EU VAT

Every country imposes VAT and there is a passable degree of uniformity in the coverage of the tax. An irony, though, is that the EU budget already has a VAT resource, though one which it has proved necessary to manipulate so as to harmonise the tax burden among the Member States.

The dilemma here is that if VAT is seen as a viable option, it would only really be fair as a potential EU resource if there were a common rate and coverage of VAT across all Member States. The much-canvassed option of adding an EU component to the existing VAT rate in each country does not deal with this problem, and if an imperative is to adjust the receipts by correcting the actual VAT to reflect differences in Member State implementation of the tax, the direct link between the tax and revenue for the EU would be broken. Indeed, the VAT resource is now seen by many as a de facto GNI resource. Still, from the perspective of improving visibility, a manipulated VAT would, arguably, be an improvement so long as the manipulation is only a minor element in the yield. On other grounds, notably the scope for raising enough revenue, VAT has much to commend it.

VAT was generalised to all EU countries in the course of the 1970s, and adopted by all new Member States during their transformation into market economies in the early 1990s. Two EU directives, in 1977 and 1991, have imposed relatively uniform taxation practices; the latter has also made some progress in the direction of harmonising tax bases and imposed floors on the two major national rates – 15% for the ‘normal’ rate and 5% for the ‘reduced’ rate. In a number of member countries, VAT is shared by the central and sub-national government levels. But VAT has retained the ‘destination principle’, so that it maintains a distinction between intra-European trade and domestic sales, hence some form of distortion in the single market. This causes revenue shortfalls, as it opens the door to VAT evasion and VAT optimisation by companies able to take advantage of differences in national VAT rates.

As shown in Figures 7-1, 7-2 and 7-3, a majority of EU Member states have increased VAT rates in the aftermath of the 2009 Great recession, as part of their effort to consolidate national public finances. Being a general tax on consumption, with a large base and relatively low rates, VAT may be regarded as one of the most neutral forms of taxation. To the extent that it does not tax savings, it corresponds to the ideal general consumption tax, such that many analysts (Hines, 2007) and policy-makers have been advocating it even to replace personal income taxes, in the US in particular. At the same time, VAT is also often deemed unfair, as it taxes low-income individuals, who tend to consume a larger fraction of their income and save less, relative to high-income individuals. This vertical inequity of VAT is mitigated by the existence of reduced rates on staples and other basic consumption goods and may be counteracted by other redistributive instruments, as exemplified in North America by food stamps.

Figure 7-1. VAT receipts in eurozone Member States (% of GDP)

Source: Eurostat.

4,0 5,0 6,0 7,0 8,0 9,0 10,0

199519961997199819992000200120022003200420052006200720082009201020112012

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Figure 7-2. VAT standard rates in eurozone Member States (%)

Source: European Commission.

Figure 7-3. Development of the average standard VAT rate in the EU-28, 2000–14

Source: European Commission.

Transferring a ‘slice’ of VAT to the EU budget has been suggested by many (Cipriani, 2014;

Mortensen et al., 2014; Haug et al., 2011), including, recently, the European Parliament. It would be relatively easy, technically. If EU decision-makers wanted to make the transition almost unnoticeable, it could be done without, initially, translating into any change in the overall rates of VAT taxation, so that EU taxpayers would barely notice it. The European Parliament would then be responsible for voting on the rate for this EU VAT. Apart from these advantages in terms of simplicity and transparency, the adoption of such an instrument would introduce a clear and relatively neutral principle of taxation, based on resident consumption expenditures, with distribution of the national tax burdens being determined by a simple, non-manipulable mechanism. Moreover, the yield from VAT taxation is directly related to economic activity, though less subject to cyclical fluctuations than many other taxes, which gives this instrument relatively good automatic-stabiliser properties, without generating unduly large imbalances in case of economic downturns, slowdowns or recessions.

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2000 2008 2009 2010 2011 2012 2013 2014

EU28 EA BE DE IE EL ES

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Even figures quoted by Gros and Micossi (2005) in support of their advocacy show that VAT yields vary between 6% and 9% of GDP across the EU-25 Member States, while private consumption (essentially, the tax base) as a share of GDP ranges from 42% to 67%. More recent data from DG TAXUD (2007) showed that these disparities have been maintained, but that one of the newest EU Member States (Bulgaria) had the highest VAT yield, rising to 12.4% of GDP in 2005. Although there is some correlation between the VAT rate and the yield, the relationship is far from linear, and the notion that VAT is regressive among Member States (that is, raising more in poorer Member States than in richer ones) is also partly contradicted by the relatively high VAT yield in the Nordic countries as well as among the least prosperous Member States. The implication of all this is that if the proposed model of taking a slice of each country’s VAT for the EU were applied, it would have an uneven incidence on the Member States. Thus, even for a tax that is relatively harmonised, the disparities between Member States remain significant. VAT is also, unfortunately, considerably prone to fraud with estimates across countries ranging from 2% to 20% of the tax yield. In presenting the new action plan for reforming VAT on 7 April 2016, Commissioner Moscovici argued that the total revenue shortfall for VAT in the EU amounts to approximately €170 billion, while cross-border fraud is estimated at about €40 billion. This factor can cause friction between Member States, if there is a perception of inequitable treatment.

The risk with a VAT resource is that, even if agreed, it would soon be ‘adapted’ to handle any of such inequitable effects, leading in time to a situation like that of the present VAT resource, which highly resembles, after all the call rate changes and caps, a GNI resource.

An interesting alternative approach addressing the issue of transparency related to using VAT is to present the cost of the EU budget to citizens by identifying the cost share on the VAT bills, but only for information at least in the transition to other resources. This approach, presented by Fuest et al. (2015), may be taken for either the national GNI contribution or the overall cost of the budget. While the proposal has its merits, it is unclear how to legally present a tax share that actually is not levied, but it highlights the need to have a way to communicate the true size of the EU budget.