Michael Noonan
Question:7 Mr. Noonan (Limerick East) asked the Minister if he will outline the Government's position on the EC Commission's most recent proposals on the harmonisation of VAT rates.
Ceisteanna—Questions. Oral Answers. - Harmonisation of VAT Rates.
Proinsias De Rossa
Question:32 Proinsias De Rossa asked the Minister whether the Government intend to agree to the proposals regarding the maintenance of Irish VAT rates above the EC average as provided for in the recent compromise paper tabled by the Luxembourg Presidency; the estimated likely loss to the Exchequer arising from the implementation of this proposal; and if he will make a statement on the matter.
I propose to take Questions Nos. 7 and 32 together.
The most recent proposals in the indirect tax area have been put forward not by the EC Commission but by the Luxembourg Presidency. In an effort to forge an agreement on this complex dossier, they have tabled a set of compromise proposals on VAT and excise duties for discussion at the ECO-FIN Council on 3 June next. The Presidency is hoping to get agreement on minimum levels for the standard and reduced VAT rates, the classification of goods and services for the different VAT rates and the maintenance of zero VAT rating, as well as on minimum levels of excise duties on alcohols, tobacco and mineral oils.
While the latest proposals are designed to allow member states greater flexibility in settling their indirect tax rates, the reality remains that, if distortions of trade and diversions of revenue are to be avoided when fiscal border formalities are removed, member states will have no alternative but to approximate their rates to those of neighbouring member states. Accordingly, in Ireland's case, the major determinant of the cost of approximation will be the rates adopted by the UK, though these may ultimately be influenced by the position in the continental member states.
The House may recall that I recently costed full equalisation of our indirect tax rates with current UK rates at some £560 million. The actual cost of the degree of approximation needed to allow the Single Market concept to operate is likely to be lower. It will depend on the extent to which differential rates vis-á-vis the UK are considered sustainable and, of course, on the nature of the ultimate settlement reached at Community level. Against that background, it is not possible to estimate accurately the final cost of tax approximation for Ireland.
In all discussions to date, I have consistently argued that the overall package must be designed to avoid undue budgetary consequences for Ireland. In this regard, my immediate concern is that the regime should provide for a sharing of the burden of adjustment between low tax and high tax member states. I shall endeavour to ensure that the final arrangements are satisfactory in this regard.
(Limerick East): Could the Minister confirm that Ireland has dropped its claim for compensation at the point of harmonisation and as that was the only clear-cut policy position being put forward by the Irish Government, we now do not have a formal policy position before the Commission or the Luxembourg Presidency?
I can confirm that we have not dropped our claim for compensation. Nobody knows the shape of the final package and what the figures are likely to be. It is true that things have moved along quite a lot since the claim was first submitted in that we have had a reduction of 4 per cent in the VAT rate from 25 per cent to 21 per cent, which has narrowed the gap at a cost of hundreds of millions to the Exchequer, but on the other hand, the British Government increased the standard VAT rate by 2.5 per cent in the March budget. A combination of both has narrowed the gap quite significantly and this changes the estimated figures in our calculations. However, what we do not know at this stage is whether the United Kingdom is likely to hold the level they are at or try to approximate more closely to the continental VAT rates. The situation is much too fluid to say what the final outcome will be.
(Limerick East): Would the Minister agree that both he and the Government have always regarded EC policy on harmonisation as a burden or a penalty on the Irish Exchequer and that at no time have they attempted to evaluate the benefits either in terms of trade or economic activity? Further, is the Minister's reference to the increase in the UK VAT rates not a confirmation of this attitude that now the imposition will no longer be as great because we will have to approximate only to 17.5 per cent instead of a 15 per cent VAT rate? Does the Minister not consider this a very outdated attitude to harmonisation and at this late stage, would he put forward proposals to the EC Commission or to the Luxembourg Presidency which would evaluate the cost benefit to us of reducing the VAT rates and excise duties? Does the Minister agree that we should have a more positive attitude to harmonisation rather than to be acting as the junior partner who has to be dragged kicking and screaming into the last decade of the century?
Listening to Deputy Noonan it would appear that no one was having any problems with the harmonisation of VAT rates at EC level except Ireland. However if he had attended some of the meetings I have attended as late as the weekend before last he would have heard the cries of the various Finance Ministers who, by their very nature, do not want to give away revenue and make their job more difficult for themselves.
(Limerick East): It is by their very nature——
We are not being dragged along by the heels. We are being realistic. The reduction of 4 per cent was a major move in that direction and a full demonstration of the political will to come to grips with the harmonisation of VAT rates. It was a major hurdle to cross the road towards tax approximation. The underlying concept is that there will be no distortions of trade and no anti-competitive practices between member states as a result of tax approximation. Because the trade distortions between the North and the South of Ireland have been removed quite substantially and, in fact, in most cases indirect taxation favours us down here, this is a major step forward which we all welcome. Consequently it will cost us less to remove some of the trade distortions in future.
We have always taken a positive attitude towards harmonisation, and we have to evaluate the impact in revenue terms against the impetus it will give to trade. Of course, all those exercises are done at budget time and in the lead up to the budget. There is no question that we are being just dragged along, as the Deputy suggested. We have made a realistic appraisal of where we stand and what we can do, taking into account that we have to take on board the reduction in personal taxation — and the Deputy knows our commitment in that regard. Indeed, changes may have to take place in relation to DIRT tax in the next couple of years in order to remain competitive from the point of view of capital. We have also to consider the removal of VAT at the point of import. All these areas have to be considered and cannot be treated as lightly as the Deputy would like to suggest.
(Limerick East): May I ask the Minister specifically if any research or work is being done in his Department on the optimum level of the standard rate of VAT and excise duty at which we would maximise our trade advantage, encourage our tourist industry and ultimately create the maximum number of jobs? Has any work along these lines been done in his Department and, if so, can this information be given to us?
Studies along these lines are ongoing in the Department in terms of building up fiscal and economic policy. With regard to VAT rates, it is not a question of what we would like; it is a question of what the Community will agree. As the Deputy knows, it has to be a unanimous decision by the 12 member states. The latest proposal from the Luxembourg Presidency, tabled in an informal way but which will be discussed formally at the next meeting, recommends abandoning the lower rates of VAT bands of 4 to 9 per cent and replacing them with a minimum rate of 5 per cent. They also propose replacing the upper rates of 14-20 per cent with a minimum VAT standard band rate of 14-16 per cent. I am merely giving the Deputy judgments as there are a number of variations involved — for example, Luxembourg are at 12 per cent, Spain are at 12 per cent, Germany are at 14 per cent while Britain are out of that category. If there is going to be agreement on VAT rates next month, I expect it to fall at 5 per cent at the lower end and 14-16 per cent at the upper end. The zero rate of VAT can be retained by the countries which have it at present in regard to the items which are included in that classification. I am giving the Deputy the up-to-date position in this regard. As I have said, this proposal will be discussed formally at the next meeting of ECO-FIN.
With regard to excise duties, this issue has only recently been put on the table and there is a very wide divergence between the views of the member states. For instance, it has been proposed by some countries that there should be a zero rating for wine on the basis that it is food and provides nourishment and low rates for alcohol and tobacco. We still have a long way to go on this issue.