Guide on the theoretical VAT - Practical guidelines for enhanced comparability across countries - 2023 edition

‘Theoretical VAT’, defined as the amounts of VAT which would be collected if all units subject to VAT were to pay it as required by law, is a concept of great interest for economic and fiscal analyses. In the domain of national accounts, estimation of theoretical VAT receipts is a crucial first step for estimating exhaustiveness adjustments for non-collected VAT. Theoretical VAT also plays an important role in validating GDP estimates.

Given the variety of approaches to the national accounts-based calculation of theoretical VAT in EU countries, this paper has been drawn up to propose practical guidelines for enhanced comparability in this regard. In the quest for good practices to be considered in this calculation, it explored the advantages offered by the framework used until recently to calculate the so-called ‘Weighted Average Rate’ (WAR) for the purpose of the VAT own resource of the EU budget.

This paper: (i) puts forward a definition of ‘theoretical VAT receipts’; (ii) describes the general framework for the national accounts-based calculation of theoretical VAT; and (iii) discusses the process for deriving theoretical VAT within the Supply and Use Tables (SUT) and the possible links between that process and the calculations made in the WAR scheme. The paper then takes a closer look at the individual aspects of calculating theoretical VAT and discusses the related good practices identified in the WAR scheme. Subsequently, it discusses the derivation of the final estimate of the theoretical VAT amounts based on the balanced SUT data and its fine-tuning for VAT evaded with complicity and other relevant transactions not covered by the SUT. Finally, on top of the considerations on theoretical VAT itself, the paper discusses the adjustments that are to be made to national accounts due to non-collected VAT and the issue of moving from theoretical VAT to actual VAT in SUT. Last but not least, the paper briefly describes the use of theoretical VAT for validating GDP estimates.