BRUSSELS – EU countries lost almost EUR 150 billion in VAT revenues in 2016, of which EUR 50 bn went to the benefit of criminals, according to a new study published Friday by the European Commission.
The so-called ‘VAT Gap‘ shows the difference between the expected VAT revenue and the amount actually collected. While the Commission says EU Member States have carried out a lot of work to improve VAT collection, the latest figures show that reform of the current EU VAT system combined with better cooperation at EU level are needed so that Member States can make full use of VAT revenues in their budgets.
Economic Affairs Commissioner Pierre Moscovici commended EU Member States for improving VAT collection throughout the EU. However, a loss of EUR 150 billion per year for national budgets remained unacceptable, he said, “especially when EUR 50 billion of this is lining the pockets of criminals, fraudsters and probably even terrorists.”
He added that real improvement would only come with the adoption of the VAT reform the Commission proposed more than a year ago. He called on Member States “to move forward on the definitive VAT system before the European Parliament elections in 2019.”
In nominal terms, the VAT Gap decreased by €10.5 billion to €147.1 billion in 2016, a drop to 12.3% of total VAT revenues compared to 13.2% the year before.
The individual performance of the Member States still varies significantly. The VAT Gap decreased in 22 Member States with Bulgaria, Latvia, Cyprus, and the Netherlands displaying strong performances, with a decrease in each case of more than 5 percentage points in VAT losses.
However, the VAT Gap did increase in six Member States: Romania, Finland, the UK, Ireland, Estonia, and France.
While much progress has been achieved to improve VAT collection and administration at the EU level, the Commission urges Member States to move forward and agree as soon as possible on the much broader reform to cut down on VAT fraud in the EU’s system, as proposed last year by the Commission. It says the ‘reboot’ would improve and modernise the system for governments and businesses alike, making the system more robust and simpler to use for companies.
The VAT Gap study applies a “top-down” methodology using national accounts data to produce estimations of the VAT gaps. For the first time, the 2018 report includes a broader analysis of the effect of some external factors such as the productive structure of the economy and unemployment, as well as those under the direct control of the tax administration such as the size of the tax administration and IT expenditures.
The Commission says this aspect is particularly important since investment in IT usually leads to a VAT gap reduction.