On 23 February 2016 the IMF published a technical assistance report on the analysis of the value added tax (VAT) gap in Denmark. Estimates of the VAT gap in Denmark were made for the years 2008 to 2012.

The IMF’s methodology for the Revenue Administration Gap Analysis Program (RA-GAP) uses two main components for estimating the VAT gap, these being an estimate of the potential VAT collections for a given period and a determination of the accrued VAT collections for that period. The methodology uses a top-down approach to estimate the potential VAT base, by looking at statistical data from the VAT generated in each sector and building up the accrued VAT collections from the tax record data.

One of the IMF’s main purposes was to estimate the VAT compliance gap. The VAT compliance gap is the gap between the VAT that could potentially be collected given the current policy framework and the actual VAT revenue collected.

The analysis found that the VAT compliance gap in Denmark for 2008 to 2012 was low, below 10% of the estimated potential (or less than 1% of GDP). This indicates that there is a high level of VAT compliance in Denmark. The results show that the VAT compliance gap fell from around 1% in 2008 to around 0.5% in 2012 so VAT compliance was still improving in that period.

There are other measures of the VAT gap that can be determined using different methods, including the VAT policy gap. The VAT policy gap is the difference between the potential VAT that could be collected if all final consumption were taxed at the current standard rate of VAT and the amount of VAT that is actually collected. Such measures are important for understanding all the factors affecting current VAT collections and can be compared to or contrasted with the VAT compliance gap.

The VAT policy gap increased between 2008 and 2010, but this merely reflected changes in consumer behavior – the proportion of exempt supplies in final consumption increased.

The VAT compliance gap arrived at using RA-GAP shows some consistency in trends with the estimates of the VAT compliance gap produced by the European Commission and by the Danish tax administration. The level of the VAT compliance gap shown by RA-GAP lies between the results of the other two sources.

The IMF notes that the tax gap measure used by the Danish tax administration is flawed and has only partial coverage of the total tax gap. The metric currently used should compare tax gap losses identified by random audit programs to the total net (rather than gross) amounts of tax due. The IMF also notes that the use of a numerical tax gap target is not recommended owing to the uncertainty in measures of this type.

The IMF also suggest that the Danish tax administration should reduce the time lag between random audit program fieldwork and the publication of the tax gap estimates, to maximize the relevance of their published estimates. This would also improve the transparency in reporting. The IMF notes that the use of detailed tax gap analysis to support strategic and tactical decisions is good practice but there are further ways in which the Danish tax administration could improve its analysis.