Policy GAP measures for 2018

• Author: Adam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
• Pages: 52-54

VAT Gap in the EU-28 Member States

page 52 of 99

4. Policy Gap Measures for 2018

In this chapter, we present an update of the series of estimates of the Policy Gap and its

components for the EU-28.

As discussed in the previous Reports, the Policy Gap captures the effects of applying

multiple rates and exemptions on the theoretical revenue that could be levied in a given

VAT system. In other words, the Policy Gap is an indicator of the additional VAT revenue

that could theoretically (i.e. under the assumption of perfect tax compliance) be generated

if a uniform VAT rate is applied to the final domestic use of all goods and services. Due to

the idealistic assumption of perfect tax compliance and a very broad base that captures

entire final consumption and households’ GFCF, the practical interpretation of the Policy

Gap draws criticism. Nonetheless, the assumption of perfect VAT collectability is

indispensable, as interdependencies between tax compliance and rate structure are not

straightforward.

In order to learn how different components contribute to revenue losses, we compose the

Policy Gap into different components of revenue loss, as we show in Annex A.e. Such

elements are, for instance, the Rate Gap and the Exemption Gap, which capture the loss

in VAT liability due to the application of reduced rates and the loss in liability due to the

implementation of exemptions, respectively.

Moreover, following Barbone et al. (2013), the Policy Gap and its components could be

further adjusted to address the issue of the extent to which the loss of theoretical revenue

depends on the decisions of policymakers. Measures that exclude liability from the final

consumption of “imputed rents” (the notional value of home occupancy by homeowners),

the provision of public goods and services, and financial services. For these specific

groups of services, charging VAT is impractical or currently goes beyond the control of

national authorities.

The estimates of the Policy Gap, Rate Gap, Exemption Gap, Actionable Policy Gap, and

Actionable Exemption Gap for the EU-28 MS for 2018 are presented in Table 4.1.

For the EU overall, the average Policy Gap level was 44.24 percent. This means that the

VAT that could currently be levied in the case of full compliance generates 44.24 percent

of what could have been generated if all the exemptions and reduced rates were abolished

and all final use according to national accounts’ definition was taxed. Of this 44.24 percent,

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.

According to the Rate Gap estimates, reduced rates are least applied in Denmark (0.77

percent), Latvia (2.37 percent), and Estonia (2.68 percent). On the other side of spectrum

are Cyprus (25.97 percent) and Italy (15.86 percent). The MS with the highest values of

the Exemption Gap are Spain (43.59 percent), due to the application of other than VAT

indirect taxes in the Canary Islands, Ceuta, and Melilla, and the United Kingdom (43.18

percent). The lowest value of the Exemption Gap was observed in Malta (15.79 percent).