COVID-19 and its impact on VAT gap in the EU : lessons from and for Poland

Abstract

PURPOSE: This article aims to present how the VAT gap has changed due to the COVID-19 pandemic and emphasize the key factors to tackle the revenue loss that becomes even more important during the state of emergency.

DESIGN/METHODOLOGY/APPROACH: The research design includes intuitive inquiry, content analysis of secondary sources, and desk research.

FINDINGS: In 2018, the difference between expected and actual VAT revenue was EUR 140 billion in European Union. Even though it is estimated to drop down to EUR 125 billion in 2019, the COVID-19 recession will likely impact the VAT gap in 2020 due to the increase in the informal economy and the number of bankruptcies. Digitalization of VAT collection system is essential to eliminate these factors but is not the only measure to eliminate the difference between actual and expected VAT revenue.

PRACTICAL IMPACT: Effective VAT system can be achieved only if digitalization is followed by transparent law, taxpayers’ education, a suitable penalty system, and substantial tax administration. Governments can use the finding of the research and its conclusion in tackling the VAT gap.

ORIGINALITY/VALUE: Examination of the VAT gap composition and proposal of standardization of technological solutions combined with soft measures to solve the problem of VAT revenue loss. VAT gap can be tackled effectively only if all determinants of the VAT gap are taken into account; technologies are explored as complementary models, and the EU Member States will work on one standard solution.