Is the Completion of the EU Single Market Hindered by Vat Evasion?

Abstract

The planned full-scale implementation of the origin principle with the cross-border pre-tax system would lead, ceteris paribus, to changes in VAT revenues in the individual EU countries. For instance, the member countries with trade surpluses and higher VAT rates would be significantly better off. For this reason, a clearing mechanism is necessary to rectify this type of revenue imbalance among the EU nations. The introduction of the Single Market in 1993 appears to have further encouraged firms' and households' evasive behaviour in paying VAT in the EU. In order to estimate its relevance, this study quantifies the annual amount of hypothetical VAT revenues for the individual countries on the basis of the national accounts data. The relation between the calculated hypothetical and the (current) collected revenues in a fiscal year largely determines the extent of VAT evasion in a country when the time-lag problem between the creation of the tax liability and the VAT collection in cash terms can be adjusted. The macroeconomic clearing is supposed to take place based on the share of hypothetical revenues of the member countries. Consequently, such a system seriously suffers from adverse incentives for the individual nations since countries with a lower evasion ratio than the weighted average of all EU countries would lose VAT revenues, whereas those with a higher evasion ratio would gain.

Keywords: VAT Evasion, EU Single Market, Origin and Destination Principle, Hypothetical VAT Revenues Macroeconomic Clearing National Accounts

JEL Classification: F02, K42, O17, H25, H26, H87