TAX3 Hearing: The Evaluation of the Tax Gap

The aim of the hearing was to better understand the different methodologies that exist to estimate the amount of tax avasion and avoidance and hence the tax gap. The tax gap for a country is commonly defined as the difference between what should be collected in tax and what is collected in tax. Apart from tax evasion and avoidance, bankruptcies and administrative mistakes also contribute to the tax gap. The experts invited were Gaetan Nicodeme, head of unit of economic analysis, evaluation and impact assessment support – European Commission and Fiscalis tax gap project group representative, Annette Alstadsæter, Professor at Norwegian University of Life Science and Petr Janský, Assistant Professor in Economics at the Charles University of Prague.

In general, we can distinguish between two methodical approaches to measure the tax gap. The first one is the top-down approach. It analyses macroeconomic data to estimate the economic activity in a country. Based on this estimate, one can then calculate the expected tax income and contrast it with the actual tax income. A drawback of the method is that it’s very data intensive and in the end, it is not possible to name the source of the irregularities.

The second one is the bottom-down approach. It is based on tax audits of individual companies, which are extrapolated to gain a picture of the entire economy. Generating tax audits, however, is resource intensive and thus some tax administrations simply do not have enough audits available to perform meaningful extrapolations. According to Mr. Nicodeme from the European Commission there is no consensus amongst tax authorities on which approach is more suitable for estimating the corporate income tax gap. Better collaboration between member states’ tax authorities, however, should help in improving current estimates.
Annette Alstadsæter´s focused in her presentation on the tax gap resulting from tax evasion by individuals. According to her research an average of 10% of global GDP is held offshore, 90 % of which goes unreported . Especially the rich are able to hide their wealth from tax administrations. The Swiss Leaks revealed, for example, that the top 1% in Scandinavia hide 40% off their wealth abroad. For Norway, she estimates an average tax gap of 3 % which increases to 25 % at the top of the income distribution. She is also demanding for more data to work with. Mrs. Alstadsæter stressed out that companies are not independent and can be forced to work with the administrations.

Petr Janský presented findings on international corporate tax avoidance and the resulting revenue losses. The different studies he presented examined between 30 and 100 countries with an estimated revenue loss of around 200 billion Dollar per year. Both researchers, Ms Alstadsæter and Mr Janský see the lack of appropriate data as a major caveat to their work. They thus urged MEPs to push for the quick implementation of public Country-by-Country reporting.
Asked about solutions to the current malaise of the international tax system, the two researchers advocated for an overhaul of the current system away from the arm’s length principal towards unitary taxation. Especially Mr Janský was cautious though about implementing the Commission’s CCCTB proposal (see our articles here and here) without prior conducting thorough impact assessments of such a profound policy change. When it comes to curbing tax evasion by individuals, Ms Alstadsæter sees tougher sanctions for enablers and promoters of the tax flight industry as a promising way forward.