Poland among top three EU countries in closing VAT gap

Poland achieved the third largest decline in its VAT gap among all European Union member states in 2018, according to a new report by the European Commission.

The Polish government has cited closing the VAT gap – and the resultant increase in revenue for the state budget – as one of its greatest successes. However, experts worry that the effects of the economic coronavirus pandemic could undo earlier progress.

The “VAT gap” is a measure of the difference between the expected revenues from Value-Added Tax (VAT) – the levy on goods and services that constitutes the largest source of income for Poland’s state budget – and those actually collected.

The lost revenue can be the result of fraud and tax evasion, corporate insolvencies and bankruptcies, and maladministration.

In 2018, Poland closed its VAT gap by 4.3 percentage points, according to the new data. This was the third largest across the bloc, following Hungary and Latvia, where shortfalls shrunk by 5.1 and 4.4 percentage points respectively.

The VAT gap decreased in 21 of the EU’s then 28 countries, bringing about a total net reduction of €900 million. However, lost VAT revenue across the whole EU still amounted to €140 billion in 2018, notes the commission.

Poland Law and Justice (PiS) government has been praised for its efforts to close the VAT gap, which it made a priority after coming to power in 2015. At the time, the gap stood at 23.9%.

PiS blamed the former government – which had inherited a VAT gap of just 8.9% in 2007 – for allowing billions of zloty of revenue to be lost. Mateusz Morawiecki – then the finance minister and now prime minister – estimated the figure at 200-250 billion zloty (€45-56 billion) over 2007-15.

“One can wonder if this [was the result of] laziness and stupidity, or if it is something more,” said Morawiecki in 2017. “I believe that Poles deserve an explanation.”

In mid-2016, the finance ministry announced a plan to reduce the VAT gap to around 15% over three years. The goal was reached significantly earlier, as the gap narrowed to 14% by 2017.

Nonetheless, experts now expect that the VAT gap could again widen in 2020 due to economic fallout caused by the coronavirus pandemic, which could incentivise greater tax evasion.

The Centre for Social and Economic Research (CASE), which estimates Poland’s annual VAT gap for the European Commission, now estimates that the gap could increase by 4.9 percentage points relative to last year. That would mean that the uncollected share of VAT could reach 14.5%.

“The decline in economic activity and problems with financial liquidity contribute to the problems of many enterprises in meeting their tax obligations,” says Grzegorz Poniatowski, director of fiscal policy studies at CASE, reports Money.pl. “The incentives for non-compliance with tax regulations may increase.”

Poniatowski adds that an important aspect of shrinking the tax gap is cracking down on the grey economy, which is more sizeable in Poland when compared to countries like Finland or Sweden.

In response to CASE’s report, the current finance minister, Tadeusz Kościński, says that it is still “too early to talk about the size of the VAT gap for this year”.

Although VAT revenue shrunk during the lockdown, there is currently a “dynamic recovery, which may mean that the scale of losses in VAT revenues will be smaller than we originally assumed”, says Kościński, quoted by WNP.

The European Commission also forecasts an EU-wide reversal this year of the recent trend towards closing VAT gaps, with a potential loss of €164 billion across the bloc in 2020 due to the economic effects of the pandemic.

Main image credit: Krystian Maj/KPRM (under CC BY-NC-ND 2.0)

Maria Wilczek

Maria Wilczek is deputy editor of Notes from Poland. She is a regular writer for The Times, The Economist and Al Jazeera English, and has also featured in Foreign Policy, Politico Europe, The Spectator and Gazeta Wyborcza.