Government closes VAT gap

In mid-2016, the Polish Ministry of Finance set out to reduce the VAT gap to around 15% over the next three years. Since then, the gap has decreased to 14.0% in 2017. Radek Pietruszka/PAP

As EU countries grapple with missing VAT revenue, Poland has been reducing its VAT gap.

A new report by the recently-established Polish Economic Institute entitled “The reduction of the VAT gap in Poland in 2016-2017” provides an overview of how this has been done, within the broader EU context.

In doing so, it shares Poland’s experience with other countries struggling with similar VAT-related challenges.

The “VAT gap” is the difference between excepted value-added tax revenue and that collected. Carousel fraud, in which VAT tax is stolen by crooked traders, is often to blame.

The revenue lost means less money for the state budget and, by implication, public services.

EU member states losing billions of euros in VAT revenue due to tax fraud and ineffective collection.

According to the European Commission, EU countries lost a total of 147.1 billion in VAT in 2016, 12.3% of total expected VAT revenue.

Member states’ estimated VAT gaps that year ranged from 0.85% in Luxembourg to 35.88% in Romania.

Individual EU countries have sought to reduce the gap in various ways, with improvements noted in most member states.

In mid-2016, the Polish Ministry of Finance set out to reduce the VAT gap to around 15% over the next three years. Since then, the gap has decreased from 23.9% in 2015 to 14.0% in 2017, according to the Ministry’s estimates.

According to the report, this improvement results from a better business climate in Poland and the government’s efforts to “seal” the VAT system. The report breaks these down into three pillars -- modern legislation, effective administrative and close cooperation with business.

“We are not putting all our eggs in the same basket. We know VAT irregularities do not all come from the same source. The report shows the pluralism of measures introduced,” said Leszek Skiba, undersecretary of state at the Ministry of Finance, speaking at the report’s launch at the Warsaw Stock Exchange on 17 October.

These include a single control file and a split payment mechanism, whereby companies that buy goods or services pay value-added tax into a dedicated VAT bank account of the supplier.

Established this year to support government policy-making, the Polish Economic Institute prepared the report with foreign audiences in mind. 

“The report shares best practices from Poland with other countries seeking to reduce their VAT gap,” said Piotr Arak, the Institute’s director, presenting the report.