In this episode of VAT Talks we had the opportunity to discuss VAT with Menno Griffioen, Lecturer at Business University Nyenrode and Chair Expert Group Transfer Tax (real estate)/Tax Policy Advisor VAT at the Dutch Tax Authority, and Prof. Lisette van der Hel, professor at the Business University Nyenrode and Senior Strategic Advisor at the Dutch Tax Authority. They recently wrote a very interesting article for NLFiscaal asking the question: can digitalisation and technology secure VAT revenues and close the VAT gap?
Could you tell how you ended up in VAT and what you like most about it.
Lisette: “I work for the tax authority in addition to my work at Nyenrode University and at some point, next to capital income tax, I was confronted with personal income tax and VAT. Additionally, I also work in tax assurance, which is about the assurance of the tax position of companies. Both from the perspective of the tax authority as from a company. As VAT is a transactional tax that is intertwined with a company’s day-to-day operations, it’s a constant challenge of being in control. This makes it very interesting.
Furthermore, it is also a tax where constructions, tax planning for example, play a key role. Here you encounter the management side, such as management decisions. The two together pose interesting and complex questions, in the sense of how to ensure that as a company and as a tax authority you are ultimately in control of VAT.”
Menno: “I also came into contact with VAT at the Dutch Tax Authority. I started at the control department and from there I worked on the daily treatment of taxpayers, and ended up at the National Supervision department. This is about VAT fraud, international collaboration and international supervision. Next to that, I also work at Nyenrode University. I teach Tax law in a broader sense, but also specifically VAT related topics. Together with Lisette I also teach tax assurance related topics based on indirect taxes and international supervision. So in the end all those worlds and all aspects come together in the two of us. Here Lisette is a little bit more focused on the assurance side, whereas I am more focused on the fraud side. Yet, there is a lot of overlap.
I find the international aspect of VAT particularly interesting, in addition to the transactional aspect that Lisette mentioned. You actually never look at 1 taxpayer, or 1 transaction, but actually always at a whole chain. This chain is as strong as the weakest link. I find that very interesting in combination with the complexity of the regulations. Then there is also the EU dimension. That really makes it a very interesting field of work for me.”
In your article about digitalisation, technology and VAT, you stated “that digitalisation and technology do not take away the root causes of the VAT gap.” What are these “root causes' according to you?
Lisette: “That is an important question. The EU does annual calculations about the VAT gap, performed by the CASE consortium. However, when the EU discusses the gap, or when the Commission says something about it, there is always a kind of reflex of “Oh there is a big VAT gap, so we have to fight fraud.” This makes it seem as if fraud is the only cause of the VAT gap. Although making a really good breakdown is very complicated, what we now is that there are many more reasons for the gap than only fraud. The first one is actually very simple: as VAT legislation is complex, people make mistakes. Another reason is tax planning, so tax avoidance. Then there is fraud, tax evasion. However it’s difficult to assess how much fraud is exactly committed. Other reasons are insolvencies and bankruptcies. Those are actually the basic causes.
Additionally, we know that the VAT gap is influenced by a number of externalities. By economic conditions, for example. For instance, nobody can do anything about the fact COVID occurred, but it did have an impact on the VAT gap. You could also think about the degree of digitalisation in a country.”
Menno: “Or the level of corruption, the complexity of regulations. The size of the amount of cash used within a country also has a significant effect as proven by various studies. For example, the Bank of Italy has done a study where they found that during the COVID period the VAT gap decreased enormously and that this can partly be explained by a decrease in cash payments because the stores, small restaurants and all kinds of businesses were closed. Everything went digital. If you then read in the news, in the most extreme cases, that the VAT gap is equal to VAT fraud, you know it is incorrect. There are actual estimates which state that the amount of VAT fraud is between €50 and €60 billion. However, this is based on a study that is more than 10 years old, and you could question all sorts of things about that study.
Have there been more reliable studies that were conducted more recently?
Menno: “There actually aren’t any. There are some macro economic studies by M.C. Frunza for example, but this is from the same period. More recently there has also been a study by Braml and Felbermayr, but they look macro economically to differences in interstate trade data and then the difference is fraud. If we take a different approach and continue the line of that 2011 study. Without saying anything substantive about the study itself, then I think the VAT fraud would be halved compared to that 50 billion. Using the same calculation methods. In itself, that is not surprising either. The tax gap in total has gone from almost 200 billion to 134 billion and a lot of measures have also been taken in the last 10 years. The digitization of countries has also gone a long way. They can more easily do risk selections. So the results achieved are not strange, but we do not know exactly what the result is and the Commission has not yet commissioned an investigation. Such an investigation would be quite complex, it should be a combination of top down and bottom up and you need the cooperation of all Member States. Besides, is it really necessary…”
Lisette: “Indeed. The question is, what would you want to use such a figure for? I’m much more interested in the distribution. So what we were just talking about. Those different causes, what exactly are these causes and what is the distribution? The problem is that sometimes it seems that there is a one size fits all approach to tackle the VAT gap. There is a problem, we call it fraud, and then we come up with all kinds of measures while you can wonder: does that work? If you differentiate a bit better, you can also better plot the measures on the causes. We find that a more interesting issue than necessarily knowing how big that number exactly is.”
Menno: “As for the one size fits all approach, the problem is also disproportionately distributed among all those countries. That makes it even more complex. So the problem is not the same for everyone.”
What is the role that digitalisation and technology can play in the fight against VAT fraud according to you?
Lisette: “We addressed that in the article and we roughly said there are three categories of companies: large, SMEs and micro. All have specific characteristics and features. What we know about large companies is that those do not engage in actual fraud. Of course they can get caught up in it, but in general a large company wants to pay taxes and does not engage in VAT fraud. Through digitalisation they try to get a grip on the business processes, and technology plays an enormous role. What you see there is that those companies have integrations with the tax authority.”
Menno: “And then the relative costs will be the lowest.”
Lisette: “These larger companies bring in the most VAT revenue of course. They can also obviously afford this digitalisation because the costs are relatively low, and they can hire good advisors to get it right. That’s not how it works for SMEs or micro businesses. Therefore, these are two different categories. I think that SMEs are actually the most interesting category when it comes to measures because tax evasion really plays a role here. Technology can help here to at least detect fraud earlier. In any case, we know that speed is important, and that’s where digitalisation and technology can make a difference.
Then we have private individuals who start acting as entrepreneurs. This becomes more and more common through e.g. Sometimes we don’t know at all if they exist and if they act as entrepreneurs. So there you need information to be able to do anything at all. The other side of the coin is, do you want to have the information of all those parties in your tax authority’s system? That’s quite a large amount of data, while they pay a relatively low amount of taxes. This would mean you would have a lot of costs, while for the people it is also very difficult because often very unconsciously things go wrong.
So coming back to the categories. Digitalisation and technology can mainly help in preventing unintentional errors and dealing with evasion and fraud which mainly occur in the SME category.”
What do you see as the biggest advantage of digitalisation by means of real-time reporting?
Menno: “It can definitely have a positive impact, but you have to weigh it against all the advantages and disadvantages. I can very well imagine that especially Member States where the VAT gap is large will implement it sooner. However where it is small, the question is: what are the costs compared to the benefits? Because if you introduce something like that, there are also implementation costs involved. What happens if people don’t submit it on time? When it happens the implementing agency needs to respond to that as well. For the upcoming French system, I read about fines per invoice, which will be a lot of work. There has to be the right balance.
Still, I think it can have an added value, certainly on the basis of speed. On the other hand it also demands something from an enforcement agency. You know that you’re going to get a lot of signals, where people just make mistakes also in the digitalisation process. I think it’s very positive that now a number of countries are introducing it from which others can learn to strike the right balance. Lastly, one should also take into account that such systems cost money as is also discussed in the EU DRR study. The question is: where are these costs put, who will pay for it. That might also be a bit of a political question underneath that.”
Is this also a topic that is on the agenda in the Netherlands?
Lisette: “There is definitely attention for real-time reporting in the Netherlands. The Secretary of State clearly indicated some time ago in a Benelux context, which I also attended, that digitalisation and technology are being looked at closely. And I think he recently said something about this at the Center for European Policy Studies as well. What you do see is that EU countries have a different pace. We have some examples that have moved quite fast, such as Italy, Poland and Hungary. They are taking steps in this direction and it is very interesting for us to see what is happening there, but as Menno just said, these steps have to do with the fact that they have a very high VAT gap. The whole constellation of a country, how things work, how a tax authority operates, the degree of non-compliance also determine to some extent whether you can implement a certain measure. Of course, the Netherlands has a relatively small VAT gap and a well-functioning tax administration. We keep talking about getting a grip on non-compliance, but in principle in the Netherlands the level of non-compliance is quite low. In short, I think yes there is attention, but actually taking the step to implementation might be something for the future.”
The European Commission is now working on a proposal for legislation regarding Digital Reporting Requirements (DRR), what do you think of this development?
Menno: “Well, I see two big problems here. First a fragmented regulatory framework in the EU. Second, outdated systems regarding reporting of intra-Community transactions. This was also mentioned in the EU studies.
Another aspect is that countries are moving at a different pace and using all kinds of different systems, although it seems that e-invoicing, i.e. real-time reporting based on e-invoicing, is slowly gaining ground in the EU. However there are different options in e-invoicing as well. So you could also ask yourself the question, isn’t the European Commission too late. You have all these countries with their own sovereign interests and their own issues.
From a business point of view it would be best if you have 1 system that works both nationally and on a European level, that is integrated with business processes. That is the ideal world, though again it would be the system that costs the most.
Then there are all kinds of other issues involved, which for some countries play a role. For example, how certain is it that the data will not end up in the wrong hands because ultimately, if you have access to the transactional data of large companies, you also affect the competitive position of those companies. This is a particular issue for the northern countries, such as the Netherlands, Germany and probably also the Scandinavian countries. At the moment it seems that the eastern and southern countries have a little less problems with this, but that too is time-dependent.
That is the complex playing field that the European Commission is working in at the moment. If you also look at the time frame, it says 5 to 10 years. That seems like a long time, but in the EU context, that’s very fast. The question is, what happens in the meantime in all those other countries, if you run such a trajectory. There are countries, like Romania or Greece, that are already taking steps, and also want to do something about the VAT gap now. So I am also very curious to see what will come this fall (red. publication of the legislative proposal). I do expect an outcome in line with the report. Still, we are now looking at the Commission, but we actually have to see what the Member States are going to do together. Which ones will push for more research, and which ones want more action right away. That is the game that is going to be played next year I think.”
If you could give one piece of advice to the European Commission regarding the digitalisation of VAT, what would it be?
Lisette: “I think as far as we’re concerned, the core of the advice would still be to just try to differentiate a little bit more. Instead of that one-size fits all approach. Take a closer look at the causes of the tax gap. Look more closely at the problems in the various countries and try to focus your measures on those.
For example, if you look at 20-25 years ago, every tax department did the same thing, namely just doing all the checks afterwards. Well, that’s just an inefficient approach. In other words, it costs a lot of money. Furthermore, it doesn’t solve the actual problems. Over the years, this supervision of tax authorities has changed towards preventing problems. I think that on the tax authorities' side, that is the way to go with VAT as well. I think that if you make sure that you work with large companies, who are thus very much involved in the digitalisation process, and are maybe even further in this process than tax authorities themselves, then you can secure a very large part of your VAT revenue. Therefore, you can question if you should impose the same measures on all different categories. So my advice would be, take a holistic approach, do it together, which allows you to differentiate if necessary.”
Menno: “And then if you want to make it perfect, you connect as much as possible to existing processes of companies, not only implementing extra reporting and obligations for Intrastat and intra-Community transactions. If you can in some way bundle that digitally, and technically you can, then that will be much more in line with the administration of those companies.”
What would you tell the reader to make them even more enthusiastic about VAT?
Menno: It is actually so invisible, for people who don’t deal with VAT professionally. When you go to a store, you know that you pay VAT, but in the end it’s automatically paid. However, there is a whole world behind these simple transactions. From the EU context to the international context. It’s actually reflected in everything, which makes it extremely interesting. It goes right through a company, on all sides, and nobody notices, except the people who are involved. That’s what I find interesting about VAT. And of course it involves huge amounts of money. It is the main tax revenue of governments, especially in the Western world.
Lisette: And what makes it so interesting for companies and consultants, is that ultimately as a company you want to be compliant as efficiently and effectively as possible. They simply want and need to focus on doing business. I think that VAT is pre-eminently a process that you can very well digitalise. That’s where the interest should be from the companies' and the consultants' perspective.”
We would like to thank Lisette and Menno again for their time and for giving their perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via email@example.com