European Commission tax report: VAT Gap; anti-fraud measures; digital VAT mandates and AI
The 2025 EU Annual Report on Taxation underscores the growing importance of robust indirect tax systems—particularly Value Added Tax (VAT)—amid shifting demographics, digitalisation, and persistent fiscal challenges.
With governments facing increased spending pressures and the need for sustainable revenues, the VAT system remains a cornerstone of EU tax policy. However, the report reveals that substantial revenues continue to be lost through compliance failures and fraud, emphasising the critical role of policy reform, digital tools, and cross-border cooperation.
€89 billion VAT gap
A focal point of the report is the VAT gap, which measures the difference between expected VAT revenues (based on total taxable consumption) and actual collections. Despite reforms, many Member States continue to experience significant compliance gaps. Encouragingly, several countries—such as Hungary, Poland, Latvia, and Slovakia—have successfully reduced their gaps by adopting electronic reporting requirements, online cash registers, and reverse charge mechanisms. These tools have enhanced transaction transparency and deterred VAT fraud, especially in sectors vulnerable to Missing Trader Intra-Community (MTIC) fraud.
MTIC fraud, where businesses exploit VAT exemptions on cross-border EU transactions, remains a major revenue loss area. To counteract this, the EU launched various initiatives, notably Eurofisc—a cooperative network of over 400 tax officials from EU Member States and Norway. In 2023, Eurofisc identified €14.6 billion in suspicious transactions, equating to nearly €3 billion in potentially recovered VAT. This network also tackles newer fraud threats, such as eCommerce-related tax evasion, now monitored through the Central Electronic System of Payment Information (CESOP).
Member states adopt live reporting and Artificial Intelligence
Digitalisation plays a key role in enforcement. Tools like the Standard Audit File for Tax (SAF-T) and real-time e-invoicing, mandated by the VAT in the Digital Age (ViDA) initiative from July 2030, are central to modern tax control. These technologies give tax authorities real-time access to transactional data, enabling more efficient audits and reducing the compliance gap. The EU estimates digital reporting alone could improve VAT collection by 1.9 percentage points.
Tax administrations are also leveraging behavioural insights and VAT artificial intelligence (AI) to bolster voluntary compliance and automate detection of anomalies in VAT filings. AI supports data mining and pattern recognition, enabling proactive fraud identification and enhancing audit efficiency. The integration of digital processes within taxpayers’ business systems—“tax compliance by design”—is viewed as the future of VAT administration.
Finally, while cross-border cooperation has strengthened enforcement, the report notes that domestic VAT fraud—like fake purchase invoices—remains outside the EU legal framework and continues to contribute significantly to revenue losses. Addressing this requires not just EU-level reforms but also robust national measures and digital infrastructure development.
Several Member States have already undertaken significant VAT reforms to curb fraud—introducing mandatory e-invoicing, real-time reporting, reverse charge mechanisms, and digital auditing tools. These measures not only strengthen enforcement and revenue collection but also enhance transparency and administrative efficiency. Collectively, such initiatives lay the groundwork for a more competitive, equitable, and sustainable European tax landscape.
