Fight against VAT fraud: the initiatives of the European Commission

VAT GAP Report 2022

The VAT GAP is an estimate of the overall difference between the expected VAT revenue and the amount actually collected. EU Member States lost an estimated €93 billion in Value-Added Tax (VAT) revenues in 2020, according to the 2022 Report on the VAT Gap released by the European Commission. Though still extremely high, the 'VAT Gap' – the estimated difference between expected revenues in EU Member States and the revenues actually collected – dropped by approximately €31 billion compared to the 2019 figures.  This increase in VAT compliance can be explained to some extent by the effect of government support measures introduced in response to the COVID-19 pandemic, which were contingent on paying taxes. However, the VAT Gap clearly remains an important problem, at a time when governments need sustainable revenues to help weather today's economic uncertainty.

EU Member States are losing billions of euros in VAT revenues because of tax fraud and inadequate tax collection systems.

The VAT Gap provides an estimate of the VAT revenue loss due to tax fraud, tax evasion, tax avoidance and optimisation practices, bankruptcies, financial insolvencies, as well as miscalculations and administrative errors. Other circumstances that could have an impact on the size of the VAT Gap include economic developments and the quality of national statistics. What causes the VAT GAP?

• Corporate insolvency;
• Vat fraud and evasion;
• Legal tax optimisation;
• Corporate bankruptcy;
• Maladministration.

In 2020, Romania recorded the highest national VAT compliance gap with 35.7% of VAT revenues going missing in 2020, followed by Malta (24.1%) and Italy (20.8%). The smallest gaps were observed in Finland (1.3%), Estonia (1.8%), and Sweden (2.0%). In absolute terms, the highest VAT compliance gaps were recorded in Italy (€26.2 billion) and France (€14 billion).

VAT fraud in the EU: a growing problem

With the 2022 report on the VAT gap (so-called "VAT gap report 2022"), the EU Commission estimated a loss of VAT revenue in the recent period since, while in 2019 the amount was close to a figure exceeding 1,000 billion euros, in 2019 it fell to 930 billion euros. As an important source of income for Member State budgets as well as a significant EU own resource, the resulting loss of VAT revenue is largely due to fraud committed in the various EU countries but also due to inadequate collection systems.

The largest type of fraud committed is the defaulting operator intra-community (MTIC) fraud which causes the most serious financial damage to EU public revenues, resulting in annual tax losses for the Member States of around €50 billion, according to the latest Europol estimate.

Hence the intention to increasingly strengthen cooperation between the Member States to ensure that taxpayers comply with the legislation on VAT and to fight against fraud, thus guaranteeing ever more strengthened protection of VAT revenues.

What problems identified by the EU Commission

The EU Commission, given the delicate situation that has arisen, has decided to intervene with particular urgency. In fact, the recent initiative originates from the Commission's Action Plan for fair and simple taxation in support of the recovery strategy which contemplates various legislative proposals to amend Regulation (EU) No. 904/2010 of the Council on the matter. The intervention, considered in the context of VAT in the digital age, is aimed at modernizing VAT reporting obligations, introducing electronic invoicing and digital reporting obligations for all cross-border transactions.

If we take a closer look, the latest amendment to Council Regulation (EU) No 904/2010 dates back to 2018 (Council Regulation (EU) 2018/1541) which gave tax authorities additional updated tools to cooperate with each other as well as detect and fight VAT fraud.

Today, however, after about five years, it is necessary to modernize the legislation, since the current legislation does not take full advantage of digital solutions. Indeed, the digital economy offers the possibility to improve tax cooperation, in particular through the exchange and analysis of relevant information:

• OLAF (European Anti-Fraud Office) and the European Union Agency for Law Enforcement Cooperation (Europol) do not reach their full potential due to limited national commitment and national legal basis;
• EPPO, i.e. the European Public Prosecutor's Office, started its work in June 2021 and is very active in carrying out its duties regarding cross-border crimes in the VAT area. As the EPPO has only been operational since the last amendment to Council Regulation (EU) No 904/2010 of the Council, this does not provide the legal basis and the specific channels of cooperation between the EPPO and Eurofisc.

What EU interventions?

The EU Commission has set itself the objective of protecting the economic and financial interests of the EU and of the Member States, by enhancing cooperation on VAT, the fight against fraud and better tax collection. Therefore the initiative being adopted is aimed at strengthening Eurofisc, improving the use of existing tools for administrative cooperation and increasing cooperation with OLAF, Europol and the EPPO in the fight against organized fraud.

What will be the intervention points?

• introducing legislation to enable the active participation of national tax administrations in the operational side of Eurofisc;
• a new legal basis to develop cooperation between Eurofisc and the EPPO and strengthen the existing legal basis for cooperation between Eurofisc , and OLAF and Europol;
• making new sources of information available to Eurofisc;
• improving cooperation between tax and customs authorities;
• introducing quick-reaction systems to deal with VAT identification numbers that may be used in cross-border VAT fraud;
• strengthening the enforced collection of VAT that remains unpaid under the One Stop Shop (Union Scheme) and Import One Stop Shop;
• transferring VAT refund amounts to another Member State when there is double taxation, unpaid VAT or other tax debts, etc.