Vol. 439 No. 7
14 Mr. Yates asked the Minister for Finance the changes that the Government is required to make to our VAT regime arising out of the final phase of the EU harmonisation of VAT by the year 1996; and the progress made to date in phasing in these changes, with particular reference to the 1994 Budget.
As the Deputy will be aware, the current VAT system applied to intra-EU trade based on taxation in country of destination, is intended to be transitional in nature. The relevant European Union VAT Directive envisages that the arrangements for the definitive system, to be based in principle on taxation in the member state of origin of the goods or services, will be decided by the Council by the end of 1995 based on proposals from the European Commission to be made before the end of 1994. The transitional system will last at least until the end of 1996. However, if the target date of 1 January 1997 for the changeover to the definitive system is not met, the transitional regime will be extended automatically until the date of entry into force of the definitive system and, in any event, until the Council has decided on the definitive system.
At present, our VAT rating arrangements are fully consistent with EU requirements and, unless changes are necessitated as a result of the review due to be undertaken later this year, they may be maintained until the end of 1996, at least. The minimum level of the EU standard rate — currently 15 per cent — to be applied after the end of 1996 will be part of this review, as will the scope of the reduced rates and all of the transitional measures relating to rates, that is, the position of the zero and other super-reduced rates and the parking rate facility.
In relation to the reduced rating, the Deputy will recall that I signalled in my financial statement on 26 January last that, in the interests of encouraging employment, the Government intends, subject to budgetary constraints, to retain labour intensive services at the reduced rate of VAT in the medium term and that I will be pressing in the review of the VAT regime for the option to maintain the current position of labourintensive services beyond the current transitional period.
Accordingly, it is not a matter of being required to make changes or phasing in changes to the VAT regime, rather one of negotiation of the definitive system based on the proposals to be made by the European Commission.
Does the Minister share my concern that if the definitive system goes ahead as proposed, a number of services currently at the parking rate of 12.5 per cent will have to go on to our top rate of 21 per cent? I refer to construction related services, which would have to be put on the standard rate, and accommodation in hotels, for example. Will the Minister indicate what he believes the outcome of the discussions later this year will be? Can they be maintained at the parking rate? If not, what steps will he take to reduce our top rate to that of the UK rate of 17.5 per cent?
I share the Deputy's concern about not achieving the position outlined in my Budget Statement because it would create many difficulties. We are preparing our case and already in some of the transitional regime discussions which are taking place between member states to decide what route we should go, I have made that position quite clear. I have made that clear also at some of the informal ECOFIN meetings over the past 12 months.
It is known that both the Commission and the Germans strongly favour a major change in the system. Deputy Cox probably knows as much about this as I do because it has been discussed at various committees of which I have seen various reports in recent weeks. Some preliminary international newspaper reports have come to my attention which claim that the forthcoming German Presidency will try to steer member states in the direction of the origin system at the end of the transitional arrangements. I have discussed this matter with IBEC and others because I do not want to wait until we are faced with a fait accompli on the issue. An origin system would radically change the whole position and would certainly mean that the present zero rates would be eliminated. An origin system could not work on the basis of zero rates. If the Germans and the Commission are pushing for that, it would represent a radical change. I say that in direct response to Deputy Yates's question in regard to the 21 per cent.
If we were to move from the zero rating to a minimum rate, we would have one rate of 15 per cent or over, two reduced rates but no zero rate. That would significantly alter the system. This would not be helpful because moving from a zero rate to a rate of 3-5 per cent in the context of the Irish system would not result in a reduction in the higher rate because the amount of income subsitution that would have to be done for zero rated items such as clothing, oral medicines, books and other items would not allow much scope. We are facing a lengthy period of discussion and I believe there will be much debate on this matter in 1995 which will commence with the German Presidency. It is a matter to which we should all give some consideration. I have asked the various business interests to give me their views as to how they would like to see this develop over the coming year.
In relation to the point of origin principle in VAT, has the Minister initiated within his Department a study of its potential implications for the operational effects on the Exchequer, apart from the views the business interests and others might have?
Yes, as part of my overall review I asked the various business interests to give me not only their views but their best assessment of how this can actually work. Having studied it at some length I would have to say it is a complicated system and would create many difficulties for business generally. The present principle is based on what happens within the State where a supplier charges VAT and recovers VAT. One does so on an international basis through a clearinghouse. It is a major system. I could understand easily how it would work if all member states imposed similar rates, for example, if the higher VAT rate here was the same everywhere else along with the lower VAT rate being similar. There will be an enormous amount of work to be undertaken in the transitional period between now and the end of 1996 to ensure it operates effectively. It would appear to be an enormously difficult administrative task to undertake, but we have begun.
