In 2017, Value-Added Tax (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 base, 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. document.getElementById('global-exploration-widget').innerHTML = widgetHTML("https://taxfoundation.org/wp-content/themes/tf-wp-theme", "https://taxfoundation.org");
