In September, the European Commission released its latest study on the so-called ‘VAT Gap’. The VAT Gap is defined as the difference between the amount of VAT 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 VAT legislation and ancillary regulations. The VAT Gap measures the effectiveness of VAT enforcement and compliance measures in each EU country, as it provides an estimate of revenue lost due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations.
During 2017, the overall VAT Gap in the EU Member States fell from €145.4 bn in 2016 to €137.5 bn in 2017. In relative terms, the EU-wide gap dropped to 11.2%, down from 12.2% in 2016.
In 2017, the estimated VAT Gaps ranged from 0.6% in Cyprus, to 35.5% in Romania. Overall, the VAT Gap as a percentage of the VTTL decreased in 25 EU countries, with the largest improvements in Malta, Poland, and Cyprus and increased in three – Greece, Latvia, and marginally in Germany.
The substantial VAT Gap again highlights the need for comprehensive reform of the EU VAT rules, as proposed in 2017 by the Commission, and increased cooperation between EU Member States to clamp down on VAT fraud and to make the rules work for legitimate businesses and traders.
Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici said: “The favourable economic climate and some short-term policy solutions put in place by the EU helped to lower the VAT Gap in 2017. However, to achieve more meaningful progress we will need to see a thorough reform of the VAT system to make it more fraud-proof. Our proposals to introduce a definitive and business-friendly VAT system remain on the table. Member States cannot afford to stand by while billions are lost to illegal VAT carousel fraud and inconsistencies in the system.”
What is being done by the EU and its Member States to improve VAT collection?
Much progress has been achieved since the beginning of the Juncker Commission mandate to strengthen the ability of EU countries to administer and collect VAT:
- New rules for the sale of e-services online came into force in 2015 allowing EU Member States to collect VAT where the consumer is based. The ‘One Stop Shop’ scheme allows traders to manage all their VAT obligations using one online portal.
- In 2017 EU Member States also agreed to extend this new system to the sale of goods online, delivering another boost for VAT collection in the EU and helping authorities to recoup the current estimated €5 bn of VAT lost on online sales every year.
In 2018 the EU also agreed on a new framework to exchange more information and boost cooperation between national tax and law enforcement authorities. Once in force, EU countries will be able to exchange more relevant information and to cooperate more closely in the fight against criminal organisations, including terrorists.
In the meantime – inspired by developments in Latin America in the last decade – several EU countries have introduced their own measures to improve VAT collection, through digital transformation. They are introducing state-controlled, real-time IT platforms that place national tax administrations at the heart of business transactions. In 2017, Spain introduced the Immediate Information System (SII), a near real-time digital reporting obligation on sales and purchase transactions. Hungary followed in 2018 with a real-time reporting mandate on sales transactions and Poland has announced that in 2020 it will expand its monthly VAT transactional report (JPK_VAT) while at the same time abolishing the monthly VAT return. Greece looks set to introduce e-reporting by 2020 and France recently announced plans to introduce a mandatory B2B e-invoicing clearance system in 2023.
Now is the time to consider the global challenge that arises when many countries start to implement similar e-invoicing and e-reporting regimes. To stay compliant globally, companies should look for a tax compliance provider that allows them to maintain central automation processes, while having the flexibility to adapt to the wave of new tax digital mandates on the horizon from countries such as Greece and France.