The European Commission’s latest “VAT Gap” report reveals a concerning decline in value-added tax (VAT) compliance in 2022. The VAT compliance gap, which represents the potential additional VAT revenue if all stakeholders followed VAT rules diligently, rose from 6.58 percent in 2021 (€76 billion) to 6.99 percent in 2022 (€89 billion). This is a worrying trend that calls for a deeper analysis and strategic intervention.
Top EU Countries with Compliance Gaps:
- Romania (30.6 percent)
- Malta (25.9 percent)
- Lithuania (14.6 percent)
- Slovakia (14.6 percent)
- Hungary, Cyprus, Portugal, Ireland (all below 2 percent)
Source: European Commission, “VAT Gap in the EU: 2024 Report,” Dec. 12, 2024, https://op.europa.eu/en/publication-detail/-/publication/298d43e2-bd28-11ef-91ed-01aa75ed71a1/language-en.
The increasing compliance gap in 15 EU countries raises questions about the root causes behind this trend. While factors like VAT avoidance and enforcement deficiencies play a role, undelivered VAT due to insolvencies, bankruptcies, or strategic tax planning also contribute to the gap’s expansion. Eurostat data on bankruptcies shows a marginal correlation between bankruptcy upsurge and compliance drop, but anomalies in Greece, France, and Hungary where compliance rose despite more bankruptcies suggest a need for nuanced interpretations.
Furthermore, the VAT compliance gap revisions for 2020 and 2021 underscore inconsistencies in VAT deferrals and data quality disruptions. The report illuminates how shifts in payment schedules artificially boosted VAT collections in 2021 without altering tax liabilities. Such distortions irk existing compliance metrics and pose challenges to future projections, especially in countries like Luxembourg, the Netherlands, and Croatia where VAT gaps escalated significantly.
The escalating VAT compliance gap projections for 2023 foreshadow a looming crisis, aggravated by a surge in bankruptcies across EU nations. The economic landscape demands stringent policy responses to mitigate revenue losses and enhance operational transparency in VAT management.
Policy Gaps in VAT Implementation:
- Actionable Policy Gap: 19 percent
- Rate Gap Contribution: 12 percent
- Exemption Gap Contribution: 7 percent
VAT policy gaps stem from reduced rates and exemptions, presenting vexing challenges to VAT enforcement and revenue collection. While reduced rates are touted for promoting specific consumptions aligned with policy objectives, studies reveal their adverse impact on revenue streams and operational complexities. The actionable policy gap remains a critical metric for assessing the revenue potential if these distortions were eliminated.
Most significantly, the VAT policy gap swelled from 17.6 percent in 2021 to 19 percent in 2022, with rate gaps driving the spike. Nations like Poland, Spain, and Greece grapple with substantial policy gaps, necessitating meticulous reforms and realignments in VAT regimes to bolster fiscal resilience.
As we anticipate phase-out measures for temporary VAT rate cuts and evolving market dynamics, striking a balance between compliance and policy gaps remains pivotal for sustainable revenue generation and economic stability. Policymakers are urged to recalibrate VAT frameworks to bridge these gaps effectively, fostering a conducive business environment across the EU. Stay tuned for actionable insights on tax policies shaping your financial landscape and subscribe to our newsletter for expert perspectives right in your inbox.
