New European Commission Report: VAT Gap

In 2017, Value-Added TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (VAT) accounted for 62.3 percent of consumption tax revenues in the OECD on average, making it an important source of government revenue.

The European Commission (EC) recently published the latest version of their annual report on the “VAT Gap” in 2018 for the 28 Member States of the European Union at that time.

The VAT Gap refers to the difference between the VAT Total Tax Liability (VTTL) and the VAT revenue that is actually collected. The gap is a measure that reflects VAT avoidance, gaps in enforcement, and unpaid VAT due to bankruptcies.

The report provides VAT Gap estimates for 2018, simplified estimates for 2019, and revised estimates for 2014-2017. It also forecasts the VAT Gap for 2020 and 2021.

In order to estimate the 2018 VAT Gap, the report breaks down the change in nominal VAT revenues into three categories: the change in VTTL (tax base), the change in the VAT rate applied to the base, and the change in compliance with the tax. As can be seen in the table below, VAT revenues grew in 2018 from 2017. This change should be primarily attributed to an increase in the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , to which the EC attributes 78 percent of growth.

Increased compliance with the VAT contributed to approximately 10 percent of revenue growth, which contributes to a 0.4 percent increase in overall VAT revenue in aggregate.

Change in VAT Revenue Components (2018 over 2017)

Member State	Change in Revenue	Change in VTTL	Change in Base	Change in Effective Rate	Change in Compliance
Austria	3.6%	4.1%	3.2%	0.9%	-0.5%
Belgium	4.3%	3.1%	3.6%	-0.5%	1.2%
Bulgaria	9.3%	7.5%	8.0%	-0.4%	1.7%
Croatia	6.8%	4.5%	4.3%	0.2%	2.1%
Cyprus	10.5%	9.1%	8.0%	1.0%	1.3%
Czechia	6.5%	6.6%	7.8%	-1.1%	-0.1%
Denmark	4.3%	3.1%	3.2%	0.0%	1.2%
Estonia	8.5%	7.5%	8.8%	-1.2%	0.9%
Finland	4.7%	3.1%	3.8%	-0.7%	1.6%
France	3.5%	3.8%	2.2%	1.6%	-0.3%
Germany	3.8%	3.6%	3.3%	0.2%	0.2%
Greece	4.4%	-0.2%	-0.6%	0.5%	4.6%
Hungary	13.9%	7.5%	9.4%	-1.8%	5.9%
Ireland	8.5%	8.2%	7.4%	0.8%	0.3%
Italy	1.6%	1.3%	2.0%	-0.7%	0.3%
Latvia	13.2%	7.7%	8.4%	-0.7%	5.1%
Lithuania	6.4%	7.5%	7.5%	0.0%	-1.0%
Luxembourg	8.6%	11.4%	5.9%	5.2%	-2.5%
Malta	13.5%	10.1%	9.8%	0.3%	3.1%
Netherlands	5.6%	4.9%	5.2%	-0.3%	0.7%
Poland	11.4%	6.0%	6.4%	-0.4%	5.1%
Portugal	6.3%	4.7%	4.0%	0.6%	1.5%
Romania	12.7%	12.0%	14.3%	-2.0%	0.7%
Slovakia	6.8%	7.3%	7.0%	0.3%	-0.5%
Slovenia	8.1%	7.5%	6.1%	1.3%	0.6%
Spain	4.9%	4.4%	3.8%	0.5%	0.4%
Sweden	4.8%	3.5%	4.2%	-0.6%	1.3%
United Kingdom	4.6%	5.0%	4.0%	1.0%	-0.3%
EU-28 (total)	4.2%	3.6%	3.3%	0.4%	0.5%
Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report,” Sep. 2020, https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2020_en.pdf.

The report estimates that in 2018, VTTL was €1,272 billion (US $1,424 billion) while VAT revenues were €1,132 billion ($1,268 billion), amounting to a €140 billion ($157 billion) loss of VAT revenues.

In 2017, the median VAT Gap in EU countries was 10.9 percent, which decreased to 9.2 percent in 2018.

Only the Czech Republic, France, the United Kingdom, Slovakia, Austria, Lithuania, and Luxembourg experienced growth in the VAT Gap between 2017-2018.

The EC finds downward trends in both the percentage of VTTL left unpaid as well as in the nominal VAT Gap. Hence, the VAT Gap has consistently improved overall.

VAT Gap by Year in the EU 2014-2019

Year	% of VTTL	EUR billion	USD billion
2014	14.3	162	181.411
2015	13	154	172.4524
2016	12.1	143	160.1344
2017	11.5	141	157.8947
2018	11	140	156.7749
2019 (simplified estimate)	9.6	125	139.9776
Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report.”

The EU Member States with the greatest percentage of VAT left unpaid are Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). The smallest VAT Gaps occurred in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent).

VAT Gap by Member State in 2018

Member State	VAT Gap %	VAT Gap (in €mn)	Member State	VAT Gap %	VAT Gap (in €mn)
Belgium	10.4%	3,617	Lithuania	25.9%	1,232
Bulgaria	10.8%	614	Luxembourg	5.1%	199
Czechia	12.0%	2,187	Hungary	8.4%	1190
Denmark	7.2%	2,248	Malta	15.1%	164
Germany	8.6%	22,077	The Netherlands	4.2%	2,278
Estonia	5.2%	127	Austria	9.0%	2,908
Ireland	10.6%	1,682	Poland	9.9%	4,451
Greece	30.1%	6570	Portugal	9.6%	1,889
Spain	6.0%	4,909	Romania	33.8%	6,595
France	7.1%	12,788	Slovenia	3.8%	148
Croatia	3.5%	252	Slovakia	20.0%	1,579
Italy	24.5%	35,439	Finland	3.6%	807
Cyprus	3.8%	77	Sweden	0.7%	306
Latvia	9.5%	256	United Kingdom	12.2%	23,452
Source: European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report.”

The report also forecasts that VAT non-compliance will rise as a result of the COVID-19 pandemic. This will coincide with the current contraction in consumption, which is depressing VAT revenues. The report estimates an economic contraction of 7.4 percent of GDP in 2020, followed by GDP growth of 6.1 percent in 2021.

The recession is expected to increase the VAT Gap by 4.1 percent, from 9.6 percent in 2019 to 13.7 percent. The EC estimates an incomplete economic recovery in 2021, meaning that the VAT Gap is unlikely to return to 2019 levels.

Just as COVID-19 is putting pressure on other sources of revenue, the loss of VAT revenues resulting from the crisis will force governments to evaluate their VAT systems.

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