EU “VAT Gap” Report released
The European Commission has released the results of its latest “VAT Gap” study, quantifying the amount of VAT that should have been collected by national tax authorities but was not. This is the eighth version of the study and report following previous studies between 2013 – 2020. This year’s study calculates the VAT Gap in 2019 and therefore also includes the UK together with the EU27.
What is the VAT Gap?
The VAT Gap is calculated as the difference between the VAT due and the actual VAT revenues collected. It represents the VAT revenues lost compared to a theoretical VAT calculation - the VAT Total Tax Liability (VTTL) i.e. the tax liability according to tax law. As well as calculating an actual monetary value of the VAT lost in each EU member state, it is also calculated as a percentage.
What are the main underlying reasons for the VAT Gap?
The European Commission’s study concludes that the underlying reasons can be grouped into four broad categories:
- VAT fraud and VAT evasion
- VAT avoidance practices and optimisation
- Bankruptcies and financial insolvencies
- Administrative errors
Key headlines and statistics from the study
- conditions for improving compliance were rather favourable
- growth of EU GDP amounted to approximately 3.5% in nominal and 1.6 % in real terms
- a relatively stable year in terms of tax regime changes affecting the effective rates and the VTTL
- EU-wide VAT Gap which covers all sources of VAT non-compliance, amounted to EUR 134 billion in nominal terms
- EU-wide VAT Gap was 10.3% as a share of the VAT Total Tax Liability
- VAT revenue increased by 3.8 %, whereas the VAT Total Tax Liability increased by 2.9% - leading to a decline in the VAT Gap in both relative and nominal terms
- compared to previous year (2018), the VAT Gap went down by approximately 0.8 percentage points and EUR 6.6 billion
- largest VAT Gaps were Romania (34.9%), Greece (25.8%) and Malta (23.5%)
- smallest VAT Gaps were Croatia (1%), Sweden (1.4%) and Cyprus (2.7%)
- the VAT gap decreased in 18 member states
- most significant decreases occurred in Greece, Lithuania, Bulgaria and Slovakia (in addition to Croatia and Cyprus)
- biggest increases in addition to Malta, were Slovenia (+3 percentage points) and Romania (+2.3 percentage points)
What are the key takeaways for businesses from this report?
VAT fraud is still here and controls and audit defence documentation need to be robust
It is clear that VAT fraud is still prevalent across the EU. This includes Missing Trader Fraud (MTIC) aka “Carousel Fraud”. Businesses can find themselves part of fraudulent supply chains and can be held jointly and severally liable for the tax lost. It is therefore important for businesses to ensure they have robust Know Your Customer (KYC) procedures in place and can meet and evidence the “Quick Fix” requirements, including:
- collecting, validating and retaining EU VAT registration numbers from customers
- reporting cross-border sales on EC Sales Lists / VIES listings
- retaining the relevant logistical documentary evidence that goods have left the country
Many businesses are looking to automate these processes and use technology to ensure that the data held on suppliers and customers is complete, accurate and also readily available in case of an audit. In addition, logistical evidence which may be required in the event of an audit or investigation may be held by a freight agent and not by the business itself. We are seeing many businesses bring this documentation back into the business, so it is archived, tagged and readily accessible.
Expect further e-invoicing and digital reporting requirements
EU Member States will continue to look for ways to plug the VAT Gap and increase overall compliance. While this could include additional SAF-T, ledgers and listings, the general direction of travel is a move towards mandatory e-invoicing. We have seen this go live in Hungary and Italy, pilots for optional use in Poland, Romania and Slovakia, and announcements for future implementation in several EU Member States including France, Spain and Germany. In addition, the European Commission is considering the implementation of a standard digital reporting requirement or mandatory e-invoicing as part of it’s “VAT in the Digital Age” initiative. As a result of this trend and clear roadmap of changing requirements and new mandates, businesses with a global footprint are advised to think strategically rather than tactically and to consider implementing an e-invoicing solution that is scalable across countries and regions rather than purchase multiple individual local technology solutions as and when new mandates appear.
Prepare for possible extension of reverse charge procedures
To remove VAT from supply chains which could be fraudulently lost, tax authorities are increasingly extending the use of the domestic reverse charge procedure to high risk goods or services. Examples of this include certain EU member states implementing the domestic reverse charge on:
- mobile phones
- computer chips
- wholesale gas
- wholesale electricity
- construction services
As this puts an onus on the customer to correctly self-account for the local VAT due and not pay/recover VAT incorrectly charged by the supplier, businesses are increasingly turning to enhanced tax determination to identify relevant purchases and correctly apply the reverse charge. This could include implementing a tax engine to automate the VAT/GST determination on purchase invoices, both in terms of validating the tax charged by the supplier/vendor and self-charging any VAT/GST due under the reverse charge procedure (akin to accounting for Use Tax in the US).
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