1. Introduction
“Value added tax is the most important event in the evolution of tax structure in the last half of the 20th century.”
Sijbren Cnossen
The basic idea of the Value Added Tax (VAT) appears to own originated with a German businessman, Wilhelm von Siemens, within the early 20th century. There have been other developments in those years made by Thomas S. Adams. However, VAT is fathered within the early 1950s by Maurice Lauré, remained confined to some states until the late 1960s. Today, most countries have a VAT, which raises, on average, about 25 per cent of their tax income (Ebrill, 2001).
VAT is a general, broadly based consumption tax assessed on the value added to goods and services within the European Union. It more or less applies to all, or any goods and services purchased and sold for use or consumption within the economy.
Therefore, VAT usually is not levied on goods sold for export or services sold to customers in other countries. On the other hand, imports are taxed to keep the system fair for European Union producers so that they can compete on equal terms on the European market with suppliers located outside the Union (EC, 2020).
VAT is the most considerable indirect tax revenue for the state’s income. Many countries in the world have a VAT in their tax system: as of April 2001, about 123 had one. They raise revenues, on average, equal to nearly 27 per cent of total tax revenue and over 5 per cent of GDP. Annex – 1 provides information on these VATs, and Annex – 2 presents some comparative data on countries with and without a VAT. Not surprisingly, those countries that have implemented a VAT are relatively more developed as gauged by per capita GDP (Ebrill, 2001).
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VAT has a significant role in the EU budget. It is an essential source for the EU budget, not only for the public budgets of individual member states. The revenues of the budget of the EU are shown in Figure - 1. They consist of the surplus from the previous year, gross national income or GNI own resource, own traditional resources or TOR, and VAT owns the resource. Additionally, the distribution of funds has shown that VAT has a considerable proportion in Figure – 1. The total revenue generated by the VAT's resource for the EU in 2018 was EUR 17.625 million (11,1 per cent of total revenue).
Figure – 1: Revenues in the EU between 2000 and 2018 (million EUR)
Source: European Commission (financial_report_web.pdf (europa.eu))
The VAT gap is an issue faced by both developed and developing countries (European Commission, 2019). Therefore, the EU Member States lose extremely high VAT revenues annually due to fraud and inadequate tax collection systems. The gap, often referred to as the VAT gap, where this loss can be defined as the difference between expected VAT revenues and VAT actually collected, includes estimates of revenue losses from tax fraud and avoidance and corporate bankruptcy, financial and corporate bankruptcies, and miscalculations. (Lamensch, M., & Ceci, E. 2018).Many other factors impact the VAT gap. European Commission defined the causes of the VAT gap being tax evasion, maladministration, and tax optimisation.
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The VAT gap is also defined by Zídková as the difference between the theoretical VAT liability and accrued VAT receipts in a respective state and year as follows from Zídková, 2014.
The smallest gaps were found in Sweden (0,7 %), Croatia (3,5 %), and Finland (3,6
%), while the largest were found in Romania (33,8 %), Greece (30,1 %), and Lithuania (25,9 %). Overall, half of the EU-28 Member States had a spot gap greater than 9,2 per cent (see Figure - 2 and Table - 1). The largest nominal gaps were recorded in Italy (EUR 35,4 billion), the UK (EUR 23,5 billion), and Germany (EUR 22,1 billion).
Figure – 2: VAT Gap in the EU-28 Member States between 2018 and 2017 (as a per cent of the VTTL)
Source: Poniatowski & Bonch-Osmolovskiy & Śmietanka, 2020
Therefore, measuring the VAT gap is significant for the country due to the VAT Gap measures. The effectiveness of VAT enforcement and compliance can be assessed in each Member State because it provides an estimate of revenue loss because of fraud and evasion, tax avoidance, bankruptcy, financial insolvencies as well as miscalculations. Quantifying the size of the VAT gap can aid in the development of well-targeted policies and the monitoring of their effectiveness (EC, 2020).
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Table – 1: VAT Gap in the EU-28 Member States between 2018 and 2017 (as a per cent of the VTTL)
Source: Poniatowski & Bonch-Osmolovskiy & Śmietanka, 2020
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This thesis purposes of examining the effects of the determinants of the VAT gap in 2010 and 2018. This research will improve the problem's solution and enrich the literature on the topic by discussing the importance of the determinants. The chosen determinants are real GDP growth, GDP per capita, GINI, final consumption expenditure of households, final consumption expenditure of households and nonprofit institutions serving households, population, VAT on GDP, number of VAT rate, standard VAT rate, share of shadow economy, research and development expenditure, and corruption perception index, whose impact is usually discussed.
Based on the reasoning above, the purpose of this study is to answer the following research question:
How did the real GDP growth, GDP per capita, GINI, final consumption expenditure of households, final consumption expenditure of households and nonprofit institutions serving households, population, VAT on GDP, number of VAT rate, standard VAT rate, share of shadow economy, research and development expenditure, and corruption perception index influence on VAT gap in 2010 and 2018?
In the first part of the thesis, it will be introduced the subject, and the chapters of the thesis will be explained. Furthermore, the importance, purpose, and ways of examining the matter will be mentioned. In the second part of the thesis, I will review the relevant literature about the subject of my analysis. Then, I will deal with these topics in detail:
the VAT revenues and the VAT structures in the EU countries, the definition of the VAT gap, and the last but not the minor determinants of the VAT gap. This chapter will play a significant role in determining the determinants and research method point of view in the following chapters of the thesis. In the third part, I will be mentioning the literature from the methodology point of view. Therefore, this part will include the methods and other details from the previous studies.
Additionally, I will explain my methodology in the following chapter. Then there will be the selected independent variables and the reason for choosing them in the last methodology chapter. In the fourth part, I will be applying the regression analysis for
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analysing the subject econometrically. The variables selected in the study aim to see the effect of these variables on the VAT gap. Specific variables are VAT gap as a dependent variable, real GDP growth, GDP per capita, GINI, final consumption expenditure of households, final consumption expenditure of households and nonprofit institutions serving households, population, VAT on GDP, number of the VAT rate, standard VAT rate, the share of the shadow economy, research and development expenditure, and corruption perception index as independent variables. It is crucial to summarise that before solving the VAT gap issue. In the fifth part, I will be presenting and discussing the results. It is also significant that to see the current situation of the problem and subject. Because of this reason, there will be a chapter that will be explaining the potential VAT gap increase due to coronavirus. In the seventh part, I will touch on the limitations, challenges, and opportunities for future studies about this research. Ultimately, in the eighth part, the thesis will be concluded and summarised.
Moreover, used sources and annexes will be listed.