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EU VAT Gap expected to widen in 2020

September 18, 2020

Paolo Gentiloni

EU estimates a potential loss of €164 billion ($194 billion) VAT revenue due to the effect of the coronavirus on the European and global economy, poor tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration.

This year’s VAT Gap report forecasts a pronounced increase in VAT revenue losses in the EU to €164 billion ($194 billion) in 2020 due to the effect of the coronavirus on the European and global economy. This is up from €140 billion ($166 billion) in 2018.

The ‘VAT Gap’ is the difference between expected revenues in EU Member States and the revenues actually collected, due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

Sweden had the lowest VAT Gap of 1% in 2018 and Romania had the largest at 33.8%. In total revenue terms Italy’s 2018 VAT Gap was €35.4 billion ($41.2 billion) in uncollected VAT and the United Kingdom’s at €23.5 billion ($27.8 billion). In Germany the VAT Gap was €22 billion ($26 billion). The United Kingdom was still a member of the EU in 2018 and is included here.

[picture] Paolo Gentiloni, Commissioner for Economy, commenting on the report said “Today’s figures show that efforts to shut down opportunities for VAT fraud and evasion have been making gradual progress – but also that much more work is needed. The coronavirus pandemic has drastically altered the EU’s economic outlook and is set to deal a serious blow to VAT revenues too. At this time more than ever, EU countries simply cannot afford such losses. That’s why we need to do more to step up the fight against VAT fraud with renewed determination, while also simplifying procedures and improving cross-border cooperation.”

Online VAT fraud is a contributor to the VAT Gap with almost 27 million articles that infringed on intellectual property rights (IPR) were detained in 2018 with a street value of nearly €740 million ($876 million).

EU customs saw a high number of fake watches, mobile phones and accessories, ink cartridges and toners, CDs/DVDs, labels, tags and stickers originating from Hong Kong, China.

The fraud works like this: The trader sets up online marketplace accounts using different names and identities, that are often cloned or stolen from legitimate businesses and customers, to sell the same stock, dispatched from the same fulfilment house.

The traders legitimate VAT registered business will import the stock and place it in a fulfilment centre. The stock will almost certainly be under declared and massively undervalued to substantially reduce the import taxes and duty that is paid.

A small volume of sales will be made against the legitimate VAT account to show the tax authorities a profit with payments going to a legitimate PayPal account. The majority of the sales are then made against a cloned or stolen VAT identity, with payments going to the trader’s home country bank accounts.

In the United Kingdom the tax authorities most recent estimate of online VAT fraud is £1.5 billion ($1.94 billion/ €1.64 billion) a year, against a total VAT collection of £205 million ($266 million/ €225 million) in VAT from overseas traders between 2016 to 2018.

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