European Commission: The VAT gap in EU € 170 billion – action plan needed to fight tax fraud
The Commission has presented an action plan to reboot the current EU VAT system to make it simpler, more fraud-proof and business-friendly. The action plan is the first step towards a single EU VAT area which is equipped to tackle fraud, to support business and help the digital economy and e-commerce.
The ‘VAT gap’, which is the difference between the expected VAT revenue and VAT actually collected in Member States, was almost €170 billion in 2013. This amounts to about 15 % of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies and miscalculation in the Member States
Cross-border fraud itself is estimated to be responsible for a VAT revenue loss of around €50 billion a year in the European Union.
At the same time, the current VAT system remains fragmented and creates significant administrative burdens, especially for SMEs and online companies.
Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue said on 7 April: “Today, we are starting a dialogue with the European Parliament and the Member States for a simpler and more fraud-proof VAT system in the EU.”
“At the same time, the administrative burden for small businesses is high and technical innovation poses new challenges for VAT collection. This Commission has already proposed clear measures to address corporate tax avoidance, and we will be equally decisive in tackling VAT fraud.”
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, added: “VAT is a major source of tax revenue for EU Member States. Yet we face a staggering fiscal gap: the VAT revenues collected are €170 billion short of what they should be. This is a huge waste of money that could be invested on growth and jobs. It’s time to have this money back.”
The action plan to tackle VAT fraud comes at the same time as the immense tax losses for EU Member States caused by the establishment of shell companies in primarily the British Virgin Islands were disclosed in the so-called Panama Papers. The documents were shown by a whistleblower to an international consortium of investigative journalists.
According to the Commission, the VAT action plan sets out a pathway to modernize the current EU VAT rules, including:
– key principles for a future single European VAT system;
– short term measures to tackle VAT fraud;
– update the framework for VAT rates and set out options to grant Member States greater flexibility in setting them;
– plans to simplify VAT rules for e-commerce in the context of the Digital Single Market (DSM) Strategy and for a comprehensive VAT package to make life easier for SMEs.
Among others, the Commission proposes more autonomy for Member States to choose their own rates policy.
Under the current rules, Member States need to stick to a pre-defined list of goods and services when it comes to applying zero or reduced VAT rates. The Commission plans to modernize the framework for rates and to give Member States more flexibility in future. It proposes two options:
One option would be to maintain the minimum standard rate of 15% and to review regularly the list of goods and services which can benefit from reduced rates, based on Member States’ input.
The second option would abolish the list of goods and services that can benefit from reduced rates. This would, however, require safeguards to prevent fraud, avoid unfair tax competition within the Single Market and it could also increase compliance costs for businesses. Under both options, the currently applicable zero and reduced rates would be maintained.