Determinants of VAT gap in EU

Abstract

This paper explains the term “VAT gap”, and briefly describes the calculation methods used in existing literature quantifying the VAT gap in various countries of the world. The VAT gap is calculated as the difference between the theoretical VAT liability ascertained from the national accounts and the VAT revenues accrued by the financial authorities. Although VAT gap is not caused by tax evasion only, it could serve as its indicator. Further, it provides a review of scientific papers and various studies that analyse factors influencing the size of the VAT gap, and summarizes the results of these empirical studies. The main purpose of this article is to perform a regression analysis of potential variables explaining the VAT gap in 24 EU Member States in two selected years (2002 and 2006) for which data on the VAT gap was available. Two factors common for both examined years affecting the VAT gap in the surveyed countries were found, being the final consumption of households and non-profit organizations in each state, with a positive impact on the VAT gap, and the share of VAT in GDP, reducing the VAT gap. Other identified variables that would explain the size of the VAT gap were the share of the shadow economy and the standard VAT rate, with a positive impact, and GDP per capita, the share in intracommunity trade, final consumption of restaurant and hotel services, and the number of VAT rates, having a negative impact on the VAT gap.