Bulgaria has emerged as among European Union states with the best rates in recent years of collecting value-added tax (VAT) – though it has also emerged that across the EU, huge sums in VAT are being lost because of non-compliance or failure to collect.
A report issued after an investigation funded by the European Commission found that an estimated 193 billion euro in VAT revenue, about 1.5 per cent of GDP, was lost in the “VAT Gap” in 2011 across all EU countries checked in the report.
The “VAT Gap” is uncollected VAT, the difference between expected VAT revenue and VAT actually collected by national authorities.
The countries with the lowest uncollected VAT are Estonia and Slovenia, each with 300 million euro, followed by Bulgaria and Luxembourg (600 million euro each).
The study was funded by the Commission as part of its work to reform the VAT system in Europe, as well as its wider campaign to clamp down on tax evasion, the EC said.
The study sets out detailed data on the gap between the amount of VAT due and the amount actually collected in 26 EU countries between the years 2000 and 2011.
The main factors contributing to the VAT Gap are also presented, along with an overview of the effect of the economic crisis on VAT revenues.
Algirdas Šemeta, European Commissioner for Taxation, said: “The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances.
“However, 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. 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.
While non-compliance is certainly an important contributor to this revenue shortfall, the VAT Gap is not only due to fraud, the Commission said.
Unpaid VAT also results from bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, amongst other things. Therefore, effectively tackling the VAT Gap requires a multi-pronged approach, the EC said.
First, a tougher stance against evasion, and stronger enforcement at national level, are essential.
The VAT reform launched in December 2011 has already delivered important tools to ensure better protection against VAT fraud, according to the Commission.
“For example, the Quick Reaction Mechanism, adopted in July 2013, will allow member states to react much more swiftly and effectively to sudden, large-scale cases of VAT fraud.
“Eurofisc, which was launched in 2010, also facilitates stronger co-operation and co-ordination between member states to in combating organised VAT fraud, especially carousel fraud.”
Secondly, the simpler the system, the easier it is for taxpayers to comply with the rules.
“Therefore, the Commission has focussed intently on making the VAT system easier for businesses across Europe.”
For example, new measures to facilitate electronic invoicing and special provisions for small businesses came into force at the start of the year, and a standard VAT declaration form for the entire EU will be proposed in the coming weeks, the EC said.
From January 1 2015, a One Stop Shop will enter into force for e-services and telecoms businesses, which will promote more compliance by greatly simplifying VAT procedures for these businesses and enabling them to file a single VAT return for their activities across the EU, the Commission said.
Finally, member states need to reform their national tax systems in a way that facilitates compliance, deters evasion and avoidance, and improves the efficiency of tax collection, the EC said.
“The Commission has given clear guidance in this respect through the country specific recommendations. Today’s report also suggests that complicated tax systems with multiple rates can contribute to non-compliance.”
The EC repeated its call to EU countries to broaden national tax bases and to limit tax exemptions and reductions, should be given particular attention.
“Not only would this help simplify tax systems, but it may enable member states to avoid hikes in the standard VAT rates.”
The report estimates that the total VAT Gap for the 26 EU countries was about 193 billion euro in 2011, or about 1.5 per cent of the GDP of the EU-26, an increase from the 1.1 per cent of EU-26 GDP recorded in 2006 (this list does not include Cyprus).
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
All EU countries rely on VAT as one of their main sources of government revenue, the report said.
On average, VAT revenues amounted to 21 per cent of total general government revenues for the EU-27 countries over the period 2000-2011, or 7.5 per cent of GDP.
The lowest percentage in total revenues was registered in Italy, while Bulgaria relies most heavily on VAT in its total general government revenues.
Bulgaria’s average gap for the period 2000-2011, at 16 per cent, places the country in the fourth quintile among the EU-26.
However, this average masks a U-shaped pattern (shared with several other “new member states”): a strong reduction in the gaps in the earlier part of the period (34 per cent in 2002 vs. four per cent in 2008), coinciding with the accession to the European Union, and resulting from substantial increases in VAT receipts; followed by a recession-induced partial reversal starting from 2009 (15 per cent), thus increasing the VAT Gap again, albeit not to the levels witnessed in the early 2000s.
Bulgaria has maintained unchanged its standard rate (20 per cent) while introducing a reduced rate in 2007 (seven per cent, changed to nine per cent in 2011).
Bulgaria also shares with countries whose adoption of the VAT is more recent a greater percentage of the VAT liability levied on household consumption rather than on unrecoverable VAT on inputs of industries producing exempted goods, the report said.
(Photo: Clive Leviev-Sawyer)