Widening VAT hole fuelled by fraud, EU confirms

Uncollected VAT receipts totalled €193 billion across the European Union during 2011, or 1.5% of the bloc's GDP, according to a survey published by the European Commission yesterday (19 September), which confirmed figures revealed by euractiv.fr earlier this week.

The massive spike in uncollected VAT revenues, revealed by euractiv.fr on Tuesday (17 September), were confirmed by Algirdas Šemeta, the EU's taxation and anti-fraud commissioner.

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

Italy lost €36 billion in revenues, France €32 billion, Germany €27 billion, and the UK €19.4 billion, according to the study carried out by Polish firm Case during the first semester of 2013 in all 28 EU member states.

Seen as a percentage of GDP, the gaps were widest in eastern European states. Romania’s lost revenue represented 8% of its GDP, and Greece, Lithuania and Latvia all lost the equivalent of 4% of GDP in uncollected VAT.

"The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances," Šemeta said, announcing a raft of new measures to tackle the issue.

Big increase since last recorded figures

The assessment showed considerable increase in the VAT gap compared to the last recorded figures, which dates to 2009 when a study was carried out by British firm Reckon. For example, that study showed the VAT gap in France stood at €9 billion, three times less than the latest study. Paris, however, contested the methodology used in the latest study.

EU officials pointed out that the earlier study was a snapshot of the financial situation in 2006, some five years before the latest one, and claimed that the financial crisis had played a large part in the increase in lost VAT.

According the Commission’s findings, there was a moderate decline in the VAT gap in 2008. But the rates went skyrocketing from that year, which marked the start of the global financial crisis.

Sharp increases in VAT rates to redress public finances, coupled with poor enforcement, have deterred compliance, according to EU officials, who add that the increase in bankruptcies, insolvencies and falling imports arising from the crisis were also contributing factors.

Commission claims reforms already having an impact

A large upswing in carousel fraud – which sees swindlers import goods VAT-free, sell to domestic buyers charging VAT, then disappear without paying the tax – is also responsible, according to the EU executive.

Šemeta said that the EU’s VAT reform launched in December 2011 has already provided better protection against VAT fraud, with the Quick Reaction Mechanism, adopted in July 2013, allowing member states to react more swiftly to sudden, large-scale cases of VAT fraud.

"There is also a positive message to be drawn from today's findings. Our ambitious reform of the VAT system, the EU measures to combat tax evasion and our recommendations for national tax reforms, are all targeted in the right direction," he added.

The commissioner's spokeswoman told journalists in Brussels that a standard VAT declaration form for the entire EU will be proposed in the coming weeks. And from 1 January 2015, a one-stop-shop will enter into force for e-services and telecoms businesses, which will promote compliance by simplifying VAT procedures.

"We know the problem; we have identified solutions to it, and now it's time for Member States to act. Today's figures will serve as a baseline to assess their progress in improving VAT compliance in the years ahead," Šemeta said.

VAT is the first source of income in European states, representing more than €700 billion each year in revenue. It is collected on trade in goods and services and in the sale of goods.

To facilitate trade between countries, companies benefit from VAT exemptions under certain conditions, when operating outside their borders.

But VAT fraud has tended to proliferate and is now believed to affect new sectors such as electronics, metals, CO2 allowances or cars, which is a source of concern for the European Commission.

  • 18 Nov. : Fiscal forum in Brussels organised by the European Commission (DG Taxud) on the topic: "An efficient VAT system".

European Commission

Member states

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