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VAT gap among EU's highest

AN ESTIMATED €2.77 billion or 4 percent of GDP slipped through the net of Slovakia’s value added tax collection in 2011, placing the country fifth worst in the EU behind Romania, Latvia, Lithuania and Greece, according to a recent study conducted by the European Commission.

(Source: Sme)

AN ESTIMATED €2.77 billion or 4 percent of GDP slipped through the net of Slovakia’s value added tax collection in 2011, placing the country fifth worst in the EU behind Romania, Latvia, Lithuania and Greece, according to a recent study conducted by the European Commission.

Based on extrapolations from GDP statistics, the state had expected to collect €7.5 billion in VAT but then found only €4.7 billion.

“Not only Slovakia but the whole of Europe has acute problems with tax evasion,” Radko Kuruc, spokesman of the Finance Ministry, said in response to the findings.

Yet, an estimated €193 billion in VAT revenues was lost due to non-compliance or non-collection in 2011 in EU member states, 1.5 percent of the GDP, according to the study, which sets out detailed data on the gap between the estimated amount of VAT due and the sum actually collected in 26 member states between 2000 and 2011.

“The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances,” EU Commissioner for Taxation Algirdas Šemeta said in a September 19 statement upon the study’s release.

According to Šemeta, the study’s figures will serve as a baseline to assess the progress of member states in improving VAT compliance in the years ahead. The study was funded by the commission as part of its work to reform the VAT system in Europe, as well as its wider campaign to clamp down on tax evasion.

The study shows a marked upward trend in the VAT gap in many member states since 2008 in correlation with the economic crisis. Spain, Greece, Latvia, Ireland, Portugal and Slovakia are noted as particular countries which are part of that trend, the report suggests.

On average, between 2000 and 2011, the tax gap in Slovakia represented 29 percent of the estimated tax collection, or 2.9 percent of GDP, the study reported.

The results of the study do not come as a surprise for Rastislav Gábik of the Financial Policy Institute (IFP), attached to the Ministry of Finance. The development of the VAT gap is, he said, more or less in line with the IFP’s earlier estimates.

“The fact that Slovakia has such a high VAT gap is unsettling from the perspective of public finances,” Gábik told The Slovak Spectator, adding that the findings indicate that “there is a large room for making the collection of VAT more effective and increasing tax revenues of the public administration without the need for additional tax rate hikes, the effects of which are starting to show this year”.

Tax evasion, involving tactics ranging from selling goods without receipts to carousel fraud, is primarily what is behind the deep tax gap, Gábik said, adding that “to a certain degree it can also be deepened by the economic situation since the crisis in 2009”, when the firms do not have the money to pay taxes.

“The fact that the calculation of the tax gap is based on several simplifying assumptions should be taken into consideration as well,” Gábik said.

Nevertheless, the EC has explained that “while non-compliance is certainly an important contributor to this revenue shortfall, the VAT gap is not only due to fraud”. Bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, among other things, also result in unpaid VAT, the EC said.

According to Kuruc, fighting evasion is among the ministry’s priorities and the government adopted an action plan with 50 specific measures to curb tax fraud and evasion back in May 2012. Half of these measures have already been adopted, he said.

The introduction of a VAT control statement (or check report) will be one of such tools, with Kuruc comparing it to “an operation, which will improve the sight of the financial administration” and thus make controls faster and most effective. The electronic VAT statement will make cross control of tax duty and refunds via an automatic system possible.

“Through a cross control of data it will, for example, be possible to uncover domestic or international carousel fraud, machinations with invoices, fictive invoices or the failure to issue any invoice as well as claiming a refund twice from the same invoice,” Kuruc said.

These VAT statements, which will include data that businesses already have at their disposal within their accounting, will be submitted electronically as of 2014, just like tax returns.

Gábik said at this point it is too early to tell which of the adopted measures he considers the most effective since these have been valid for less than a year and the IFP does not have the data to analyse the policy’s impact. He is nevertheless positive about the introduction of the VAT control statement, for example.

The EC has said that it will seek a tougher stance against evasion and push for stronger enforcement at the national level, while noting that “the simpler the system, the easier it is for taxpayers to comply with the rules”.

Slovakia managed to significantly curb tax evasion in 2003, when the upper limit of VAT dropped by 4 percentage points to 20 percent and the lower rate went up from 10 to 14 percent. One year later, a major tax reform unified both rates at 19 percent. Between 2003 and 2005, the proportion of tax evasion on estimated VAT revenues ranged between 20 and 24 percent, SITA reported.

The share of tax evasion started to increase more significantly in 2006, from 20 to 27 percent of total assumed VAT collection. One year later, this rate swelled to 30 percent, where it has mostly lingered ever since. The highest VAT gap was measured in 2010, some 38 percent, with the EC partly attributing this development to the crisis.

But Radovan Ďurana, an analyst with the Institute of Economic and Social Studies (INESS), said that several measures aimed at boosting VAT collection are worsening the business environment.
“The government should take into consideration that, after all, by smothering business efforts it might lose more than it has originally expected to additionally collect,” Ďurana told The Slovak Spectator. “It should focus on revealing the fraud and not flatly complicating the business efforts of all the subjects.”

Jana Liptáková contributed to this story

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