The present study attempts to address the multifactorial problem of the VAT GAP within the European Union (EU) area. Firstly, the study tries to extend the existing research on understanding the factors that affect the VAT GAP in European Union. The research design is based on a panel data analysis investigating whether and to what extent some macroeconomic and institutional indicators affect the VAT GAP in the EU countries. Secondly, a comparative analysis is carried out concerning subgroups of countries based on characteristics such as the average VAT GAP and the average level of the shadow economy. No previous study to the best of author’s knowledge and through search in peer-reviewed databases has empirically explored the determinant factors of VAT GAP through this separation. The main findings of the study indicate that, in terms of the analysis of all EU countries, the factors that significantly affect the VAT GAP are the GDP per capita, the size of the shadow economy and the level of unemployment. Regarding the findings of the comparative analysis of two subgroups, this study concludes that the informal economy and unemployment affect more the VAT GAP of the less developed EU countries. On the other hand, for the developed ones, the VAT GAP is affected mainly by the unemployment.
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