In 2020, Spain halted inflows totaling 3.396 billion euros as the European Commission highlighted persistent VAT gaps across the EU. The VAT shortfall arises from fraud, evasion, optimization tactics, and errors in administration, with the latest annual VAT gap report showing a difference between collected revenue and expected income reaching 93 billion euros for the union, about 9.1% of total potential revenue. That figure marks a decline of roughly 30 billion euros from 2019, a shift Brussels attributes to stronger compliance efforts and tighter controls across member states.
Analysts note that 15 EU members regularly monitor VAT compliance gaps, while the Covid-19 crisis contributed to a revenue dip in 19 of the 27 states due to lower global demand and short-term reductions in VAT rates. Governments are weighing these outcomes as they seek to cushion the economy amid ongoing uncertainty.
Despite these challenges, the European Commission has kept its stance clear: the VAT gap remains an urgent policy issue that requires robust funding for public services and credible means to curb losses tied to tax evasion in cross‑border trade. Brussels estimates that a conservative figure places roughly 24 billion euros of losses as a result of intra‑community fraud. Among officials, plans to harmonize the tax system and push digitalization are framed as essential steps to reduce fraud and improve tax collection.
Disparities within the 27 member states
Recent findings show a wide spread in nominal gaps, with Finland at 1.3 percent, Estonia at 1.8 percent, and Sweden around 2 percent, while Italy and Malta register much larger percentages and Romania stands at the high end. The report highlights that major gaps persist in several large economies, notably Italy, France, and Germany, when viewed purely on nominal terms. However, when examining the policy gap, which assumes a uniform VAT rate across all consumption, the theoretical revenue shortfall shifts. Under that scenario, Spain faces the largest deficit at about 47 percent, with Slovakia performing best at roughly 16 percent; Greece and Finland hover around 42 percent, while Malta lingers in the mix. The bulk of the exemptions driving these gaps relate to services that are not easily taxed in principle, including imputed rents, certain public services, and some financial activities.
The report underscores that the gaps are not just technical numbers but reflect real financial losses for member states and citizens, highlighting the need for reforms that simplify compliance and close loopholes.
Real-time updates and new reforms
To narrow the gap and strengthen enforcement, Brussels unveiled a set of reforms designed to modernize VAT rules. The plan envisions a potential uplift of up to 18 billion euros in annual revenue across the EU over time. The approach rests on three pillars. First, real-time digital notification linked to electronic invoicing for cross-border traders will give authorities faster visibility into transactions and help prevent fraud. Early projections suggest this could trim VAT losses by up to 11 billion euros annually over the next decade and cut compliance costs for businesses by more than 4.1 billion euros per year.
Second, the proposal updates VAT rules for passenger transport and short‑term hosting platforms. Operators would be held responsible for collecting VAT and remitting it to authorities when service providers fail to do so, particularly in cases involving small firms or individual providers. Finally, a unified EU VAT registration system is proposed to replace multiple national portals with a single, one-stop solution for online sellers. This would enable companies selling across borders to register once for the entire union and manage VAT obligations in a common framework, potentially saving about 8.7 billion euros in administrative and registration costs over ten years.