European VAT Tax Evasion No Selling Point

J.D. Foster / May 04, 2010

A big reason Europeans adopted a value-added tax (VAT) was to raise enormous sums to underwrite their social welfare state, but another was that the VAT was supposed to be much more difficult to evade than most other taxes. Europeans have a well-deserved reputation for tax evasion and so their governments need a tight, reliable, auditable, mighty revenue source and the VAT seemed to fit the bill. Well, maybe not.

According to a recent study commissioned by the European Union, Member States lose more than $150 billion annually to fraud. This represents about 12 percent of total VAT revenues. This is a startling large figure when one considers the decades of experience Europeans have in auditing and enforcement of their VATs.

The design of the VAT imposes enormous paperwork burdens on businesses specifically to facilitate auditing and enforcement. Every business levies VAT on its sales, but it also pays VAT on its purchases. It then tallies up the VAT paid as shown on its purchase invoices and subtracts the total from VAT owed on its own sales; hence the name the “credit-invoice VAT”. The benefit that is supposed to flow from this crediting mechanism is a paper trail to prevent evasion. A 12 percent evasion rate suggests it’s not worth the effort. (more…)