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EU Expects Pandemic Will Exacerbate Shortfall In VAT

By Todd Buell · September 10, 2020, 11:51 AM EDT

The coronavirus pandemic is expected to increase the gap between expected and actual intake of value-added tax in the European Union, a discrepancy that had been narrowing for years, a report from the European Commission said Thursday.

The VAT gap, which had fallen to around €140 billion ($166 billion) in 2018 and had been predicted to drop to €130 billion in 2019, is now expected to climb to €164 billion in 2020, the commission said.

The €140 billion shortfall in 2018 was €1 billion lower than the gap in the previous year, when it had fallen by nearly €3 billion, the report said. The predicted drop to €130 billion in 2019 was made using a different measurement approach than the one used for 2014-2018, the commission noted. The gap consists of tax revenue lost due to fraud, as well as insolvencies and bankruptcies.

The EU's commissioner for taxation, Paolo Gentiloni, said in a statement that the figures issued Thursday show the bloc has made "gradual progress" in stopping VAT fraud and evasion but that "much work is needed" still. The coronavirus pandemic has "drastically altered" the EU's economic outlook and is likely to "deal a serious blow" to VAT revenue, he added.

"At this time more than ever, EU countries simply cannot afford such losses," Gentiloni said. "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."

The commission said the data underscored the need for a thorough overhaul of the EU's VAT rules to improve cooperation among the bloc's 27 member countries. In July, the commission, which proposes legislation in the EU, put forward a package of taxation measures that included changes to the VAT system.

Among the July proposals were establishment of a single VAT registration for the EU and modernization of VAT reporting. The plan also calls for updating and simplifying VAT rules for financial services.

The VAT gap data for 2018 showed that in percentage terms, the widest VAT gaps were in Romania, Greece and Lithuania, while the smallest gaps were in Sweden, Croatia and Finland. The median gap was 9.2%, the report said. 

--Editing by Vincent Sherry.


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