EU VAT Gap Release Falls Ahead Of New Anti-Fraud Action
The European Union value-added tax gap – the overall difference between expected VAT revenue and actual EU member state collections – was EUR152bn in 2015, says the European Commission, highlighting the need for further reforms to tackle avoidance, error, and evasion.
The VAT Gap was down in 2015 on the 2014 level of EUR160bn. Notably, from January 1, 2015, the European Union introduced enhanced rules on business-to-consumer supplies of telecommunications, broadcasting, and electronic services, requiring that these be subject to value-added tax in the location of the consumer, with strengthened rules to boost business compliance rates. The study includes data from taxpayers’ compliance with these rules.
The EU’s report also looks at the performance of individual member states. The largest VAT Gaps were reported in Romania (37.2 percent), Slovakia (29.4 percent) and Greece (28.3 percent). The smallest gaps were observed in Spain (3.5 percent) and Croatia (3.9 percent). In absolute terms, the highest VAT Gap of EUR35bn was in Italy. The VAT Gap decreased in most member states, with the strongest improvements in Malta, Romania, and Spain. Seven member states saw small increases: Belgium, Denmark, Ireland, Greece, Luxembourg, Finland, and the UK.
The European Commission said the scale of the tax gap “demonstrates the need for serious reform so that member states can make full use of VAT revenues for their budgets.”
“While the collection of VAT revenues shows some signs of improvement, the missing amounts remain unacceptably high,” it said.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: “Member states should not accept such shocking losses of VAT revenues. While the Commission is supporting efforts to improve collection throughout the EU, current VAT rules date from 1993 and are outdated. We will soon propose to revamp the rules governing VAT on cross-border sales. Our reform will help cut cross-border VAT fraud by 80 percent and get badly-needed money back to member state coffers.”
This October, the European Commission will set out proposals for the most far-reaching update to the EU’s VAT rules in 25 years. VAT fraud should become easier to tackle and VAT collection made more efficient. Cross-border fraud accounts for EUR50bn of the VAT Gap each year in the EU and the new system should reduce cross-border fraud by 80 percent (about EUR40bn).
Since 2016, the Commission has been working towards tabling proposals for a “Definitive VAT system for Business to Business (B2B) intra-EU transactions on goods”
Under the current transitional VAT system, goods sold cross border between businesses established in different member states are exempt from VAT in the member state of departure of the goods (this constitutes an exempt intra-EU supply) and the customer has to self-assess and pay the VAT due in the member state of arrival on his intra-EU acquisition. Such solution leads to complex and fragmented VAT rules. This results into high compliance costs for businesses trading across the EU and significant administrative burden for companies and tax administrations. It also generates important risks of cross-border fraud in the trade of goods and hampers the functioning of the Single Market.
Therefore, the Commission is preparing a legislative proposal for a simpler and fraud-proof definitive VAT system as indicated in its 2016 Action Plan on VAT, focusing on taxing supplies under the destination principle.