02 Dec 2021
External Publications

VAT Gap in the EU. Report 2021

This Report has been prepared for the European Commission, DG TAXUD, for the project TAXUD/2019/AO-14, “Study and Reports on the VAT Gap in the EU-28 Member States”, and is a follow-up to the eight reports published between 2013 and 2020.

The report provides yearly Value Added Tax (VAT) Gap estimates for the EU-28 covering the 2015-2019 period. We calculate the VAT Gap as the difference between the VAT due and the actual VAT revenues. As such, it represents the VAT revenues lost compared to a theoretical VAT calculation. The underlying reasons for this VAT Gap can be grouped into four broad categories: (1) VAT fraud and VAT evasion, (2) VAT avoidance practices and optimisation, (3) bankruptcies and financial insolvencies, and (4) administrative errors. While each of these reasons calls for a different policy response, even under the best circumstances the VAT Gap could not be completely eliminated, for instance as regards foregone VAT due to bankruptcies and financial insolvencies.

To calculate the VAT Gap, we follow a consumption-side top-down approach, developed under the 2013 VAT Gap Study and agreed with Member States’ authorities to ensure that the VAT Gap is estimated in a consistent way across time and Member States. However, the consumption-side top-down approach does not allow for a further breakdown of the VAT Gap into the causes listed above. A more targeted analysis of the components and reasons for the VAT Gap is therefore outside the scope of this report. However, DG TAXUD announced that it foresees launching more targeted studies in the future which would allow segmenting the overall VAT Gap into separate elements that could be quantified and further analysed. This additional work might then help design targeted policy measures to reduce the overall VAT Gap.

In addition, based on the updated set of estimates, we analyse econometrically the VAT Gap determinants. In order to improve the explanatory power of the models presented in the 2020 Study, we use the principal component analysis (PCA) and extend the set of “tax administration” variables. This Report also presents the overall collection efficiency (the “C-efficiency” ratio), updates of the Policy Gap estimates for 2019, and the contributions that reduced rates and exemptions made to the theoretical VAT revenue losses.

In 2019, conditions for improving compliance were rather favourable. Overall, growth of EU GDP amounted to approximately 3.5 percent in nominal and 1.6 percent in real terms, respectively. The core component of the base, final consumption, inclined by over 1 percent in the vast majority of Member States. In addition, 2019 was a relatively stable year in terms of tax regime changes affecting the effective rates and the VAT Total Tax Liability (VTTL).

The EU-wide VAT Gap, which covers all sources of VAT non-compliance, amounted to EUR 134 billion in nominal terms and 10.3 percent expressed as a share of the VAT Total Tax Liability in 2019. VAT revenue increased by 3.8 percent whereas the VAT Total Tax Liability increased by 2.9 percent, leading to a decline in the VAT Gap in both relative and nominal terms. Compared to 2018, the Gap went down by approximately 0.8 percentage points and EUR 6.6 billion. The smallest Gaps were observed in Croatia (1 percent), Sweden (1.4 percent), and Cyprus (2.7 percent), the largest – in Romania (34.9 percent), Greece (25.8 percent), and Malta (23.5 percent). Half of the EU-28 Member States recorded a Gap above 8.6 percent. In most Member States, the absolute year-over-year change in the VAT Gap was less 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 (recording reductions in the VAT Gap by between 3.2 and 2.2 (-3 percentage points). In Sweden, Finland, and Estonia, the loss in VAT revenues for years already has been consistently measured at less than 5 percent of the VAT due. The biggest increases in the VAT Gap, apart from Malta, were observed for Slovenia (+3 percentage points) and Romania (+2.3 percentage points). Because of significant changes in the tax regimes and structures of the economies observed in 2020, we report fast estimates for 2020 only for selected Member States.

Separate from the estimates of the VAT Gap and their descriptive analysis, the report also provides an analysis of the overall collection efficiency (C-efficiency) and the Policy Gap. The Policy Gap is decidedly not part of the VAT Gap, but a separate indicator: where the VAT Gap is an estimate of the Compliance Gap, the Policy Gap stands for theoretical revenue losses due to the application of exemptions and reduced rates. For the EU overall, the average Policy Gap level was 44.7 percent, which is similar to the previous year. Of this, in 2019, about 9.8 percentage points were due to the application of various reduced and super-reduced rates (the Rate Gap) and 34.9 percentage points were due to non-taxability and the application of exemptions without the right to deduct to some tax base components (the Exemption Gap). Finally, the measure of collection efficiency (C-efficiency) is an indicator of the departure of the VAT system from a perfectly enforced tax levied at a uniform rate on all consumption. In 2019, the average C-efficiency in the EU amounted to 55.5 percent of final consumption.

The results of the econometric analysis confirmed that the VAT Gap is influenced by a group of factors relating to the current economic conditions, institutional environment, and economic structure as well as to the measures and actions of tax administrations. Out of a broad set of tested variables, GDP growth and general government balance appeared to explain a substantial set of VAT Gap variation. Within the control of tax administrations, the share of IT expenditure and the application of additional information obligations for taxpayers proved to have the highest statistical significance in explaining the size of the VAT Gap.


This Report was written by a team of experts from CASE directed by Grzegorz Poniatowski, and composed of Mikhail Bonch-Osmolovskiy and Adam Śmietanka. The Project was coordinated by Roberto Zavatta (Economisti Associati, Bologna). Research assistance was provided by Agnieszka Pechcińska. The Report has been proof-read by Kristen Hartwell.


Read the Report