Here’s How the European Union Runs a Trade Surplus With...Itself

(Bloomberg) --

The European Union has a growing trade surplus with itself, a statistical discrepancy that may indicate value-added tax fraud of more than 60 billion euros ($67 billion) a year, according to a study by two leading German research institutes.

Exports to fellow EU countries are exempt from VAT. However, if companies have improperly declared the transactions, and they are in fact domestic, they are not recorded as imports by the partner country and go untaxed, according to the study published Tuesday by Gabriel Felbermayr, president of the IfW Institute in Kiel, and Martin Braml, a researcher at Ifo in Munich.

The EU’s trade balance with itself should be zero if all transactions are properly reported, and measurement errors alone can’t account for the “systematic deviation,” the study said.

“It is highly probable that tax fraud is a major cause of the intra-EU trade surplus and costs the taxpayer billions every year,” the researchers wrote.

“An error of this magnitude in the balance-of-payments statistics is not something the EU can simply shrug off as an intriguing outlier, especially given that the size of trade surpluses is fueling international disputes,” they added.

The researchers say the EU has run a trade surplus with itself since 1993, and the figures have increased since the bloc’s enlargement in 2004. The discrepancy amounted to 307 billion euros last year, costing EU countries as much as 64 billion euros in lost sales tax.

Divergent Rates

The study identified larger differences in countries with sizable financial services industries such as the U.K., Ireland, Luxembourg, the Netherlands and Cyprus, suggesting that the sector is prone to statistical lapses, according to the study.

The discrepancies were also more pronounced between neighboring countries and member states with divergent VAT rates, the researchers said.

“The self-surpluses for goods and services trade have increased over time and give reason to suggest that EU statistical regimes are systematically incapable of tracking true import and export figures,” they added.

The EU’s common value-added tax system raises more than 1 trillion euros per year for public coffers, corresponding to 7% of the bloc’s GDP, according to the most recent data from the European Commission.

Around 137.5 billion euros is lost due to fraud, evasion, insolvencies, bankruptcies, administrative errors, and tax optimization, the EU’s executive arm estimates.

--With assistance from Nikos Chrysoloras.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Iain Rogers

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