CASE – led team assesses VAT evasion in the European Union

The analysis of VAT Gaps for the period 2000-2011 in this report shows that (i) prior to 2008 a moderate declining trend was present in the data, in many cases quite evident in post-accession countries; (ii) there continue however to be great disparities in the performance of countries, and most “worse performers” have been unable to improve their situation substantially over time; (iii) the post-2008 difficult economic times faced by several Member States have strained VAT systems, particularly in the hardest-hit countries, leading to increases in VAT Gaps even as rates were increased on several occasions. The report estimates that the total VAT Gap for the 26 EU countries amounted to approximately Euro 193 billion in 2011, or about 1.5 percent of the GDP of the EU-26, an increase from the 1.1 percent of EU-26 GDP recorded in 2006. Italy, France, Germany and the United Kingdom contributed over half of the total VAT Gap in absolute terms, although in terms of their own GDP the countries with the largest gaps are Romania, Latvia, Greece and Lithuania. Econometric estimates of the determinants of the VAT Gap show that VAT compliance appears to fall when tax rates are increased, at least in countries with weaker tax enforcement. In addition, VAT compliance appears to fall during recessions. These results are consistent with predictions from the theory of tax avoidance, and consistent with some previous estimates. Together, the estimates of the VAT Gaps and the econometric analysis give some indication of the important place of tax enforcement and tax compliance considerations in determining how VAT should be reformed to respond to Europe’s fiscal pressures. Certainly, these results are consistent with the notion that reforms to VAT policy and VAT enforcement can be an important part of fiscal consolidation exercises in some member states. The report covers 26 out of 28 EU members, as Cyprus could not be included due to the imminent release of major revisions to its national accounts, and Croatia joined the EU after the report was completed.

"Study to quantify and analyse the VAT Gap in the EU-27 Member States" was commissioned by the Directorate General for Taxation and Customs Union (TAXUD) of the European Commission and prepared by a team of experts consisting of CASE Fellows Luca Barbone and Misha V. Belkindas, as well as Leon Bettendorf, Richard Bird, Mikhail Bonch-Osmolovskiy and Michael Smart.

Read the full publication here.