Study and Reports on the VAT Gap in the EU-28 Member States: 2017 Final Report

Abstract

This analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, 2015, and 2016.

We present new estimates of the VAT Gap and the Policy Gap for the year 2015, as well as updated estimates for the years 2011‒2014. This report provides first estimates of the VAT Gap for Cyprus, using the newly revised national accounts data from the Cyprus Statistical Agency.

The VAT Gap is the difference between the amount of VAT revenue actually collected and the theoretical amount that is expected to be collected, given the observed information on the country’s economy and the actual VAT legislation. The amount of VAT total theoretical liability, known as VTTL, is calculated using the so-called “top-down” approach: the national VAT rate structure is imposed on the national accounts expenditure and investment data at the most detailed level possible to derive expected liability.

VAT Gap cannot be treated as a straightforward equivalent of VAT fraud. Apart from VAT fraud and tax evasion and avoidance, the VAT Gap can be influenced by bankruptcies and tax arrears, as well as reporting problems in national accounts. An important change in the VAT rules in 2015 came with the introduction of the MOSS regime, which changed the way VAT was invoiced for exported electronic services. VAT structure remained unchanged in most countries, with only three Member States changing the level and scope of VAT rates.

Nominal VAT revenues increased on average by 4.5 percent in the EU-27 — a combination of revived economic growth (2.9 percent) and an increase in VAT compliance (2.4 percent).

In nominal terms, in 2015, the VAT Gap in the EU-28 Member States amounted to EUR 151.5 billion. The VTTL accounted for EUR 1,187.8 billion, whereas VAT revenue was EUR 1,035.3 billion. Expressed as a percent of VTTL, the VAT Gap share dropped to 12.8 percent, down from 14.1 percent in 2014. In absolute values, the VAT Gap dropped by EUR 8.7 billion and is at its lowest level since 2011. The share of the VAT Gap in the VTTL decreased in 20 Member 12 States, and increased only in 7 out of the total 27 Member States (EU-28 excluding Cyprus).

The smallest Gaps were observed in Sweden (-1.42 percent), Spain (3.52 percent), and Croatia (3.92 percent). The largest Gaps were registered in Romania (37.18 percent), Slovakia (29.39 percent), and Greece (28.27 percent). Overall, half of the EU-27 Member States recorded a Gap below 10.8 percent.

Keywords: onsumption taxation, VAT, tax fraud, tax evasion, tax avoidance, tax gap, tax non-compliance, policy gap

JEL Classification: H24, H26