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1. Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report

Author:
Adam Śmietanka, Grzegorz Poniatowski, and Mikhail Bonch-Osmolovsky
Publication Date:
10-2020
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
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. 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.
Topic:
European Union, Fiscal Policy, VAT, and COVID-19
Political Geography:
Europe and Global Focus

2. The Sales Tax Proposal: Are We Beating a Dead Horse? Preliminary results from a rapid assessment

Author:
Shebo Nalishebo and Florence Banda-Muleya
Publication Date:
09-2019
Content Type:
Policy Brief
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
The fiscal authorities have argued that the horse – in this case, (value-added tax) VAT – is dead. In contrast, this rapid assessment argues that the VAT may have been pronounced dead too quickly, perhaps for expediency’s sake. Examples from many countries abound and show that with the right fiscal discipline to ring-fence VAT refunds and improve compliance, VAT works just fine, offering value-added incentives and avoiding cascading effects. In finding a solution for this supposedly dead horse, important questions that we need to ask are “Is the horse really dead? If it is, what killed the horse?” Without this introspection, the other horse in form of Sales Tax, which in fact died and was buried 25 years ago, might be resurrected. Without learning from previous experiences and experiences elsewhere, we are bound to make the same mistakes in trying to resuscitate a truly dead horse.
Topic:
Government, Tax Systems, Economic Policy, and VAT
Political Geography:
Africa and Zambia

3. Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report

Author:
Adam Śmietanka, Alejandro Esteller Moré, Grzegorz Poniatowski, José María Durán-Cabré, and Mikhail Bonch-Osmolovsky
Publication Date:
10-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
In this Report, the Authors present the new Value Added Tax (VAT) Gap estimates for 2016, as well as updated estimates for 2012-2016. In addition to the analysis of the Compliance Gap, this Report examines the Policy Gap in 2016 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. Moreover, the Report contains an econometric analysis of VAT Gap determinants, which is a novelty introduced from this year’s Study. In 2016, most European Union (EU) Member States (MS) saw positive tailwinds with a combined real GDP growth of 2.0 percent. As a result of a growing base and increasing VAT compliance, VAT revenue increased in all MS with three exceptions. Most pronounced is the case of Romania, where VAT revenue decreased in response to reduction of the standard rate by four percentage points. In nominal terms, in 2016, the VAT Gap in EU-28 MS fell below EUR 150 billion and amounted to EUR 147.1 billion. In relative terms, the VAT Gap share of the VAT total tax liability (VTTL) dropped to 12.3 percent from 13.2 percent in 2015, and is the lowest value in the analysed period of 2012-2016. Denoted at the share of GDP, the VAT Gap in 2016 amounted to 0.99% compared to 1.05% in 2015. Of the EU-28, the VAT Gap share decreased in 22 countries and increased in six—namely, Romania, Finland, the UK, Ireland, Estonia, and France. The biggest declines in the VAT Gap—of over five percentage points—occurred in Bulgaria, Latvia, Cyprus, and the Netherlands. The smallest Gaps were observed in Luxembourg (0.85 percent), Sweden (1.08 percent), and Croatia (1.15 percent). The largest Gaps were registered in Romania (35.88 percent), Greece (29.22 percent), and Italy (25.90 percent). Overall, half of EU-28 MS recorded a Gap below 9.9 percent. The Policy Gaps and its components remained stable. The average Policy Gap level was 44.8 percent, out of which 9.95 percentage points are due to the application of various reduced and super-reduced rates (the Rate Gap). Countries with the most flat levels of rates in the EU, according to the Rate Gap, are Denmark (0.93 percent) and Estonia (2.97 percent). The Exemption Gap, or the average share of Ideal Revenue lost due to various exemptions, is, on average, 35 percent in the EU, whereas the Actionable Policy Gap—a combination of the Rate Gap and the Actionable Exemption Gap—is, on average, 16.5 percent of the Notional Ideal Revenue. The econometric analysis can be considered a successful first attempt at inferring the impact of various determinants. Firstly, it can be observed that the productive structure of the economy exerts an impact on the VAT Gap. The share of retailers has the strongest impact on the VAT Gap; however, telecommunications, industry, and art also have a positive impact. Secondly, liquidity constraints and the productive structure of the economy also play a role in determining VAT compliance. The most interesting results have to do with the impact of the variables under the direct control of the tax administration. We show that the impact of the size of the tax administration and the VAT Gap is concave. On the contrary, in the case of IT expenditure, the impact is convex, albeit small, until productivity vanishes when IT expenditure is about 9.8 percent of the total expenditure of the tax administration.
Topic:
Financial Crimes, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union

4. Study and Reports on the VAT Gap in the EU-28 Member States: 2017 Final Report

Author:
Grzegorz Poniatowski, Mikhail Bonch-Osmolovsky, and Misha V. Belkindas
Publication Date:
10-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
CASE prepared a new study for the European Commission on the VAT Gap in the European Union in 2015. The figures offer an important snapshot of the problems of collecting VAT in the EU and what needs to be done to improve revenues and fight tax fraud. During 2015, the overall VAT that should have been collected in EU Member States grew by about 4.2 %, while collected VAT revenues rose by 5.8 %. As a result, the overall VAT Gap in the EU Member States decreased by about €8.7 billion in absolute terms, down to €151.5 billion. As a percentage, the overall VAT Gap decreased by 2.1 % to 12.7 %. In 2015, the highest VAT Gap was recorded in Romania with a figure of 37.18 %. In absolute terms, the highest VAT Gap of €35 billion was in Italy. Overall, the VAT Gap decreased in most Member States, with the largest improvements noted in Malta, Romania and Spain. The VAT Gap measured in this study includes for the first time revenues emerging from new VAT rules for cross-border sales of e-services which came into force on 1 January 2015, following a Commission proposal. CASE's team was led by Grzegorz Poniatowski, Director of Fiscal Policy Studies, and composed of Mikhail Bonch-Osmolovskiy and Misha Belkindas.
Topic:
European Union, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union

5. Mutual Learning for Reducing Tax Gaps in V4 Countries and Ukraine Peer Country Paper: Poland

Author:
Iakov Frizis, Krzysztof Głowacki, and Katarzyna Mirecka
Publication Date:
08-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
Tax administration has been improving in Poland in recent years. The country moved from a ranking of 128 to a ranking of 47 in the Paying Taxes indicator of the World Bank’s Doing Business report between its 2012 and 2017 editions. However, compliance with taxes still requires 271 man hours, compared to the European Union (EU) & European Free Trade Association (EFTA) average of 173 man-hours and to the top Central and Eastern Europe (CEE) performer Estonia’s 81 man-hours. Polish tax legislation has been described as complex by some observers and not overly complex by other observers, while many emphasise that it is improving at a good pace. The paper summarizes knowledge on tax gaps in Poland with respect to PIT, CIT, VAT, and excise. An introduction to the Polish tax system is given, trends in tax collectability and estimates of the tax gaps are discussed, and methods of combating tax evasion and avoidance are reviewed. The paper has been written as part of the project “Mutual Learning for Reducing Tax Gaps in V4 Countries and Ukraine” co-financed by the Visegrad Fund in the years 2016-2017.
Topic:
Financial Crimes, Tax Systems, Free Trade, Fiscal Policy, and VAT
Political Geography:
Europe, Ukraine, Poland, and European Union

6. Mutual Learning for Reducing Tax Gaps in V4 Countries and Ukraine Final Report

Author:
Iakov Frizis and Krzysztof Głowacki
Publication Date:
08-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
ax gaps, or the differences between tax amounts that are due by the taxpayers and the amounts that are actually collected by the state, remain a challenge for many European Union (EU) Member States, including for the V4 countries. Tax gaps also present a formidable challenge for Ukraine, which is currently reforming many aspects of its financial and legal systems. To help increase awareness about tax compliance and exchange knowledge on the state-of-the-art methods used to combat tax gaps, the project Mutual Learning for Reducing Tax Gaps in V4 Countries and Ukraine has been implemented. The paper is a summary of the exchange of knowledge and experience that took place in the course of the project co-financed by the Visegrad Fund in the years 2016–2017.
Topic:
Economics, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Ukraine, Poland, and European Union

7. How the European Commission and European countries fight VAT fraud

Author:
Kamil Olczykowski, Piotr Laskowski, Tomasz Kassel, and Tomasz Michalik
Publication Date:
06-2017
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The VAT gap, both on the European Union scale and that of particular member states (though not all of them) appeals to the imagination and awakens many extreme emotions. For it is difficult to accept that the level is so significant, and – what is more – in recent years it has narrowed quite insignificantly despite attempts to limit it. In the popular understanding, this gap is quite often identified exclusively with the consequences of fraud, but it has many more component elements, many of which have nothing to do with abuse. Still, this doesn’t change the face that it is precisely fraud and abuse that constitute a particularly significant element of the VAT gap.
Topic:
Financial Crimes, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union

8. Study and Reports on the VAT Gap in the EU-28 Member States: 2016 Final Report

Author:
Grzegorz Poniatowski, Mikhail Bonch-Osmolovsky, and Misha V. Belkindas
Publication Date:
09-2016
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, and 2015. In this report, estimates of the VAT Gap and the Policy Gap for the year 2014 are presented, as well as revised estimates for the years 2010–2013 “due to the transmission” of Eurostat national accounts from the ESA95 to the ESA10. This update covers Croatia, which was not included in the previous updates. While it was hoped that the update would also cover Cyprus, it has not been possible due to incomplete national accounts data. The VAT Gap is a measure of VAT compliance and enforcement that provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as miscalculations. It is defined as the difference between the amount of VAT collected and the VAT Total Tax Liability (VTTL), which is expressed in the report in bothabsolute and relative terms. The VTTL is the theoretical tax liability according to tax law, and is estimated using a “top-down” approach.
Topic:
Economic growth, Tax Systems, Macroeconomics, Fiscal Policy, Innovation, VAT, and Trade
Political Geography:
Europe, Poland, Croatia, and European Union

9. VAT non-compliance in Poland under scrutiny

Author:
Grzegorz Poniatowski, Jarek Neneman, and Tomasz Michalik
Publication Date:
07-2016
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
Since 2009, despite constant growth in the tax base and only slight variations in effective rates, the trend in VAT revenue in Poland has been reversed, and inflows have become less stable. The ongoing decline in VAT collection and the increase in the uncertainty related to the main component of budget revenues is a very important problem, which in the light of growing budget spending may threaten the stability of public finances. In the new mBank - CASE Seminar Proceedings three experts: Grzegorz Poniatowski, dr. Jarosław Neneman and Tomasz Michalik examine the structure and the causes of the VAT gap as well as the legal context and possible methods of improving VAT compliance at national and European level.
Topic:
Budget, Economic growth, Tax Systems, Fiscal Policy, and VAT
Political Geography:
Europe, Poland, and European Union

10. Study to quantify and analyse the VAT Gap in the EU Member States. 2015 Report

Author:
Luca Barbone, Mikhail Bonch-Osmolovsky, and Grzegorz Poniatowski
Publication Date:
10-2015
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
This report provides estimates of the VAT Gap for 26 EU Member States for 2013, as well as revised estimates for the period 2009-2012. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member Statess, published in September 2013 (hereafter: 2013 Report), and to the report “2012 Update Report to the Study to Quantify and Analyse the VAT Gap in the EU-27 Member States” , published in October 2014 (hereafter: 2014 Report). As in previous reports, it was not possible to include estimates for Croatia and Cyprus, due to as-yet-incomplete national account statistics for the two countries. The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. As the VAT Gap in this study is based on a top-down approach, it does not readily lend itself to be deconstructed according to industrial sectors or other criteria (territorial, professional), and can be best used as a diagnostic tool in the context of its evolution over time. As discussed in previous reports, the VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations. This report calculates, for each country the VTTL on the basis of national accounts, by mapping information on standard, reduced rates and exemptions onto data available on final and intermediate consumption, as well as gross fixed capital formation, from national accounts and use tables. Thus, the quality of the VAT Gap estimates depends on the accuracy and completeness of national accounts data and use tables. The year 2013 saw a continuing overall unfavourable economic environment, as the GDP of the European Union was nearly stagnant. This contributed to a slowdown of nominal final consumption and of other economic aggregates that form the basis of the Value Added Tax. Six countries applied changes to standard or reduced rates in 2013, marking a relatively stable policy environment. During 2013, the overall VAT Total Tax Liability (VTTL) for the EU-26 Member States grew by about 1.2 percent, while collected VAT revenues rose by 1.1 percent. As a result, the overall VAT Gap in the EU-26 saw an increase in absolute values of about Euro 2.8 billion, to reach Euro 168 billion. As a percentage, the overall VAT Gap stayed constant at 15.2 percent. The median VAT Gap rose by 1.6 percentage point, to reach 13.9 percent. In 2013, Member States’ estimated VAT Gaps ranged from the low of 4 percent in Finland, the Netherlands and Sweden, to the high of 41 percent in Romania. Overall, 15 Member States decreased their VAT Gap, with the largest improvements noted in Latvia, Malta and Slovakia. 11 Member States saw an increase in the VAT Gap, generally of small magnitudes, with the largest deteriorations in Estonia and Italy. This report also provides new and expanded evidence on the Policy Gap for the EU-26. The Policy Gap is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied standard rate to all consumption of goods and services supplied for consideration. We provide here estimates of the Policy Gap adjusted to take into account items that could not easily be taxed even in an “ideal” system (imputed rents, public goods, financial services). The results moderate views of the relative importance of reduced rates and exemptions in reducing the revenue potential of VAT, and suggest that better enforcement remains a key component of any strategy of improvement of the VAT system. The results of this report and the underlying data were presented to Member States in advance of publication and discussed on several occasions with the representatives of Member States. Deviating approaches and views of Member States are noted in the relevant country section in Chapter 3. The authors are grateful for the constructive cooperation and helpful input of Member States.
Topic:
Economic growth, Macroeconomics, Fiscal Policy, Innovation, VAT, and Trade
Political Geography:
Europe and European Union