Malta’s VAT gap is sixth-highest in EU

Malta’s public finances depend heavily on revenue derived from VAT, making up 22.8% of government’s total tax revenue in 2018.

But no government can recover all VAT revenue legally collectable, largely due to tax fraud or maladministration. This is reflected in the so-called VAT gap.

The VAT gap is the difference between expected revenues from VAT, and the actual sum collected by authorities. Expected VAT, or VAT Total Tax Liability (VTTL), is the estimated amount of VAT that a government can theoretically collect.

According to the European Commission’s 2020 VAT Gap report,. Nominally, this is reflected as a loss of €164 million worth of tax revenue during that period.

While standing above the EU average, Malta’s VAT gap has been on the decline since 2014, when it stood at 31.3% of VTTL, falling by 16.2 percentage points.

The VAT gap provides a reliable measure of the effectiveness of VAT enforcement and compliance procedures. The higher the gap, the more tax is being lost to the undeclared economy. It could also signal losses from tax evasion, corporate insolvency, or legal tax optimisation.

At EU level, the VAT gap stood at €140 billion throughout the bloc, with a total revenue loss of 11%. There was a marginal improvement over the years, but the COVID-19 pandemic might deal a significant blow to the progress made. A decline in economic growth, and deteriorating government balances could see the EU’s VAT gap increase in 2020, possibly reaching €164 billion in tax losses.