A staggering €159.5 billion in Value Added Tax (VAT) revenues were lost across the EU in 2014 according to figures released by the European Commission. Research shows that the overall difference between the expected VAT revenue and the amount actually collected (the so-called ‘VAT Gap’) amounted once again to an unacceptably high yearly figure. The findings support recent calls by the Commission to overhaul the EU’s VAT system to tackle fraud and make it more efficient. Member States must now follow up on the Commission’s Action Plan towards a single VAT area presented last April by agreeing on the way forward towards a definitive VAT regime for cross-border trade in the European Union. More immediate measures to tackle the problem of VAT fraud have already been set in motion, but today’s figures show that deeper reforms are needed.
The VAT Gap rate ranged from a high of 37.9% of uncollected VAT in Romania to a low of only 1.2% in Sweden. In absolute terms, the highest VAT Gap of €36.9 billion was recorded in Italy while Luxembourg had the lowest of €147 million. Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said:
“Our Member States are losing tens of billions of euros in uncollected VAT revenue. This is unacceptable.The current regime is woefully ill-equipped to deal with the problems of VAT fraud and miscalculations,and it’s clear that the numbers will not get better by themselves. Member States must now quickly agree on a definitive fraud-proof EU VAT system, as laid out by the Commission earlier this year. I therefore urge all of our Member States to have a frank and meaningful discussion in order to feed into next year’s proposals, so we can tackle this issue once and for all.”
The VAT Gap study is funded by the Commission as part of its work to reform the VAT system in Europe and to clamp down on tax fraud and evasion. Today’s report is evidence that while some Member States have improved their VAT revenue collection, substantial progress can only be achieved if Member States agree to make the current EU VAT system simpler, more fraud-proof and business-friendly.
Compared to 2013, the 2014 VAT GAP has decreased by €2.5 billion but individual performances of Member States still vary enormously when it comes to VAT compliance. Some 18 Member States showed an improvement in their figures, while eight Member States failed to collect more VAT revenues than the year before.The estimates for 2014 are more accurate than previous years thanks to improved accounting data provided by EU Member States, in line with new international standards.
The Commission adopted the Action Plan on VAT – Towards a single EU VAT area in April 2016. The plan sets out immediate and urgent actions to tackle the VAT Gap as well as strategic long term solutions to overcoming VAT fraud and improving VAT collection across the EU. It describes the necessary steps that need to be taken towards a single EU VAT area, and how to adapt the VAT system to the realities of the internal market, the digital economy and the needs of SME’s. The Action Plan sets out a pathway to modernize the current EU VAT rules, including:
- key principles for a future single European VAT system;
- short term measures to tackle VAT fraud;
- update the framework for VAT rates and set out options to grant Member States greater flexibility in setting them;
- plans to simplify VAT rules for e-commerce in the context of the Digital Single Market (DSM) Strategy and for a comprehensive VAT package to make life easier for SMEs.
The Commission will table legislative proposals in 2017 to re-establish the principle of charging VAT on cross-border trade within the EU. Cross-border fraud accounts for € 50 billion of the VAT Gap each year in the EU and the new system should reduce cross-border fraud by 80% (about €40 billion). The Commission is now calling on Member States to have an in-depth discussion towards a definitive VAT system that is fit for the 21st century.