The EU Member States face the problem of ineffective tax collection, especially in the case of VAT. It is a challenge to assess the scale of tax evasion which probably explains the lack of data published so far. This paper aims to identify determinants of VAT gap in the EU Member States based on a panel analysis. Effectiveness of tax system or macroeconomic condition may influence the size of VAT gap but do not explain this phenomenon comprehensively. The quality of institutions and social trust may also improve the effectiveness of tax collection. On the other hand, factors commonly considered as crucial in the VAT gap analyses did not confirm to be significant in the empirical research, e.g. number of VAT rates or their spread, which indicates no justification for the recommendation repeated for years that Poland should limit the use of  reduced VAT rates. The in-depth understanding of VAT gap mechanism allowes to choose proper policy tools to reduce the scale of this phenomenon. Systematic data collection, reliable research and interinstitutional cooperation in the area of tax fraud may significantly limit misbehaviours related to the tax law. Moreover, common cashless payments, electronic register of invoices and receipts as well as an increase in transparency of public institutions activities could substantially reduce the scale of VAT gap.

This working paper is a translated version of the working paper Luka VAT w UE (No 28-2018).