Commission mulls VAT gap reform

VAT reform could save EU member states €40 billion per year. [Butz.2013/Flickr]

The European Commission has published its third report on the ‘VAT gap’. The situation has not improved since 2011. EURACTIV France reports.

In 2013, just like in 2012 and 2011, the EU-28 lost over €160 billion to VAT fraud. But for the first time, the European executive is beginning to dig its teeth into the problem.

“The total amount of VAT lost across the EU is estimated at €168 billion,” according to the report. This equates to 15.2% of revenue loss for EU member states.

Performances vary greatly across the EU-28. Finland is the most efficient tax collector, with a VAT gap equal to just 4% of the VAT collected, while Romania is the least efficient, with a VAT gap of 41%.

Italy on a par with Greece

But in terms of the absolute value, the picture is quite different.

France cut its VAT gap from €32 billion in 2013 to €14 billion in 2014, largely thanks to a new VAT system in the pharmaceuticals sector.

>>Read: France’s €30 billion VAT gap revealed

But in Italy, the gap between theoretical VAT revenue and the VAT actually collected has exploded to €47.5 billion. At 34% of the total, this is similar to the Greek VAT gap, but the relative sizes of the two economies means it is much larger in absolute terms.

Business bankruptcies, statistical errors and fraud are among the causes of the gap.

The authors of another Commission study published this summer found that MTIC fraud (Missing Trader Intra-Community fraud, or carousel fraud) alone “is responsible for a VAT revenue loss of approximately €45 billion to €53 billion annually. Given the current fragile economic and financial climate, a reduction of VAT fraud could provide governments with the additional tax revenues that they need without the need to further increase the tax burden on consumers”.

Carousel fraud occurs when a fraudulent business (or “missing trader”) buys goods in another EU country. The missing trader then sells the goods to a business in its member state and charges VAT. The purchaser, who may be an innocent party, reclaims the VAT charged by the missing trader. The missing trader then disappears without paying the VAT to the tax authorities of the member state in which the VAT is due.

For the first time, some – but not all – member states have agreed to provide more detailed information to evaluate the level of fraud in their countries. Nine countries (Austria, Bulgaria, the Czech Republic, Cyprus, Finland, Slovakia, Slovenia, the United Kingdom and France) have agreed to collaborate with the European Commission’s experts, to investigate how to stop VAT fraud.

MTIC fraud alone worth €45 to €53 billion

Yet as the Commission’s report shows, the problem of VAT fraud is fairly concentrated in terms of the absolute value lost: “the United Kingdom, France and Germany represent half of uncollected VAT”.

The report concentrates largely on MTIC fraud, the single most costly kind of VAT fraud to the EU. From the total of €168 billion lost to VAT fraud every year, between €45 and €53 billion are down to MTIC alone.

France estimates its own VAT gap from MTIC fraud at around €12 billion per year; the biggest loss to MTIC fraud in the EU. The United Kingdom and Italy each lose around €8 billion to MTIC fraud each year.

One of the European Commission’s aims in carrying out the study was to assess the impact of a possible change to the rules governing VAT for European businesses. The EU executive concluded that changing the system to make companies automatically pay VAT on purchases made outside their own country would add minimal costs for European companies, but could raise a further €40 billion per year in revenue for member states.

"I ask the member states to take the necessary measures to fight tax evasion and tax fraud at all levels. This remains a major problem and a top priority of this Commission," said Pierre Moscovici, France's European Commissioner.

Value added tax (VAT) is the most important source of revenue for European countries. Far in front of company tax and income tax, VAT is worth 7% of the EU's gross domestic product (GDP), or roughly €700 billion every year.

It is added to goods and services during transaction or payment. The final consumer is the only person who pays VAT, while companies just collect it for the state.

To facilitate economic exchange between EU member states, companies are exempt from this tax under certain conditions, when operating outside their home country. VAT fraud has increased in recent years, particularly on electronic products, metals, CO2 quotas and cars.

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