(P) What measures should be taken in order to decrease the VAT GAP?

Recently the EU Commission has published the 2015 study on the VAT Gap (meaning the difference between the expected VAT revenues and the VAT actually collected) in the EU Member States. 152 billion EUR of VAT were lost in 2015 overall, at EU level. The novelty is that the Commission links the VAT fraud with organized crime and terrorism financing.

Over the last years, Romania has shown capability and proved determination in decreasing the VAT Gap. It is among the countries, which registered the strongest improvements compared to the previous study of the EU Commission. However, it continues to report the largest VAT Gap in EU. Based on the report, Romania reached a 37.2% level of the VAT GAP, translated into approximately EUR 7.7 billion not collected at the State Budget. Central and Eastern Europe (CEE) member states lead top of the list of highest VAT Gap across the EU with a significant difference to next ranked countries as Slovakia (29.4%) and Greece (28.3%). At the opposite side ranks Sweden (-1.4%) and Spain (3.5%).

The study shows that Romania returns to the level registered in 2011 year (37.3%), however, the trend is positive, given the maximum level of 43% in 2014.

Over the last 3-4 years, Romania took several measures, such as reduction of the VAT rate for bread and bakery products (2013) and the reverse charge mechanism for supply of energy and wood industry (2014). 2015 these were followed by extension of the reduced VAT rate to the food products, introduction of fiscal receipt lottery, and limitation of cash payments or additional administrative measures: the well-known 088 form regarding the VAT registration procedure. The authorities continue to tackle the VAT fraud issue by implementing 2016 the reverse charge in more sectors – sale of buildings or laptops/mobile phones, reducing the standard VAT rate to 20% and extension the applicability of the 5% reduced rate or the amendment of 394 form. In order to assess whether these measures have decreased the VAT Gap in 2016 we have to wait for the new report of the Commission, to be issued next autumn.

Inspiration can be drawn from western countries experience in dealing with tax evasion and their most efficient measures. For example, in Spain the VAT Gap registered a huge decline in the last years – from 13% in 2011 to 3.5% in 2015 – this, due to the modernization of the VAT administration, paired with extensive e-audits. Legislative measures introduced in order to help the states to fight VAT fraud did not bring the desired results without effective targeted tax audits. We refer here to the standard audit file for tax SAF-T, adopted by Poland and Czech Republic, which involves a permanent electronic exchange of financial information between the taxpayer and the tax authorities, implying more efficient audits.

The new measures indicate tax authorities concern about the level of the not collected VAT and aim to encourage voluntary disclosure. The fear of being under scrutiny of tax evasion may lead to taxpayers to comply with the law.

Is the VAT split the solution that could lead to a significant lower VAT Gap?

This measure may contribute to a decrease in tax evasion and VAT Gap (at least the VAT reported by taxpayers will remain at the tax authorities’ disposal). However, no official numbers or impact studies have been released, so it is difficult to assess the potential impact. The practice of the other EU Member States is of no avail in this respect, as Romania will be the first to implement this system.

On the other hand, one single measure cannot be the winning solution. An entire package of measures has to be implemented to tackle fraud. For example, Italy combined the VAT split payment for the VAT due on goods and services supplied to the public sector with the extension of the domestic reverse charge scope. This led to a 2.5% decrease of the Gap in 2015.

EU Commission continues its endeavors on VAT Gap. Following the VAT action plan released in April 2016, a proposal for the biggest reform of the EU VAT system over the last 25 years was launched October 4th

Next steps?

Romania took initial steps to counter the VAT Gap, however, compared to the EU average there is a significant room for improvement. A strong legislative package seeking 2-3 measures targeted on sectors prone to fraud, complemented by an impact study of EU Member States good practice might be a solution.

Written by Bianca Vlad, Director Tax Advisory and Alexandru Stanciu, Assistant Manager Mazars Romania.

(p) – this article is an advertorial

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