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.