RIGA - Latvia recorded a value added tax (VAT) gap of 8.3 percent, or EUR 237 million, in 2019, while Estonia's VAT gap was 4.5 percent, or EUR 116 million, and Lithuania's VAT gap was 21.4 percent, or EUR 1.048 billion, the European Commission said in its latest Report on the VAT Gap.
As LETA was told at the European Commission's Representation in Latvia, European Union (EU) member states lost an estimated EUR 134 billion in VAT revenues in 2019.
VAT Gap reflects the difference between expected revenues in EU member states and the revenues actually collected. VAT Gap occurs due to tax fraud, tax evasion, tax avoidance and optimization 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.
In nominal terms, the overall EU VAT Gap decreased by almost EUR 6.6 billion to EUR 134 billion in 2019, a marked improvement on the previous year's decrease of EUR 4.6 billion. This downward trend was expected to continue, though the coronavirus pandemic is likely to revert the positive trend, the Commission said.
In 2019, Romania recorded the highest national VAT compliance gap with 34.9 percent of VAT revenues going missing in 2019, followed by Greece (25.8 percent) and Malta (23.5 percent). The smallest gaps were observed in Croatia (1 percent), Sweden (1.4 percent), and Cyprus (2.7 percent). In absolute terms, the highest VAT compliance gaps were recorded in Italy (EUR 30.1 billion) and Germany (EUR 23.4 billion).
In most member states, the absolute year-over-year change in the VAT Gap was lower than 2 percentage points. Overall, the VAT Gap share decreased in 18 member states. In addition to Croatia and Cyprus, the most significant decreases in the VAT Gap occurred in Greece, Lithuania, Bulgaria and Slovakia (between –3.2 and -2.2 percentage points in these four countries).
Sweden, Finland and Estonia were successful from a different perspective: in these countries, fiscal authorities have for years succeeded in limiting the loss in VAT revenues to less than 5 percent of the VAT due. The biggest increases in the VAT Gap were observed in Malta (+5.4 percentage points), in Slovenia (+3 percentage points) and in Romania (+2.3 percentage points).
According to the EUR Commission, lost VAT revenues have an extremely negative impact on government spending in public goods and services such as schools, hospitals and transport. The missing VAT could also prove beneficial as member states strive to cover debt incurred during the initial recovery from the Covid-19 pandemic, or raise their climate financing ambitions.