98/527/EC, Euratom: Commission Decision of 24 July 1998 on the treatment for national accounts purposes of VAT fraud (the discrepancies between theoretical VAT receipts and actual VAT receipts) (notified under document number C(1998) 2202) (Text with EEA relevance)
Date: 1998-07-24
Institutions: European Commission
Subjects: VAT, gross domestic product, gross national product, tax collection, tax evasion

21. 8. 98

EN

Official Journal of the European Communities

L 234/39

COMMISSION DECISION

of 24 July 1998

on the treatment for national accounts purposes of VAT fraud (the discrepancies
between theoretical VAT receipts and actual VAT receipts)

(notified under document number C(1998) 2202)

(Text with EEA relevance)

(98/527/EC, Euratom)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

Whereas such adjustment relates to that component of
the discrepancies between theoretical VAT receipts and
actual VAT receipts which is attributable to evasion not
involving the connivance of the buyer (‘without compli-
city');

Having regard to the Treaty establishing the European
Atomic Energy Community,

Whereas the measures provided for in this Decision are
compatible with the opinion of the committee set up by
Article 6 of Directive 89/130/EEC, Euratom,

regard

to Council Directive

Having
89/130/EEC,
Euratom, of 13 February 1989 on the harmonisation of
the compilation of gross national product at market
prices (1), and in particular Article 1 thereof,

Whereas Commission Decision 94/168/EC, Euratom, of
22 February 1994 on measures to be taken for the imple-
mentation of Council Directive 89/130/EEC, Euratom on
the harmonization of the compilation of gross national
product at market prices (2), relates in particular to tax
evasion but does not explicitly describe how VAT evasion
should be treated; whereas it is therefore appropriate to
describe how such evasion should be treated;

HAS ADOPTED THIS DECISION:

Article 1

The Member States shall calculate the value of VAT
evasion ‘without complicity' by applying the methods set
out in the Annex to this Decision.

Whereas, in order to ensure the exhaustiveness of their
GDP and GNP estimates in accordance with Directive
89/130/EEC, Euratom, the Member States need to adjust
those estimates so as to take VAT evasion into account;

For the purposes of the above-mentioned calculation, the
Member States shall determine theoretical VAT receipts
and actual VAT receipts and calculate the discrepancy
between these two amounts, by applying the following
formula:

Evasion ‘without complicity' = Theoretical VAT receipts less actual VAT receipts less
time differences less insolvencies less missing revenue
(evasion ‘with complicity')

The Member States shall adjust, if necessary, the amount of value added included in their
GDP and GNP estimates made in accordance with Directive 89/130/EEC, Euratom by
adding to it the value, calculated using the above formula, of evasion ‘without complicity'.

Article 2

In order to make the adjustment described in Article 1, the Member States may apply a
method which is equivalent to that described in the first subparagraph of Article 1, and
which produces comparable results.

(1) OJ L 49, 21. 2. 1989, p. 26.
(2) OJ L 77, 19. 3. 1994, p. 51.

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Article 3

The Member States shall, no later than 1 October 1998, provide the Commission with an
explanation of the sources and methods applied and state the value of the adjustments
made. The Commission shall, in accordance with Article 19 of Council Regulation (EEC,
Euratom) No 1552/89 (1), examine the validity of the sources and methods used and the
adjustments made, and the comparability of the results obtained, particularly in cases
where, in accordance with Article 2, the method described in the first subparagraph of
Article 1 has not been used.

The time limit for the new Member States (Austria, Finland and Sweden) is fixed at 1
October 1999.

Article 4

If a Member State can demonstrate to the Commission that the equivalent calculation is
already implicit in its accounts, Article 1 shall have no effect. Any Member State wishing
to follow this route shall supply full documentation to the Commission by 1 October 1998
(for Austria, Finland and Sweden: 1 October 1999).

The Commission shall inform the GNP Committee on the outcome of the implementa-
tion of this Decision and, in particular, on the methods used by the Member States.

This Decision is addressed to the Member States.

Article 5

Done at Brussels, 24 July 1998.

For the Commission

Yves-Thibault DE SILGUY

Member of the Commission

(1) OJ L 155, 7. 6. 1989, p. 1.

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ANNEX

The value of VAT evasion not involving the connivance of the buyer (‘without complicity') is calculated using
the two following variables:

1. The value of theoretical VAT receipts;

2. The discrepancies between theoretical VAT receipts and VAT receipts actually collected during the period.

Calculation of theoretical VAT receipts

The theoretical VAT receipts are the amounts of VAT which would be collected if all units subject to VAT
were to pay it as required by law.

In order to calculate theoretical VAT receipts, the first step is to bring the VAT base into line with current
legislation: in other words, to identify all the transactions which are subject to non-deductible VAT. Final
household consumption is treated as wholly subject to non-deductible VAT, whereas other categories of uses
have to be broken down in order to determine a rate of non-deductibility. This calculation is made using the
most highly disaggregated national accounts data available. The VAT base is calculated in the light of all
current legislation and rules governing VAT.

The second step is to apply the appropriate rate of VAT to each transaction constituting the VAT base as
defined in the previous paragraph. The VAT rates applied must be those in force during the year for which the
VAT base has been calculated. Theoretical VAT receipts are calculated in the light of all current legislation
and rules governing VAT.

Calculation of the discrepancies between theoretical VAT receipts and VAT receipts actually
collected during the reference period

The discrepancies between theoretical VAT receipts (calculated in the light of all current legislation and rules)
and actual VAT receipts comprises four components:

1. Time differences between treasury data and national accounts data;

2. Ad hoc cancellations by the tax authorities of certain VAT claims in cases of insolvency;

3. Evasion involving the buyers’ connivance (with complicity) (cases where the buyer does not pay VAT to the

seller);

4. Evasion not involving the buyers’ connivance (without complicity) (cases where the buyer pays VAT to the

seller, but the latter fails to remit it to the tax authorities).

As a result, the value of evasion ‘without complicity' is arrived at by deducting evasion ‘with complicity' and
insolvency-related cancellations from the discrepancies between theoretical VAT receipts and actual VAT
receipts, taking into account time differences between the transaction giving rise to the VAT and the
collection of VAT receipts by the tax authorities.

Evasion ‘without complicity' = Theoretical VAT receipts less actual VAT receipts less time differences

less insolvencies less missing receipts (evasion ‘with complicity')

Actual VAT receipts are the amounts actually collected by the tax authorities during the period to which the
calculation of theoretical VAT receipts relates.

Adjustments for time differences are intended to correct receipts so as to allow for the fact that some payments
of VAT made in the current year (n) relate to the previous year (n–1) and that some VAT payable in respect
of year n is not actually collected until the following year (n+1).

There may be instances where current legislation entitles the tax authorities to make ad hoc cancellations of
VAT claims in cases of insolvency. In such cases, the value of the cancellations must be deducted from the
difference between theoretical VAT receipts and actual VAT receipts (unless it has already been taken into
account in the calculation of theoretical VAT receipts).

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In order to calculate the value of evasion ‘with complicity', only those activities should be taken into account
in respect of which an adjustment for undeclared work (non-recording in statistical files of economically active
units) has been made.

By using this method, applying the adjustments for undeclared work previously made to the output of
branches of economic activity and multiplying the corresponding amounts for additional sales (undeclared
sales) by the appropriate rates of VAT, it is possible to estimate the value of ‘missing' VAT receipts which the
tax authorities have been denied because of VAT evasion ‘with complicity'.

By way of example:
the household
consumption of a given product, excluding VAT, is increased by 15 %, and if the rate of VAT applying to
purchases of that product is 18,6 %, the amount owing to the tax authorities can be calculated as follows:

following an adjustment

for undeclared work,

the estimate of

if,

Missing VAT receipts due to evasion ‘with complicity' = value of sales of the product before adjustment (cid:253)
15 % (cid:253) 18,6 %.