The EU tax gap


Governments all over the world have the same problem: there is a difference between the tax revenue collected and the tax revenue that should have been collected. This is called the tax gap. It is estimated that almost €1 trillion is lost on an annual basis within the European Union (EU) alone.[1] In this blogpost we’ll discuss the gaps of different types of taxes; import duties, personal income tax (PIT), corporate income tax (CIT), and value added tax (VAT). Furthermore, we’ll show which tax gap would be the most efficient to tackle. So as Rutger Bregman at the World Economic Forum 2019 advised, we need to: “start talking about taxes.”[2]

What is the tax gap?

At summitto we love talking about taxes and the tax gap. With a tax gap, we mean the tax revenue that was supposed to be collected, but was not due to non-compliance, tax evasion and/or tax avoidance. The term non-compliance is straightforward, but the difference between tax evasion and tax avoidance needs clarification. Tax evasion is the illegal practice of not paying rightfully owed tax, whilst tax avoidance is technically not illegal; it is the practice of making use of legislation to pay the least amount of tax possible. Tax gaps are to date hard to measure (as will be shown below), nonetheless the European Union provides several researches that give an indication of the enormous size of the EU tax gap.

Closing the tax gap is an important issue for several reasons: (a) to increase government revenue, (b) to reduce money going to criminal organisations[3], (c)to prevent unfair competition, as companies profiting from paying less tax can outcompete honest companies by e.g. asking for lower prices, and (d) honest companies can no longer be held liable for not reporting doing business with a fraudster.[4]

In the following, we will discuss the several different types of taxes that make up the tax gap. We chose to discuss (1) import duties, (2) PIT, (3) CIT, and (4) VAT because the highest amount of data was available and because we consider these taxes as the most important ones, be it on a EU level (import duties) or on a national level (PIT, CIT and VAT).

Import duties

Import duties are levied on imported goods. These duties are collected by the individual Member States and directly transferred to the EU. The EU urged Member States to “collect reliable data on the customs and VAT gap in the Member States and report every six months to Parliament in this regard”. Still, it seems that this is not too high on the political agenda, as to date there has not been an EU wide agreement on an import duty tax gap measurement methodology.[5] However, the EU customs union estimated that the annual loss in import duties is €584 million, based on data received from the Member States.[6] There are other estimates of the amount of fraud committed with this type of tax; The European Anti-Fraud Office (OLAF) estimated that this figure was €76.5 million euro per year in 2013.[7]


Within the EU, only Estonia, Italy, Latvia, and the UK[8] are conducting income tax analyses according to Professor of Political Economy Richard Murphy.[9] The lack of measurement in the Netherlands is aptly worded by the Dutch newspaper NRC as “no one at the tax authority knows how many people are committing fraud with their tax returns”.[10] Public data from Estonia, Italy and the UK[11] provides an insight into the size of the PIT gap. Italy provides the clearest information; in 2015 they missed out on €23.4 billion of PIT revenue[12] whilst the PIT gap of Estonia was roughly €65 million.[13] Lastly, the UK combined the figures of PIT, National Insurance Contribution and Capital Gains Tax in their analysis and measured a gap of £12.9 billion in total.[14] Additional research conducted by the European Commission found that international tax evasion, which they define as PIT evasion, CIT evasion and evasion on the stock of offshore wealth, results in tax losses of €46 billion per year.[15]


The UK and Italy, as two of the few European countries, also provide information about the CIT gap. The HMRC estimates that, over 2017-2018, the CIT gap was £5.2 billion[16], whilst the Italian CIT gap for 2015 was €5.2 billion.[17] The European Parliament estimates that €50 to €190 billion of corporate income tax is being avoided each year, although the researchers explicitly state that this upper bound is likely an overestimate.[18] To combat this type of tax avoidance, the OECD set up the BEPS framework in 2013. Within this framework, 125 countries are working together to “put an end to tax avoidance that exploit gaps and mismatches in tax rules to avoid paying tax.”[19]

Value added tax (VAT)

The VAT gap might very well be the best documented tax gap within the EU. It has been documented by the European Union from 2000 onwards, although there are ongoing discussions on the measurement methodology.[20] Estimates made by Center for Economic and Social Research (CASE) show that the VAT gap for 2017 was €137.5 billion. As was apparent with the PIT gap, there are enormous differences between Member States. The EC estimates that €50 billion of this VAT gap is due to fraud.[21] Others found that this figure might be as high as €60 billion[22], while Europol even argues that the EU loses €100 billion to Missing Trader Fraud alone.[23] We argued previously that the VAT gap and the subsequent VAT fraud might rise because of the current crisis.

Measures taken and to be taken in order to reduce the tax gap

Actions undertaken to reduce the import duty gap mainly relate to further collaboration between different Member States. The European Parliament report found that an increase in “political will and commitment by Member States (e.g. at the EU Council) is likely to provide significant improvements in tackling customs fraud”, thus reducing the gap.[24] The report also encourages Member States to measure the gap. Unfortunately, it seems that closing this particular gap is not too high on the political agenda at the moment. Besides, the losses suffered are relatively low and do not hurt the Member States themselves directly as gains are used for the EU budget compared to the other tax gaps discussed in this blogpost.

Of the proposed solutions in the PIT and CIT sections above, the BEPS framework currently seems to have the highest priority. In order to change the international tax system, the cooperation between almost every country in the world is required.[25] We support all endeavors to tackle international tax avoidance and every other type of fraud of course, but we want to stress that the process of solving this type of fraud is very, very complex.

Instead, the VAT gap could potentially be closed per-country, which, together with the huge estimated amounts that are lost on an annual basis, makes the VAT gap the lowest hanging fruit. Previous measures helped reducing the VAT gap over the last couple of years[26], but they did not tackle the inherent problems of the EU VAT system.[27] In their attempt to nip VAT fraud in the bud, some Member States followed the Latin-American approach by implementing invoice reporting systems, often coupled with the introduction of mandatory e-invoicing. Again, we encourage these endeavors as similar systems have proven to reduce the VAT gap in Latin-American countries, but we are concerned that these systems might not fully guarantee the confidentiality of the taxpayer and might hurt businesses disproportionately as even governments with the best intentions can accidentally leak information.

To overcome these problems, summitto developed TX++. Modern technology allows us to not store any data at all, whilst at the same time detecting 100% of the VAT fraud committed. This will also solve the problem of liability. Namely, companies can be held liable for not reporting that they have done business with fraudulent companies. This can even hurt honest businesses that were not aware of the nature of their trading partner. Tax Law Professor Rita de la Feria points towards another problem with this liability. She argues that the reduction of the VAT gap is mainly due to the fact that the VAT revenue lost is collected from the “third-party”, not from the actual fraudster.[28] A discussion on the reason for the recent VAT gap decrease is outside of the scope of this blogpost. What is certain though, is that invoice reporting systems can help companies to be compliant by design.


We tried to map the tax gap in the EU. Not all taxes could be discussed, mainly due to a lack of data. To fully understand and efficiently try to close the tax gap, which is a definitive burden for the complete EU society, Member States should perform more analyses and provide more data. We showed that in all different types of taxes, hundreds of million of euros are lost each year. However, VAT fraud seems to be the “easiest” one to solve. An invoice reporting system could help fight the VAT gap per-country, as previously shown in Latin-America. With implementing such a system, legislators need not to forget about confidentiality. Summitto leveraged modern technology to allow the reduction of the VAT gap without storing data. Furthermore, companies will not be harmed in their day-to-day business.

  1. Murphy, R. commissioned by the Socialists and Democrats Party (2019). The European Tax Gap. Retrieved from:

  2. Farrer, M. Historian berates billionaires at Davos over tax avoidance. Retrieved from: Complete quote: “Stop talking about philanthropy, start talking about taxes”.

  3. Europol (2018). MTIC (Missing Trader Intra Community) Fraud. Retrieved from:

  4. This is especially problematic for VAT. An excellent discussion on this topic is provided by de La Feria, R. (2020). Tax Fraud and Selective Law Enforcement. Retrieved from:

  5. European Parliament (2019). Protection of EU Financial interest on customs and VAT: Cooperation of national tax and customs authorities to prevent fraud. Retrieved form:

  6. European Customs Union (2019). Facts and Figures. Retrieved from:

  7. OLAF (2016). Trade Customs Fraud. Retrieved from:

  8. Although the UK officially left the European Union as 31 January 2020, at the time of writing they are still at the transition phase. Furthermore, all estimations were done at a time when the UK was still an official member of the EU.

  9. Murphy, R. commissioned by the Socialists and Democrats Party (2019). The European Tax Gap. Retrieved from:

  10. Van Staalduine, J. and Rijlaarsdam, B. (2016). Tienduizenden plegen belastingfraude. Retrieved from:

  11. Data of Latvia could not be found.

  12. OECD (2016). Italy’s Tax Administration. A review of Institutional and Governance Aspects. Retrieved from:

  13. IMF (2014). Republic of Estonia: Technical Assistance Report-Revenue Administration Gap Analysis Program-The Value-Added Tax Gap. Retrieved from:

  14. HMRC (2019). Measuring tax gaps 2019 edition. Tax gaps estimates for 2017-2018. Retrieved from:

  15. European Commission (2019). Estimating International Tax Evasion by Individuals. Retrieved from:

  16. HMRC (2019). Measuring tax gaps 2019 edition. Tax gaps estimates for 2017-2018. Retrieved from:


  18. European Parliament (2015). Bringing transparency, coordination and convergence to corporate tax policies in the European Union. Retrieved from:

  19. OECD (2020). International collaboration to end tax avoidance. Retrieved from:

  20. European Court of Auditors (2015). Tackling intra-community VAT Fraud: More action needed. Retrieved from:

  21. European Commission (2018). VAT: EU Member States still losing almost €150 billion in revenues according to new figures. Retrieved from:

  22. Braml, M. T. and Felbermayer, G.J. (2020). The EU Self-surplus puzzle: an indication of VAT Fraud. Retrieved from:

  23. Europol (2013). EU Serious and Organized Crime Threat Assessment. Retrieved from:

  24. European Parliament (2019). Protection of EU Financial interest on customs and VAT: Cooperation of national tax and customs authorities to prevent fraud. Retrieved form:

  25. Christensen, R.C. (2020). Elite professionals in transnational tax governance. Retrieved from:

  26. de La Feria, R. (2020). Tax Fraud and Selective Law Enforcement. Retrieved from:

  27. Read more about these problems in one of our previous blogposts:

  28. de La Feria, R. (2020). Tax Fraud and Selective Law Enforcement. Retrieved from: