European Commission releases report on tax gaps to support competitiveness and fairer tax systems

The Mind the Gap report is flanked by two technical reports estimating tax gaps for Value Added Tax (VAT) and Corporate Income Tax (CIT). According to the latest available data, estimates of the VAT compliance tax gap alone - representing the difference between the money that could have been collected by governments and the money actually collected - amount to 128 billion EUR in 2023.
The findings, presented in the Mind the Gap report, along with the complementary research in the VAT Gap report, and the CIT Gap report, reveal critical insights into tax compliance challenges and policy choices, which impact fiscal sustainability and competitiveness. They distinguish between tax gaps that emerge due to taxpayer non-compliance, such as tax evasion and avoidance, and policy choices - namely tax expenditures, such as tax reliefs or concessions. Tackling tax gaps, whether related to compliance issues or policies, requires action across a range of priority areas. Efforts to address compliance gaps should prioritise minimising these gaps. For policy gaps, establishing a framework for regular and transparent assessment is essential to ensure that measures are both proportionate and effective in achieving overarching policy objectives.

Key Findings from the reports

Mind the Gap: A call to reduce tax gaps through sound policy checks, smarter tools and deeper collaboration

As the first country-by-country overview to underpin the analysis of tax gaps and the effectiveness of tax administrations in the EU, the report builds a basis for future action at EU level. The report highlights the benefits of reducing tax compliance gaps, including fostering fairer tax systems and sounder public finances. It stresses the need for regular and transparent reporting on, and evaluation of tax expenditures to ensure that they remain cost effective, targeted and proportionate. The report also emphasises the importance of enabling factors to reduce the tax compliance gaps, notably the ongoing digital transformation in Member States and the need for effective mechanisms for tax collection, recovery and administrative cooperation. In terms of providing solutions, it encourages Member States to build up estimation capacities, to check whether tax expenditures serve their purpose and deliver value for money, and to make better use of modern - and digital - tools to fight compliance gaps.

Read more about the Mind the Gap report

VAT Gap Report: A 128 billion EUR challenge

The VAT compliance gap in the EU reached 128 billion EUR in 2023, with Romania (30%) and Malta (24.2%) recording ed the highest VAT compliance gaps, while Austria (1%) and Finland (3%) performed best. The evolution of the gap across the EU shows diverging national trends, partly explained by sustained administrative capacity and digital reporting reforms. The report also underscores a 50.5% VAT policy gap, driven by reduced rates and exemptions, with Spain (59.1%) and Greece (57.0%) having the highest policy gap levels, reflecting their respective policy choices.

Read more about the VAT Gap Report

CIT Gap Report: Hidden corporate profits

The European Commission's Joint Research Centre has developed a new, harmonised methodology for estimating the Corporate Income Tax (CIT) compliance gap. Estimates indicate an average CIT compliance gap of almost 11% of collected CIT revenues across 23 EU states, with Slovakia and Romania exceeding 20%, while Denmark, Netherlands, and Finland have the lowest estimates in the set of Member States assessed, below 3% (based on latest available data for each country).

Actions to reduce tax gaps

• Build estimation capacity for systematic reporting: Member States can strengthen the tax administrations with skilled teams and robust data systems which would allow for regular estimates of tax gaps across tax types. Member States would benefit from implementing processes for regular publication of tax gap estimates, notably of the CIT and PIT gap. These estimates can build public trust and support the development of targeted strategies to reduce the tax gap. Member States could also build on ongoing efforts and harmonise methodologies for tax gap estimation (e.g. FISCALIS Project Group on Tax Gap Estimation). This would promote greater consistency and comparability across the EU.
• Report on and review past policy choices: Member States can strengthen their tax systems by monitoring, evaluating and reporting tax policy-induced gaps, such as tax reliefs or concessions, in terms of their effectiveness and proportionality. There are several thousand tax exemptions across the EU Member States. In times of strained public finances, it is vital that these are regularly reviewed to check whether they serve their purpose and deliver value for money.
• Use digital tools to increase tax compliance: Investments in digitalisation and the integration of new technologies in tax administrations can be further accelerated, also through the use of AI. The integration of these tools and AI-driven analytics can enhance compliance risk management, administrative organisation and taxpayer services. Standardised and automatic exchange of information as established in the Directive on Administrative Cooperation (DAC 1-9) established wide ranging international collaboration, enforcing tax compliance across the EU. Looking ahead, The VAT in the Digital Age (ViDA) reform will help combat the VAT compliance gap specifically by enforcing e-invoicing, real-time automated reporting and cross-border data matching to detect fraud and compliance issues swiftly.
• Invest in tax collection and recovery systems: by further automating, digitalising and integrating their IT systems, as well as linking them with third party stakeholders, Member States could collect due taxes and recover overdue taxes better. Some Member States could reap benefits from improving their handling of old and disputed debts which can be observed despite very divergent national practices making monitoring difficult.

"Every year, billions of public revenues are lost to governments, taxpayers and institutions. In a time when Europe needs to be more competitive, reducing tax gaps is critical and we're working towards this. In the area of VAT, we recently adopted VIDA, which will allow to exchange information about transactions in real time. With these types of measures, we will boost compliance to ensure we don't miss out on vital revenue." Quote from Commissioner Wopke Hoekstra

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More Information

• Mind the gap webpage
• VAT gap webpage
• The Corporate Income Tax Gap, A European approach to measuring losses in corporate tax revenues
• VAT in the Digital Age (ViDA)
• Tax Administration EU Summit (TADEUS)
• Towards a common approach to tax gap estimation in the EU