After importing the dangerous practice of VAT fraud from the rest of the EU, Poland is fighting to minimise this illegal activity from causing more damage to its economy.
You have probably heard that Poland is Europe’s growth champion and managed to get through the crisis without a recession, but there is a second story of prudence in public finances. Narrowing the VAT gap has been one of the Polish government’s priorities since 2015.
According to the European Commission, EU countries lost almost €150 billion in Value-Added Tax (VAT) revenue in 2016 – almost 1% of the whole EU economy.
The creation of a single market of 28 countries brought with it VAT fraud, which became the new white-collar crime exported to Central and Eastern Europe.
The main reason behind Poland’s crackdown on crime is that VAT revenue makes up around 40% of its budget. Warsaw did not try to reinvent the wheel; rather, it was inspired by other countries, mainly in Europe, sometimes taking measures to a new level. Now, the Balkans and other emerging markets with open economies can learn how to minimise the chances of becoming safe havens for fraudsters.
With this new political wave, Poland is concentrating on narrowing its VAT gap. This is a growing trend across Europe, with measures such as SII in Spain, RTIR in Hungary and LatAm-style clearance of e-invoices in Italy. Poland has opted for a step-by-step approach with more and more intrusive measures. In the not-too-distant future, all invoices may need to be issued electronically in a structured XML format, improving tax checks and oversight of VAT.
Source of the problem
VAT is a consumption tax on most goods and services in the EU. It is levied on the “value added” to the product at each stage of production and distribution. VAT aims to be “neutral”; businesses can reclaim any VAT they pay on goods or services. In the end, the final consumer should be the only person taxed.
The VAT gap is the overall difference between expected VAT revenue based on regulations and the amount collected.
VAT is the Polish budget’s biggest source of revenue, so its size and stability is key to responsible financial policy. An increase in the tax gap has a significant impact on the state’s finances and means less money for public services.
Since 2008, Poland’s VAT gap – the losses to the budget due to the shadow economy and fraudulent VAT refunds in intra-Community transactions – has grown sharply rising from 0.4% in 2006 to 2.4% of GDP in 2012.
Settling intra-Community transactions creates opportunities for both simple and more complex abuse (so-called carousel fraud). Worryingly, the TAXE 3 Committee estimates that every year €400m from VAT fraud is used to fund terrorism and support radical groups such as the so-called Islamic State.
Crackdown on fraud
Aware of the scale of fraud and the losses to the State Treasury, Poland implemented a multifaceted plan to seal the VAT system in 2015-2018.
It narrowed significantly in 2018 to around 7-12% of potential revenue (depending on the source of estimation), down from 23.9% in 2015, 20% in 2016 and 15% in 2017. This means that Poland currently has a lower VAT gap than the EU average of 12,3% according to the newest data.
Another success story is Slovakia, which managed to decrease the GAP by 11 percentage points from 37% in 2012 to 26% in 2016.
The higher VAT revenue results from improvement in Poland’s economic climate and the authorities’ “sealing efforts” based on better regulations and cooperation with businesses.
After identifying the areas prone to fraud, Poland launched numerous legislative efforts. The fuel package, constantly supplemented and broadened, is an example of a “targeted” solution. Another is the split payment mechanism, where the purchaser pays VAT directly to the supplier’s dedicated VAT bank account. The supplier has limited rights to the money in its VAT account, ensuring that VAT-related liabilities are paid. The idea came from Italy and Romania, where the mechanism was introduced a few years earlier.
SAF-T reporting has been required since 2018. Every month, companies must send a report to the tax register via a new IT system. A Central Register of Invoices will be established in 2019, helping the tax authorities collect and analyse data, and then follow up with taxpayers.
The narrowing of the VAT gap has not taken place at entrepreneurs’ expense. Taxpayers’ money has not been retained. In the first half of 2017, the average time for a VAT return fell by almost one week year-on-year, from 43.19 to 36.3 days.
Complex reform of the tax administration, which was equipped with innovative analytical tools through multifaceted cooperation with the IT and banking sectors, has helped tax officials detect irregularities. The number of fiscal checks by tax control offices has fallen by over one-fifth. No-one was hurt in the process.
Poland could be said to be combating VAT fraud the most effectively in the whole EU. The difference between what the tax office collects and what they would get if everyone paid their taxes has been reduced more than two fold since introducing the new policies.
According to data for 2018, the gap in Poland is now similar to that in countries like Finland, France, Germany and Britain. This a success that can be used in emerging economies struggling to collect taxes.
White-collar crime is a real problem today and we need policies that reduce fraud. If countries collect more money from current taxes the need to introduce new ones diminishes.