The European Commission’s latest “VAT Gap Report 2023” documents a further reduction in the VAT gap within the EU for 2021, confirming the trend that has been ongoing since 2013. This article looks at the driving forces behind this positive development, the impact of recent initiatives, and expectations for the future.
What is the VAT gap all about?
The VAT gap, also known as the VAT compliance gap, measures the discrepancy between the VAT revenue that could theoretically be collected and the VAT revenue actually collected. This gap, expressed in absolute figures or per cent, illustrates the extent of uncollected VAT. There can be many reasons, such as VAT fraud, optimisation practices, bankruptcies or administrative errors.
According to the report of 24 October 2023, the EU-wide VAT gap fell from around 99 billion euros in 2020 to about 61 billion euros in 2021, a massive decrease of 39 billion euros. Italy, Poland, and Belgium recorded particularly striking declines. But what factors are contributing to this trend?
The report shows that VAT revenues and the expected VAT Total Tax Liability (VTTL) recovered in 2021 and exceeded pre-crisis levels. The VAT gap narrowed in almost all EU member states. Following the COVID-19 pandemic, which made tax payments a prerequisite for support services, as well as a shift in consumption habits towards better-regulated areas such as online commerce and various administrative reforms, including new technologies for monitoring, they have contributed to narrowing the gap.
The VAT gap is also expected to narrow as new EU VAT initiatives “ VAT in the Digital Age” come into force, tackling fraud and simplifying administration.
© EU-Commission
The smallest gaps in value-added tax (VAT) were observed in the Netherlands (-0.2%), Finland (0.4%), Spain (0.8%), and Estonia (1.4%). As seen in the case of the Netherlands, member states with already low non-compliance rates can experience negative values due to statistical and measurement inconsistencies.
New developments in EU VAT
VAT fraud has fallen significantly since the introduction of the VAT package for e-commerce in 2021, which included the abolition of the VAT exemption for low-value parcels and the introduction of the One-Stop-Shop (OSS) mechanism, which simplifies VAT reporting and payment for B2C services and distance selling of goods. The Import-One-Stop-Shop (IOSS) for low-value parcels and special regulations for non-IOSS use have also been introduced.
Local measures, such as introducing the Standard Audit File for Tax and the split payment mechanism in Poland, also contributed to reducing the VAT gap. From July 2024, the exclusive issuance of invoices via the national e-invoicing system will be mandatory in Poland, further improving VAT compliance.
In 2022, Operation Admiral, a cooperation between the European Public Prosecutor’s Office and law enforcement authorities from 14 EU Member States, uncovered a VAT carousel fraud worth 2.2 billion euros. This operation was made possible by technologies that facilitated data exchange between the authorities involved.
DAC 7 and CESOP on the rise
In addition, “DAC7” and “CESOP” were developed to combat fraud and close the VAT gap. DAC7, the seventh directive on administrative cooperation in taxation, came into force in 2023 and introduced reporting obligations for digital platform operators.
CESOP, the Common European Solution for Online Platforms, aims to make cross-border online trade more transparent and thus combat VAT fraud more effectively. These initiatives show that the EU is determined to close the VAT gap through legislation, technological innovation, and increased international cooperation.
Outlook
The successes to date are impressive, no question. However, 2024 will undoubtedly present us with real challenges, especially in fiscal terms: The Karlsruhe ruling on the 2021 supplementary budget reveals future financial holes in the federal budget — the expected additional revenue from the reduced VAT gap is at least cause for optimism.
Experts emphasize that further continuous efforts are needed to take on the fight against VAT fraud and avoidance. The EU is tasked with supporting its member states to ensure that the new regulations are implemented effectively, and that state-of-the-art technologies are used in the best possible network.
