Country-specific updates: EU

European implementation assessment on “VAT gap, reduced VAT rates and their impact on compliance costs for businesses and on consumers”

The European Parliamentary Research Service has published a report about the EU’s VAT gap — the difference between projected VAT revenue across the bloc and the amount that is actually collected — and the factors that influence that gap. The report was prepared in support of ongoing work by the European Parliament's permanent subcommittee on tax matters on the implementation of the EU’s sixth VAT directive.

The report notes that:

• VAT comprises an average of about 21% of total tax revenue across the EU-27, making it one of the top sources of government revenues;
• on average, the VAT gap has declined from 20% in 2009 to 10% in 2019 in the EU member states. (However, the size of the VAT gap varies considerably across Member States, ranging from 33 % in Romania to 1 % in Sweden and Croatia.)

The report discusses the effectiveness and efficiency of reduced VAT rates for achieving distributional, social and environmental goals.

The report says that the current diversification of VAT rates across the EU member states distorts the functioning of the internal market by leading to uneven competition. Examining the potential of a uniform tax rate and the associated reduced compliance costs, the report says that: “Based on the assumptions that the current system of diversified VAT rates is replaced by one standard rate which is applied uniformly across all goods and services and which generates the same VAT revenue as the current system, the standard rate could on average be reduced by 7 percentage points in the EU27. However, the degree to which the standard rate could be reduced varies significantly across the EU Member States, from 2 percentage points in Estonia to 13 percentage points in Greece.”

Digitalisation can also help cut compliance costs for businesses, but it is “not always accompanied by simplification, thus greatly limiting its potential beneficial impact,” the report adds.