Executive summary

AuthorAdam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
VAT Gap in the EU-28 Member States
page 9 of 99
Executive Summary
This Report has been written for the European Commission, DG TAXUD, for the project
TAXUD/2019/AO-14, Study and Reports on the VAT Gap in the EU-28 Member States, and
is a follow-up to the seven reports published between 2013 and 2019.
This Study contains Value Added Tax (VAT) Gap estimates for 2018, fast estimates using a
simplified methodology for 2019, the year immediately preceding the analysis, and includes
revised estimates for 2014-2017. It also includes the updated and extended results of the
econometric analysis of VAT Gap determinants initiated and initially reported in the 2018
Report (Poniatowski et al., 2018). As a novelty, the econometric analysis to forecast potential
impacts of the coronavirus crisis and resulting recession on the evolution of the VAT Gap in
2020 is reported.
In 2018, most European Union (EU) Member States (MS) saw a slight decrease in the pace of
gross domestic product (GDP) growth, but the economic conditions for increasing tax
compliance remained favourable. We estimate that the VAT total tax liability (VTTL) in 2018
increased by 3.6 percent whereas VAT revenue increased by 4.2 percent, leading to a decline
in the VAT Gap in both relative and nominal terms. In relative terms, the EU-wide Gap dropped
to 11 percent and EUR 140 billion. Fast estimates show that the VAT Gap will likely continue
to decline in 2019.
Of the EU-28, the smallest Gaps were observed in Sweden (0.7 percent), Croatia (3.5 percent),
and Finland (3.6 percent), the largest in Romania (33.8 percent), Greece (30.1 percent), and
Lithuania (25.9 percent). Overall, half of the EU-28 MS recorded a Gap above 9.2 percent. In
nominal terms, the largest Gaps were recorded in Italy (EUR 35.4 billion), the United Kingdom
(EUR 23.5 billion), and Germany (EUR 22 billion).
The Policy Gap and its components remained stable. For the EU overall, the average Policy
Gap level was 44.24 percent. Of this, in 2018, 10.07 percentage points were due to the
application of various reduced and super-reduced rates (the Rate Gap) and 34.17 were due to
the application of exemptions without the right to deduct.
The results of the econometric analysis show that the VAT Gap is influenced by a group of
factors relating to the current economic conditions, institutional environment, and economic
structure as well as to the measures and actions of tax administrations. Out of a broad set of
tested variables, GDP growth and general government balance appeared to explain a
substantial set of VAT Gap variation across time and countries. Within the control of tax
administrations, share of IT expenditure proved to have the highest statistical significance in
explaining the size of the VAT Gap. In addition, the VAT Gap appeared to be inter-related with
the values of risky imports of goods, indicating the role of fraud in driving the overall share of
the VAT Gap.
Since the COVID-19 recession will likely have a dire impact on the EU economies, the VAT
Gap in 2020 is forecasted to increase. If the EU economy contracts by 7.4 percent in 2020 and
the general government deficit jumps as forecasted in the Spring Forecast of the European
Commission, the Gap could increase by 4.1 percentage points year-over year up to 13.7
percent and EUR 164 billion in 2020. The hike in 2020 could be more pronounced than the
gradual decrease of the Gap observed over the three preceding years. Moreover, a return to
the VAT Gap levels observed in 2018 and 2019 will take time and require significant action
from tax administrations.

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