VAT Trapped in the Cracks

As value added tax (VAT) gains popularity among global jurisdictions, countries with long-established VAT systems confront a growing challenge: the so-called “VAT gap.” The phrase refers to the shortfall between expected revenue from the tax and the amount actually collected. Tax executives within multinational corporations (MNCs) ought to monitor how jurisdictions address this gap.

In its September 2016 VAT Gap Report, the European Commission (EC) estimated the total revenue loss in the EU states at slightly more than 14 per cent, nearly €160 billion. Within individual member states, VAT shortfalls range from ho-hum (1.24 per cent in Sweden) to jaw-dropping (north of 35 per cent in Lithuania and Malta and nearly 38 per cent in Romania).

The report points to a number of cracks in the VAT system where the yield gets trapped: missing trader intra-community (MTIC) fraud and tax evasion, corporate insolvency, bankruptcy, maladministration and legal tax optimisation. Still, fraud is clearly the primary concern. The EC has stated its intent to “improve tax compliance by working with businesses to address fraud” and to “support the modernisation of tax administrations to prevent and fight fraud.”

Tax officials in the United Kingdom are already looking for ways to close its VAT gap. In April, the UK’s National Audit Office (NAO) announced an investigation into overseas-based sellers failing to charge VAT on online sales of goods from fulfilment houses in the UK. The full extent of the problem is difficult to assess, the NAO notes, and current estimates “do not account for the wider impacts of online VAT fraud and error, such as distortion of the competitive market landscape.”

Tax executives should keep a close eye on VAT developments given that tax authorities appear poised to take aggressive action to minimise the amount of revenue that falls between the cracks.

As such, having the right technology in place will allow companies to stay ahead of the curve and catch early signs of irregularities in dealing with new vendors and customers. Advanced technology can also help to avoid getting caught in a missing trader fraud scheme and help companies to prevent potentially damaging financial and reputational consequences.