News Nodokļi

On Thursday, 8 December, the European Commission (EC) published a report on the current assessment of the value added tax (VAT) gap for European Union (EU) member states. The assessment was carried out for a five-year period from 2016 to 2020, including a so-called “quick” assessment of the VAT gap for 2021. Despite the negative impact of COVID-19 on the growth of the European economy, according to the published data, also in 2020, as compared to 2019, a downward trend in the VAT gap in the EU member states was observed, as it decreased from 11.0% to 9.1% during the year.

In 2020, the downward trend of the VAT gap also continued in Latvia, ranking it 5th among EU member states with the most efficient VAT collection system. According to the assessment made by the EC, the VAT gap in Latvia in 2020 was only 3.6%, which is 3.6 percentage points less than a year earlier. Only the Netherlands (2.8%), Sweden (2.0%), Estonia (1.8%) and Finland (1.3%) outperform Latvia in this indicator.

The EC’s quick assessment of VAT for 2021 shows that the VAT gap in Latvia continued to decrease last year as well, although not at such a fast pace, taking into account the low level already reached, decreasing by another 0.2 percentage points. The quick assessment follows a simplified methodology, but allows for an initial assessment for the year prior to the year of publication of the report.

Legislative changes have also influenced the reduction of the VAT gap. In order to reduce the possible risks of VAT fraud, work is being done in cooperation with the State Revenue Service to improve the legal framework in the field of taxes. So far, a number of measures have been implemented in the field of legislation and tax administration to reduce the VAT gap, which have brought good results.

For example, based on risk analysis, the tax audit process has been improved. In order to mitigate the risk that unfair VAT payers might include fictitious transactions in the total VAT taxable transaction amounts in the VAT returns and the appendices thereto, it is set that the VAT return shall include a detailed itemisation of all transactions, starting from the transaction threshold of 150 euros. To follow the discipline of paying VAT more effectively and reduce the risk of VAT fraud, Latvia has stopped using a taxation period of “half a calendar year”, and, for newly registered VAT payers, a taxation period of “one calendar month” is prescribed for a period of six months. In order to reduce fraud in the field of VAT, in sectors where the risk of VAT fraud remains high, the reverse VAT payment procedure has been introduced.

The tax gap is the amount of taxes that taxpayers do not declare or, if declared, is not paid into the state budget.

Report available here.