VAT gap is undeclared and declared unpaid VAT amount ratio of potential VAT volume that would be calculated and charged if all taxpayers would fully meet tax obligations. 

According to the study[1]  of the European Union (EU) on the VAT gap in 26 EU countries during year 2012 and 2013, Latvia and Lithuania are among the countries where the VAT gap is approximately two times higher in comparison with EU average level. VAT gap in Estonia for the same period is close to the EU average indicator. It means that approximately 30% of the total volume of the VAT in Latvia and Lithuania during this period has not been paid, while in Estonia - only 15% which is the EU average level. Smallest VAT gap during 2012 and 2013 was in Finland, followed by the Netherlands, Sweden, Luxembourg, Slovenia and France, while the largest gap was in Romania, Lithuania, Slovakia, Greece, Italy and Latvia. In addition to the above indicators, it is interesting to point out that in 2013 the VAT reverse had already been introduced in timber, scrap metal and construction industries in Latvia during 2013 while in comparison with Estonia, it is only valid for scrap metal transitions up to now. 

Tackling gap minimization 

The negative effect due to the VAT gap on the budgets of the EU and Member States is considerable. Thus solutions are sought to improve the situation. One of the solutions is to implement VAT reverse i.e., extended VAT reverse charge procedure that is applied for new industries in Latvia. 1 April 2016 the amendments to the VAT Act entered into force, providing reverse procedure for mobile phones, tablets and other electronic devices sold. In addition, new draft amendments of VAT Act foresee application of the said procedure for trade of cereals and industrial crops. Moreover, there is on-going discussion on how to identify further industries where it can be implemented in the near future. 

In Lithuania, a smart tax administration system has been introduced on 1 October 2016 in addition to the existing reverse in metal and timber industries and fraud reduction in construction. The taxpayer's accounting system automatically generates tax audit documents in accordance with approved standards to be further submitted to the tax administration or the tax administration has access to documents. In case of further interest, please refer to information in English available in the following link: https://leinonen.lt/news/news-2016/smart-tax-administration-system-i-mas-3-major-obligations-as-regards-data-presentation-to-the-st 

Assessment of business partners recommended 

The taxpayer acting in good faith still can become a victim of fraudulent transactions. The only way to safeguard the actions and avoid potential   financial loss and tax surcharge is to take precautionary measures i.e., risk assessment and the evidence of counterparty analysis and assessment. 

State Revenue Service (SRS) offers on-line recommendations on how to evaluate counterparties and transaction risks.  In addition, SRS issued informative material during May 2016 on how the VAT payers in Latvia can meet European Commission guidelines on administrative cooperation among Member States in the field of VAT fraud. For further information, please refer to the following address: https://www.vid.gov.lv/default.aspx?tabid=8&id=177&hl=1&oid=86196&otype=24 

As a tax advisory service provider, we can assist you in reviewing your internal procedures concerning approval of business partners and transactions in your company. We provide other services at your disposal i.e., review of reduced and 0% rate application, input declaration, VAT reverse procedure and other tax issues. Please contact us for any further enquiries: http://www.leinonen.lv/kontakti/msu-cilvki 


[1]http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2013.pdf