The Commission accused of tolerating corruption and fraud in taxation

Algirdas Šemeta, Member of the European Commission in charge of Taxation and Customs Union, Audit and Anti-Fraud, gave a press conference yesterday on a new study confirming that billions are lost in VAT evasion and fraud, thus creating a gap between actual and potential tax income for member states. (EC Audiovisual Services).

The European Commission published yesterday a study on Value Added Tax (VAT) evasion and fraud in the 27 EU member states, estimating the lost state incomes from this source at €193 billion only in one year, 2011. This is the difference between the actuall and the potential receipts from VAT, that is the VAT GAP. The amount is impressive and a first reaction could be that if it had been collected even partially, it could have solved the over indebtedness and the fiscal deficit problems in most EU countries. This is particularly true in some crisis stricken member states like Greece and Spain. In the first of those two the VAT gap between actual and potential collection was in 2011 around €10 billion and in the second case €15bn.

As the Commission acknowledges however not all the gap can be cashed in. The relevant Press release states, “While non-compliance is certainly an important contributor to this revenue shortfall, the VAT GAP is not only due to fraud. Unpaid VAT also results from bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, amongst other things”.

The South European patient

In the case of Greece this gap was 39% in 2011, the largest in Eurozone and the second largest in the EU after Romania’s 48%. In Italy the corresponding percentage was 27%, in Portugal 16% and in Spain 21%. It is obvious that the quality of the tax and customs administration and the political will to extinguish corruption and fraud play a vital role in confronting VAT losses. The table published here is very informative about all that. The large differences of VAT gaps between the EU countries tell very eloquently the story why this happens and which countries still tolerate a corrupt and quite incapable systems.

Successive Greek governments even during the last five crisis years showed quite a pathetic if not tolerant attitude to this problem. The country could have avoided the severe austerity and the concomitant economic destruction and social and political disintegration, if only a part of the VAT gap would have been collected by a traditionally corrupt and incompetent tax and customs administration. Still today the entire Greek tax legislation is so contradictory and chaotic that nurtures corruption and tax evasion. At this point must be noted that Antonis Samaras, currently Prime Minister of Greece, has served as Minister of Finance of his country back in the 1990s, without changing anything in the tax and customs administration.

Pseudo-exports are a classic VAT fraud trick giving right to handsome VAT refunds. It’s not only VAT losses that haunt the European tax collection though. Fraud with special taxation on fuels and tobacco constitute also a large part of government income losses in countries with corrupt and incompetent tax and customs administrations.

What if

An additional problem with taxation in general is that a large part of legal but tax avoiding economic activities in construction, the agricultural sector, the SMEs and the professions are counting for their survival on tax evasion. If for example is was possible in a magical way to establish the Swedish tax and custom services in Greece, a large part of the above mentioned activities would go bust and disappear within days or weeks.

By the way, according to the study presented by the Commission, the Swedish VAT losses were only 2% in 2011, a minimal gap that can be attributed even to statistical errors. This country’s paradigm, along with Malta and to a lesser degree of Netherlands, Ireland, Denmark and Slovenia prove that it is possible to effectively arrest tax evasion and fraud on the condition that the political will is there.

Diluted medicines

In trying to remedy the system the Commission says that the European “Quick Reaction Mechanism, adopted in July 2013, will allow Member States to react much more swiftly and effectively to sudden, large-scale cases of VAT fraud. Eurofisc, which was launched in 2010, also facilitates stronger cooperation and coordination between Member States in combating organised VAT fraud”. Those mechanisms however can deliver results only if the tax and custom administrations are willing, able and compelled by simple and clear rules to enforce the correct practices. Unfortunately in many countries it’s not like that and the environment in which they operate tolerates, if not encourages, fraud and corruption.

The Commission must denounce them

Knowing all that, the Commission finally proposes that “Member States need to reform their national tax systems in a way that facilitates compliance, deters evasion and avoidance, and improves the efficiency of tax collection”. This is not however an encouragement addressed only yesterday. For years the Commission services try to convince Greece, Italy and Spain to do all that. Not to say anything about Romania, the Czech Republic, Hungary, Latvia, Lithuania and Slovakia.

In all those countries the large VAT gaps cannot be attributed only to errors and incompetence but have to be ascribed also to the very structure of the tax and customs services and the lack of political will to change the system. The stakes are huge and go up to billions in countries with large ‘holes’. The Commission has to stop tolerating this practice and denounce the countries and the politicians who either don’t care or encourage those catastrophic practices.

In any case this study gives us a good base to estimate the dimensions of corruption and the degree of tolerance that the political elites in some countries show to tax evasion and fraud. The Commission by not telling the whole truth about all that is actually susceptible in sharing the accusation of tolerating corruption and fraud in tax and customs administrations of certain member states.

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