IMF Report: Finland's uncollected 'tax gap' is narrow

Tax Administration Bulletin, 2/12/2016

The Finnish Tax Administration collects value-added tax (VAT) quite successfully according to the results of an international comparison. The part of the VAT gap due to policy, i.e. due to reduced VAT rates and other public subsidies, is two times higher than the part due to uncollected VAT that taxpayers are legally required to pay.

Working together with the Finnish Tax Administration, the International Monetary Fund has released a report evaluating Finland's VAT taxation. The IMF distinguishes between the overall VAT gap, the compliance gap and the policy gap.

The VAT gap (compliance gap)

The VAT gap is the difference between the potential tax revenue under the tax rules and the actual revenue received.

The VAT gap in Finland is low (5% of potential tax revenue under current tax rules) if compared with other countries and has decreased since 2008. In 2014, it was about one billion Euros.

– We are a country with a narrow tax gap and we'd like to keep it that way, says Pekka Ruuhonen, Director-General of the Finnish Tax Administration.

The industry-specific tax gap review focuses on the construction sector. There is a visible decline in that sector's VAT gap figures after the adoption of a reverse-charge scheme for VAT payments on construction services in 2011.

The retail sector has the largest impact on VAT revenue. The concentration of the sector into a few large corporate groups is of great significance for the low level of the VAT gap.

The VAT gap resulting from fiscal support (policy gap)

The policy gap measures the impact of tax policy (for example a reduction of VAT on certain products) on VAT revenues. The policy gap is broken down into essential fiscal support (efficiency gap) and policy gap margin (expenditure gap).

The expenditure gap was approximately two billion Euros in 2014 i.e. about one per cent of GDP. The proportion is thus double that of the VAT gap.

The policy gap has increased from 2008 to 2014. The increase may be a result of the recent decisions regarding taxation policy (for example, reduction of VAT on some product categories or for certain industry sectors) or of consumption trends that favour products subject to reduced VAT (for example, more food is consumed in restaurants and consumption of alcohol is reduced).

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