to increase to 13.7 percent — or €164 billion — in 2020 because of the recession caused by the coronavirus pandemic, according to the European Commission.
The VAT gap — the difference between expected VAT revenues across the EU and the amount actually collected — has been declining since 2013, but “the COVID-19 recession will likely have a dire impact on the EU economies,” the commission said in its 2020 report on the VAT gap in member states, released September 10. The report contains VAT gap estimates for 2018; "fast estimates" using a simplified methodology for 2019; and, "as a novelty," a forecast of the potential impact the coronavirus crisis will have on the 2020 VAT gap. It also contains revised estimates for 2014 to 2017.
The report found that in 2018, the EU-wide VAT gap decreased in both relative and nominal terms to 11 percent and €140 billion, compared with 11.5 percent and €141 billion in 2017.
The €1 billion decrease in the EU VAT gap in 2018 was notably smaller than the €2.9 billion decrease in 2017, the commission said in a September 10 release. "The considerable 2018 VAT Gap, coupled with forecasts for 2020 — which will be impacted by the coronavirus pandemic — highlights once again the need for a comprehensive reform of EU VAT rules to put an end to VAT fraud, and for increased cooperation between Member States to promote VAT collection while protecting legitimate businesses," it said.
Of the 28 countries in the study, Romania had the highest VAT gap in 2018, at 33.8 percent, followed by Greece at 30.1 percent and Lithuania at 25.9 percent. Romania has consistently recorded the highest VAT gap in the EU for the last seven years, although it has managed to decrease its gap from 41 percent in 2013.
Member states with the smallest VAT gaps in 2018 were Sweden at 0.7 percent, Croatia at 3.5 percent, and Finland at 3.6 percent, according to the report.
With a 2018 median VAT gap of 9.2 percent, EU member states varied significantly in their VAT collection performance, the release says. Hungary had the largest percentage point decrease in VAT gap at -5.1 percent, with Latvia at -4.4 percent, followed by Poland at -4.3 percent. On the other hand, Luxembourg saw a 2.5 percentage point increase in its VAT gap.
“Today's figures show that efforts to shut down opportunities for VAT fraud and evasion have been making gradual progress — but also that much more work is needed,” EU Tax Commissioner Paolo Gentiloni said in the commission release. He said the EU needs to intensify the fight against VAT fraud, simplify VAT procedures, and improve cross-border cooperation.
In July the commission rolled out a taxation package that includes some changes to the VAT rules on financial services and the special VAT scheme for travel agents and tour operators. Over the last several months, Poland has signed declarations with Ukraine and Slovakia to fight VAT fraud through tax tool sharing and digital cooperation.
The commission has also asked member states to implement VAT reforms proposed in 2017 that call for the EU to move to a destination-based approach with cross-border business-to-business transactions taxed based on the VAT rate of the destination country; upgrade the electronic one-stop shop for VAT filing and payments; and make vendors liable to collect VAT unless the buyer qualifies under the certified taxable person standard. In May the commission proposed delaying implementation of the VAT e-commerce package until July 2021 in light of the pandemic.