European Commission study: EU countries lose 152 billion in VAT revenues, indicating need for VAT reforms

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Member states of the EU lost an estimated total of 152 billion of euros in Value-Added Tax (VAT) revenues in 2015 due to tax fraud and inadequate tax collection systems. The difference between the expected VAT and the VAT that is collected is also known as the VAT Gap. According to the Commission, the VAT Gap again shows the need for modernisation of the VAT system. The current rules can discourage businesses from expanding their scope across borders, and harm the Single Market.

The current system splits every sale across EU borders into a VAT exempt transaction in the country of origin, and a taxable purchase in the country of destination. However, the system lacks control mechanisms, and is therefore sensitive for cross-border fraud, tax evasion and tax avoidance. While there is improvement, missing amounts remain, and performances among member states vary significantly. According to the Commission, it is no longer viable to base the system on 28 different VAT procedures.

Therefore, the Commission aims to create an EU-wide VAT system. This would treat cross-border transactions in the same way as domestic transactions, with the goal of boosting jobs and competitiveness. Businesses will be, in theory, able to sort out their VAT more easily via an online web portal in their home country. To make full use of VAT revenues, the Commission will table legislative proposals later this year to reform the VAT system. Furthermore, it hopes there will be a quick agreement by the Member states on new rules to improve VAT for e-commerce.

To read more about the study,  please click here.

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