Special Committee on the Finance Bill, 1992 debate -
Wednesday, 13 May 1992

SECTION 144.

Question proposed: "That section 144 stand part of the Bill".

Mr. B. Ahern

On this section I would like to outline a general speaking note containing explanations of much terminology and detail that will come up in this debate. For those following the debate, this data may help them make sense of this new regime.

Most of the VAT provisions in the Finance Bill relate to the new European arrangements which will come into force on 1 January 1993. These arrangements are an essential part of the creation of the Single Market in the Community. The Single Market will have far reaching effects on trade within the Community, effects which will be beneficial for both business and customers in this country, provided that we continue to ensure the competitiveness of our economy. The most striking visible sign of the Single Market will be the abolition of frontier controls on intra-Community trade. For traders this will mean an end to the need to clear goods through customs before exportation or importation. A container truck travelling from Dublin to Belfast should ideally not have to change gear at the Border.

The VAT position will also change quite dramatically for private consumers. Irish consumers travelling to other EC member states will be free to purchase as much as they wish of non-excisable goods at VAT inclusive prices and to transport them home without paying any Irish VAT. Similarly, Irish business will be in a position to capitalise in a much greater way than hitherto on expenditure from tourism from other member states.

The detailed provisions as they relate to VAT are contained in this Finance Bill. Because the changes are in many respects fundamental, many of the existing provisions of VAT law need to be amended. The general note on pages 33 to 35 of the explanatory memorandum provides an over-view of how these changes will work in practice and the details will be discussed as we examine each of the sections in this part of the Bill.

The technical changes arising from the Single Market are the direct consequence of changes in EC law which were finalised last December. We are legally obliged to implement these changes by 1 January 1993.

The provisions in this Bill represent the core of the new EC VAT regime. They do not however represent the full extent of the technical changes which will need to be made to our national VAT legislation in order to provide for the Single Market. New or amending legislation will be required in a number of areas including trade in second-hand goods, transactions in gold, passenger transport within the Community, provision of ships, trains, boats using intra-Community and international routes, harmonisation of allowable productions. New Community legislation has to be agreed in all these areas. I hope I will be in a position to introduce some of the necessary changes regarding second-hand goods and in other areas perhaps in the second Finance Bill which will be tabled later this year.

That Bill will also contain proposals to address the cash flow loss which will result from the abolition of VAT at the point of entry on imports from other EC member states.

Section 1 of the VAT Act is the interpretation section. This section in the Finance Bill amends subsection (1) of the VAT Act and inserts a new subsection (1) (2) (a) in that Act. Most of these additional definitions are necessary because of the new EC VAT arrangements arising from the establishment of the Single Market within the Community and the abolition of frontier controls and checks on intra-Community trade. These changes will come into effect on 1 January 1993.

In a legal sense, the most important changes are the new proposed definitions for exportation of goods, subsection (a) (i), importation of goods, subsection (a) (iii) and intra-Community acquisition of goods, subsection (a) (iv). These are necessary because, as we have outlined in the explanatory memorandum, the legal concepts of exportation and importation will from 1 January 1993 arise only in respect of the delivery of goods to destinations outside the Community and imports of goods from outside the Community. The definition of importation covers both direct imports from outside the Community and goods transported through another member state without liability to import VAT in the member state. A typical example of the latter would be a consignment of goods from Canada transhipped in Rotterdam and subsequently imported into this state. Intra-Community acquisition is defined as having the meaning assigned to it by the new section (3) (a) being inserted in the VAT Act by section 148. The concept of intra-Community acquisition is being introduced because of the new EC VAT arrangements.

On the Single Market the section adds six new definitions and amends one existing definition in section 1 of the VAT Act, consequent on the new EC VAT arrangements. The definitions of importation, exportation and intra-Community acquisition are dealt with in an additional note which I will come to later.

New means of transport are defined in subsection (a) (vi) because of the special intra-Community acquisition rules that will apply in relation to these goods. The definition which follows EC VAT legislation covers motorised land vehicles, vessels and aircraft. New means of transport are defined in specific technical terms. this is to ensure that the new means of transport to which the special intra-Community acquisition rules will apply on 1 January 1993 can be simply and unambiguously identified.

A new definition of vessel is necessary related to subsection (a) X in relation to waterborne transport because of the use of the term in the definition of the new means of transport and a minor technical amendment is also made in section 1 as a consequence of inserting the new definition of vessel. That covers the major titles that we will be meeting in most of the sections. There are many other definitions, if any one wishes me to go through them, but these are the principal ones which come up in each section.

Mr. Noonan (Limerick East)

First, I would like to ask the Minister if he would pinpoint the conceptual change in the way VAT will be collected in future? I understand that VAT at the point of entry will be abolished. What will happen in the case of an importer bringing goods in from the United Kingdom in a container lorry? There is no liability to pay VAT in the UK, I take it; the liability arises when the goods are acquired here. Is the liability imposed on the retailer in the normal way? Is that the point at which the return has to be made to the Exchequer at whatever the rate the Minister decides?

Second, what would the position be for a private individual importing non-exciseable goods? If one wants to bring garden furniture home from one's holidays in France does one get a VAT rebate on the purchase in France, and pay the VAT here? Or are private individuals exempt from VAT completely? Third, how about the small trader whose total turnover is below the VAT threshold at present? Is he still exempt, if instead of trading in indigenous goods, he trades in imported goods up the value of £32,000? Does he incur any VAT liability at all? I would like the Minister to explain what will happen in those three cases during the transition period up to 1996 which if reaffirmed subsequently will become a permanent procedure.

Mr. B. Ahern

The private individual pays no Irish VAT. He will pay VAT in the country he buys the goods.

Mr. Quinn

It will be a retail transaction.

Mr. Noonan (Limerick East)

There is no rebate available?

Mr. B. Ahern

There is no rebate or further liability in any form. We talked last evening about the case of beverages and cigarettes, where people pay VAT on what they bring in for their own consumption. In the case of garden equipment the person will buy it, pay the VAT in France, return home and that is it.

Mr. Noonan (Limerick East)

If its an non exciseable product, it can be carried through.

Mr. B. Ahern

Yes.

Mr. Noonan (Limerick East)

Roll-on/roll-off, take if home, no questions, no paperwork.

Mr. B. Ahern

That is the essence of the Single Market, and the most obvious way in which the ordinary individual will see it operate from 1 January. In my speaking note I mentioned Border control. I know it is not possible for security reasons, but the theory is that one may then drive through the Border. That is when the public would start seeing the effects of the Single Market.

Mr. Hilliard

Will the VAT be shown on the invoice of purchase? Will the purchaser still be in a position to retain VAT from the Irish State?

Mr. B. Ahern

No. We are talking about an Irish person buying goods outside the State but within the Community.

Mr. Hilliard

So the VAT will be included in the purchase price?

Mr. B. Ahern

The person will pay VAT only in the country of purchase. It cannot be reclaimed there or here.

Mr. Hilliard

If some of the goods that the Irish person or company buys are resold in this State, will VAT be imposed on the person buying the goods?

Mr. B. Ahern

That is the next category. The small trader is in the same position as the private person but must register for VAT if turnover exceeds £32,000.

Mr. Noonan

So it would be possible to run a small business here using imported goods and incur no VAT liability in this State.

Mr. B. Ahern

If turnover was under £32,000.

Mr. Quinn

It is the intra Community extension of the non VAT registered small trader here. Do we take it that the same principles would apply for VAT related activities for small traders? That there would be many thresholds for VAT purposes?

Mr. B. Ahern

Small traders in the State will be regarded as making intra Community acquisitions if they acquire goods from another member State. However, Irish VAT will not be payable on these purchases unless the trader acquires goods in other member states in excess of an annual threshold of £32,000. The trader would pay VAT in the other member states at the rate applying there. Where the threshold is exceeded the trader must register in Ireland and be treated as a VAT registered trader.

On the matter of postponed accounting, a VAT registered trader purchasing goods in another member state would be liable to tax on the intra Community acquisition. Amended section 19 of the VAT Act establishes when the tax has to be paid. The reality however will be that, in most cases if a trader is entitled to deduct the VAT charged on his business purchases a simultaneous credit for the VAT due on acquisition will be given, cancelling out any immediate liability to pay VAT on the acquisition. This is the so called postponed accounting system that Deputy Noonan referred to. In due course, if the trader supplies the goods onwards in the State, a liability to VAT on that transaction will arise and will be paid in the normal manner which is Deputy Hilliard's point.

Mr. Noonan (Limerick East)

Could we go through it again in non-technical language? If we had a trader here who imports exciseable goods, say, lawnmowers from Liverpool, he pays VAT on them when he buys them there and then gets a rebate of the same amount when he pays for them in the UK. Is there a double transaction involved?

Mr. B. Ahern

I will give you the less technical note. The practical effect of the new sections would be that a trader registered for VAT in the State and purchasing goods from another member state will be liable to account for VAT on these goods when they arrive in the State at our domestic rate. This will be done through the periodic VAT return, at two monthly intervals. If the trader is entitled to deduct VAT charged on business purchases a simultaneous VAT credit can be claimed in the VAT return thereby cancelling out any immediate liability to pay VAT. This is the so-called postponed accounting procedure which applies to imports prior to the introduction of VAT at the point of importation in 1982.

Mr. Quinn

That is a oneway transaction which I understand. If a trade buys from Liverpool as Deputy Noonan outlined and the Liverpool trader sells zero VAT out of Liverpool and does not charge the Irish purchaser the UK rate of VAT, presumably it is charged here. In a parallel transaction from Dublin to Liverpool if an Irish trader buys a commodity from another Irish trader who has paid VAT locally and places a VAT tag on this commodity when the trader sells it to Liverpool he presumably has to sell it at zero VAT rate. Can the trader offset the two VAT accounts against one another and get a reconciliation or balancing as is possible at the moment?

Mr. B. Ahern

Is the Deputy asking if he can claim any import credit?

Mr. Quinn

Until we get to the point where all VAT is paid at the point of purchase, in order to protect the VAT base in the Twelve member states during this transition period until 1996 or 1997 we will pay VAT at the domestic rate and reconcile accounts between buying and selling. At the due accounting periods one submits a net VAT account which will be net of whatever credits one has received.

Mr. B. Ahern

Yes.

Mr. Rabbitte

Is there a requirement for the Irish business person to supply the foreign person with whom he is doing business with his Irish VAT number?

Mr. B. Ahern

We will come to that later on.

Mr. Quinn

It would be useful — excuse our lack of technical expertise — if the Minister were to describe in a broad sense his overall perception of how it will operate and then we can go through it on a technical basis. If Dublin/Liverpool traders, Dublin/Palermo traders are buying and selling from each other we give VAT credit in the sense that we zero rate a purchase coming from Italy to Ireland and vice versa. How may that be reconciled so that there is no fraud and so that VAT is properly paid elsewhere? Currently each trader in the Community has a national VAT number, as I understand it, and in the twelve Community States there are 12 sets of serial numbers. Will the new regime require a community serial set of numbers so that there is one single register of VAT registered traders?

Mr. B. Ahern

There is a VAT information mechanism.

Mr. Hilliard

Assume we have two partner companies, one in Liverpool and one in Ireland, both have VAT numbers and are trading with one another through paperwork alone; they may not be exporting or importing the goods to or from one another. There is a differential in the VAT bands. I understand that there is VAT of 5 to 9 per cent for certain types of goods. The Liverpool company could be paying 9 per cent while the Irish company could be paying 5 per cent. Is there any danger of fraud in that situation?

Mr. B. Ahern

The zero rate of imports would mean that that would be cancelled out.

Mr. Hilliard

If two companies trade in the same product and are conducting paper work transfers of products from one company to the other to make profit, there could be a 4 per cent VAT band differential between the two companies.

Mr. B. Ahern

There would not be a differential because the export of the goods is at zero rate.

Mr. Hilliard

Not all goods are at zero rate. Other goods are at VAT rates of 5 to 9 per cent.

Mr. Noonan (Limerick East)

The export price is always the net price.

Mr. B. Ahern

Once it is sold outside the country it will be zero rated.

Mr. Noonan (Limerick East)

With regard to the provision of services across community boundaries, where does the VAT liability fall for an engineering firm in Dublin providing consultancy services in three or four different EC countries?

Mr. B. Ahern

With regard to Deputy Quinn's question on the VAT information exchange system, that is being developed as part of the Single Market. At present every consignment of goods imported from or exported to another EC member state must be entered with Customs and Excise on a single administrative document and the goods must be available for possible customs examination before being released from custody. All this will change as a consequence of EC plans to move barriers to EC trade upon completion of the single market on January 1 next. From that date, frontier controls on the movement of goods between member states will be abolished and importers and exporters in EC trade will no longer be required to lodge the SAD either at import or export. The SAD mechanism makes an important contribution to the security of VAT receipts in member states and it also forms the basis for collecting statistics for foreign trade. The EC recognise that it is necessary to take counter-balancing measures to fill the gap in revenue security as well as to find an alternative way of collecting trade statistics in the Single Market situation. The EC is establishing a community wide administrative co-operation arrangement which will be an alternative method of verifying traders' VAT liabilities in respect of intra-community trade which up to now has been largely based on SAD. The legal authority for the new system is contained in the sixth VAT directive as last amended by Directive 91/680/EC and Council regulation EC/218/92 which established a mechanism of administrative co-operation and the arrangement will be called VAT information exchange system or VIES. The system is designed to prevent and deter abuse of the VAT zero relating provisions for goods traded in the EC after 1992. An integral part of the arrangement is a requirement that each member state must store and process information which it collects from its exporters about the value of its trade with other member states. The new system will place responsibility on traders to make periodic returns of their trade to revenue and the return will only relate to exports to other EC countries. When customs control procedures including SAD are abolished on intra-community trade, VAT control will rely on a much greater degree on the auditing of traders' commercial records such as accounts, transport documents, invoices, settlement documents and on co-operation arrangements between the member states. In addition, zero rating of VAT between member states will be conditional on the exporter being in a position to satisfactorily show that the goods have been sold to a VAT registered person in another member state.

The system will provide a mechanism whereby checks can be made in each member state on the regularity of claims to zero rating and it will help to detect unreported movements of zero rated goods between member states. It will also enable exporters to get information on the accuracy of VAT registration for their customers in other member states. The system will apply to intra-community trade only. The present arrangements including the normal export entry procedure will continue to apply to third country trade after 1 January 1993; extra-Community trade will remain as at present. Under these returns, from 1 January 1993 each exporter to other member states will be required to supply a periodic return to the Revenue Commissioners containing its own VAT registration number; the VAT registration number of each of their customers in other member states to whom it exported goods during the period and the total aggregate sales to each customer for that period.

Mr. Quinn

Is that significantly different from what they are required to do under present exporting requirements?

Mr. B. Ahern

It will be easier for them to do it this way because now they have to do a SAD document for each individual transaction. This is a more concise and consolidated form.

Mr. Quinn

It strikes me that they would nearly be required to do that or something very similar for their accountancy audits anyway.

Mr. B. Ahern

They would, because a record has to be kept.

Mr. Quinn

It is a parallel record.

Mr. B. Ahern

From a paperwork point it is far easier but perhaps for checking purposes people will require more detail.

Mr. Quinn

A good piece of software could do the two jobs together.

Mr. B. Ahern

The Deputy will know that a number of software companies are already targeting that business. From an exporter's point of view it will be far easier to comply with this system. There is far less paperwork involved. They must give their VAT registration number, the VAT registration number of each of their customers in member states to whom they exported goods during the period and the total aggregate sales to each customer for the period.

Returns will be required in respect of each calendar quarter commencing with the quarter ending 31 March next year. However, where traders find it more convenient to furnish monthly returns they can do so subject to prior approval from the Revenue Commissioners. Smaller exporters whose total annual exports are under a certain value may apply to make one return each year. If one is using software, the quarterly basis would be far handier. Somebody using a manual system, if they still exist, may prefer to keep their accounts and records on a monthly basis. Exporters will not be required to provide details of particular transactions. They need only give a total value figure for trade with each customer in another member state in the course of each period. Returns will be accepted in the following formats: electronic data interchange, diskette, magnetic tape, paper, either on an official form or on plain paper in a prescribed format. It gives all the flexibility a person would require.

Mr. Quinn

Somebody could actually link up the modem in the Revenue Commissioners and transfer the memory account, get it signed off and registered appropriately.

Mr. B. Ahern

That is what will increasingly happen.

Mr. Quinn

So one will actually file it, do one's accounts and export data and then do another programme that will give our access to Dublin Castle or wherever.

Mr. B. Ahern

Straight into Dublin Castle. I am not so sure what it will do for employment.

Mr. Quinn

It will do a lot for the people making computer printing circuit boards in Apple in Cork.

Mr. B. Ahern

The head office for statistics will be in Dundalk and that will be in operation by autumn.

Mr. Quinn

I knew my cousin had some influence on the Minister.

Mr. Noonan (Limerick East)

It is a bit of a curiosity that at a time when border posts have been dismantled and the Community is coming together as a community of states we should be talking in terms of better collection of trade statistics between the Community countries. Nobody keeps trade statistics between New Jersey and New York.

Mr. Quinn

It is essential for cohesion.

Mr. Noonan (Limerick East)

In the United States, for example, there is no register of trade statistics between states. Nobody bothers about the balance of trade between New Hampshire and Massachusetts, so why is there a strong emphasis on this at present?

Mr. B. Ahern

There are two points; the easy one is that we are not in a monetary union. I am sure that New Hamphire and New Jersey would consider that they are. The technical one is that the system is not just for trade statistics, it is to protect the VAT base of the member states. It is a very fundamental step. Many people do not understand what we have been talking about for the last three-quarters of an hour. It is a major movement on the road to integration and cohesion. One cannot walk away from the system. It is a well-worked out and thought out system. Maybe when we come to work the system we will find there are some quirks in it but if one takes it as it stands now we will have a trade statistics office in each member state which will have the data along with the revenue base. It is not too hard to imagine the next move over the coming years particularly when it is very much geared towards simplicity and modern technology.

Mr. Rabbitte

I do not know if I understand this properly. Is what we are talking about, to some extent, a temporary arrangement in so much as there is a dispute between the political structures of the Community and the Commission? What we propose is a system of VAT to be paid in the country of use of the goods as distinct from Irish purchasers paying VAT in the foreign countries in which they purchased the goods. The Commission set out arguing for the latter system, that the VAT would be paid in the country of origin and they have not let go that particular bone. They are continuing to argue it and the system we are installing here, called the destination system for short, is a temporary arrangement until 1 January 1997. Could the Minister indicate the considerations in the minds of the politicians who resisted the Commission proposal in favour of the system we are now talking about. What are the national advantages for our economy of a system that installs the payment of VAT in the country of use of the goods as distinct from the original Commission proposal? I do not understand the relative merits of what appears to me a fairly substantial and major argument.

Mr. B. Ahern

This was negotiated at some length and with some verbosity by everybody concerned because it was such a fundamental change in the regime. The present system will be reviewed in 1995. There must be unanimous agreement before we make any amendment to that system and it would not come into force until 1996. All these things will be linked into the discussion on monetary union. People feel that in 1997, for one reason or another, countries will not be ready to move on to the next phase and we are more likely talking about 1999. People will argue their national positions for all kind of reasons and it was better to commence the system and review it in the mid-decade. From an Irish point of view, any decisions will have to be on a unanimous basis. We are not in any way disadvantaged. The high VAT exporting countries could have been at a major disadvantage and they were concerned that if the Commission proposals were implemented in their original form, they would create great difficulty for them.

Mr. Noonan (Limerick East)

Basically is it not the failure to harmonise that has caused the switch from country of origin to country of destination?

Mr. B. Ahern

I do not know if that was the basic reason. It was as much the difficulty of trying to find a mechanism whereby the VAT will come back from the country where it was collected.

Mr. Quinn

That is the point I was going to come to.

Mr. B. Ahern

In lots of ways that would be the bigger concern. Even for ourselves, the whole system is a major concern and worry. We collect £2 billion a year in VAT, two-thirds of that at the point of entry. Now that system has gone. It is fine to talk about harmonisation, cohesion, progress and unity but there are issues that play a fundamental part in that.

Mr. Quinn

That is my point. It seems only like yesterday when we were talking about the launch of the EUROFIN programme and we are now on the run into it. It is a very short time in both administrative and political terms. If we are talking about converting our system to one of VAT at the point of purchase rather than VAT at the point of origin, in other words the trader in Liverpool, Palmero or Paris charges the price inclusive of VAT and one takes one's goods, is that not another indication of the centralising force of an integrated single market? For example, the VAT we pay on a BMW or a Mercedes bought in Ireland after 1997 will be paid in Stuttgart or in Bavaria and not either at the point of entry or to one of the importers we were talking about last night. Presumably there is a parallel argument running in line with this in relation to equalisation of VAT receipts across the Community and presumably the whole question of cohesion and federal transfers has to come into play. I know we are drifting somewhat away from the technicalities but it enables us to understand it. Is it reasonable to assume that there are built into all of these Directives clear negotiating breaks that will prevent us from moving to the next stage unless there is a corresponding movement on the other side?

Mrs. Thatcher made great play out of her money coming into the Community when in fact a lot of it was not her money; it was transhipment VAT being paid at the point of entry. It just so happened that London and the UK was a major point of entry for what were intra Community destined goods. The original point of registration from the point of view of excise and customs happened to locate in the UK but it was not "her money". We are making steady progress towards what is ultimately a federal system, that is the logic and the direction of it as Deputy Rabbitte was saying. A federal system is not something that I would be against at all. I would be in favour of it, provided we got a federal budget to run parallel with it but with an intra Community budget including the Delors II package going up to only 1.37 per cent of GNP when we need something of the order of a minimum of 8 per cent of GNP, we are giving away more and more negotiating cards in the absence of any compensating mechanisms being integrated into this. Is there a counterbalance?

Acting Chairman (Mr. Dennehy)

On the point made by Deputy Rabbitte, because the preamble impinges on almost every section it would be no harm if we spent some time on this. We have spent a fair amount of time on the section.

Mr. B. Ahern

I mentioned these definitions because this is the system that operates and these titles run right through it.

Mr. Hilliard

My assumption is that the net VAT is basically revenue on profit. Could the Minister clarify where does this VAT profit or credit go to and how is the credit VAT or profit VAT pooled?

Mr. Martin

What we are talking about here are the nuts and bolts of the grand concepts of cohesion, the internal market and so on. The Minister mentioned a revenue base of £2 billion. Have we endeavoured to quantify whether any of that £2 billion is in danger under the new system? Will there be substantial leakage, in other words, could we suffer a significant reduction in our VAT intake because of this new system? If, for example, we suffer dramatically in 12 months or two years time have we a mechanism whereby we can urgently review the arrangement in order to safeguard our own revenue base?

Deputy Quinn made the point that we could talk about cohesion and the internal market and so on but we must safeguard our basic position and our revenue base. On the other hand, Europe wants us to converge on a fiscal basis in terms of borrowing requirements, current budget deficits and so on but something which could have a dramatic impact on our revenue base on the VAT side would obviously make it very difficult for us to do so. Are there any mechanisms in place which would assist us in reviewing urgently any situation which might develop which would basically mean a significant leakage from our VAT returns?

Mr. B. Ahern

I have no difficulty about agreeing with Deputy Quinn's point. There is difficulty in getting a clearing system that will operate effectively. That is being discussed ad nauseam in an effort to devise a mechanism to do that. Agreement on that will take some considerable time. As regards where it is all leading to, as Deputy Noonan said yesterday about VAT, the intention is that somewhere along the way it will all harmonise. Deputy Rabbitte spoke about the report on taxation and the various forms of taxation but VAT was not one of those. A Community VAT scheme will be introduced in the future. Like everything in the Community, one initiative ultimately leads to the examination of another and that is what will happen. A Community VAT system will eventually be on the agenda. As regards Deputy Quinn’s point about the cohesion funds and making an argument where one is losing tax revenue, one may not get money to replace the VAT. I do not think that was the intention though some people made that point and others continue to do so. It certainly is a good and justified argument if one takes it in our case about the motor registration tax and VAT. When was the last time we made two such fundamental moves that put our tax revenue at risk to this extent? That is why from section 160 on we will be talking about the powers of the Revenue Commissioners in relation to VAT. The professionals are not arguing about that so I do not want to misrepresent them. They totally understand the position.

We face an enormous task in trying to be a compliant country. I gave the figures the other day and mentioned £13 billion for DIRT which we cannot operate any more because of Community law; £260 million is at risk because we cannot operate the motor registration tax system any more. I think £155 million will be lost to us on VAT and excise and today we are talking about another change in the VAT regime where two-thirds of the £2 billion we collect will be lost to us. The committee will understand why I defend VAT and Revenue powers. I am concerned about them. Those who negotiated this over the last few years are confident that the arrangements will work. To say that they definitely will only time will tell.

Deputies are sometimes obsessed about where we will put the 608 officials. My concern is whether 608 officials will be sufficient to carry out the task and whether I can convince them, through their unions, to move to where I want them? For monetary reasons, we must devise alternative systems in this regard. I assure the committee that I look forward with some confidence to discussing these matters after the referendum on the Maastricht Treaty. We have a good case to argue — we have been following a European line; we have moved along to make these fundamental changes and we are putting our tax and particularly our VAT base at risk. I think we are doing it in an open and fair way but we certainly require support.

Some countries are obsessed with competition and disguise a lot of other things with competition. I know Deputy Quinn has had the experience, as I have had, of listening to the Germans and Dutch talk about increasing the social rights of workers, when what they really mean is making sure that the competition laws are in line. I am not saying that they are not concerned about workers but the argument is a competition based one. It is not a social policy based argument. We have moved all the way on competition and we have a strong argument on the other side. A section of the Department of Finance are working on and developing these ideas but given the figures I have quoted openly and in a straightforward way, one can see the consequences if we were not to be successful in Delors II.

Mr. Martin

It may not be relevant to the section, but, given that we are taking these risks, and the Minister outlined the three major areas where we are taking risks with our revenue base, is there not a case to be made to our European partners for a direct relieving of our debt situation because most of our revenue base is going towards paying off the debt and debt servicing costs etc? A quarter of all tax revenue is servicing the national debt. Is there a case to be made in the future for asking our partners in Europe to have direct relief of the debt which would be far better than ongoing structural funds. I know it is not directly related but since we are taking these risks with our revenue base we should take a more fundamental view of our overall position.

Mr. B. Ahern

To answer the question put by Deputy Hilliard, an exporter exports at zero rate so the 4 per cent differential the Deputy is concerned about does not arise.

Mr. D. Ahern

I want to place on record my thanks as a Border Deputy for the effort which has been made since 1987 by this and previous Ministers regarding tax harmonization with a view to 1 January 1993. VAT and excise duty have been reduced in successive budgets since then. The 48 hour rule had a tremendous effect on my home town. Despite what people may say on the far side of the House it did work. The reality is that Dundalk is now a far more thriving town than it was in the early eighties, largely because of the fact that measures have been put in place and budgets have, particularly since 1987, changed the differential between north and south. Thankfully the day of the special buses going across the Border are no longer and the traffic is coming down this way.

I would also like to place on record my thanks to the Minister for announcing that a number of new blocks of work will be put in place in the Dundalk area to replace jobs which will be lost. The reality is that because it is an economic as well as a physical Border, quite apart from the 200 or so customs and exicse officers who are in the greater Dundalk area, a small private industry of customs clearance agents has been built up. There are somewhere in the region of 200 customs clearance agents in the Dundalk area. I am told that they are one of the biggest users at the moment of the telephone system and FAX machines in the area. They will have nothing to do, because on 1 January 1993 the Border will be gone. Does the Minister envisage any role for customs clearance agents after 1 January 1993? Is there any work that could be carried out by them given the fact that there would potentially be equalisation between north and sought. The Minister as I said — and I would like to compliment him — put in new blocks of work. One was in relation to the VAT information exchange and another related to Interstat, the collecting of statistics for EC purposes. One hundred potential jobs will be put into place in Dundalk. That is only replacing 90 jobs which would be lost on the customs and excise side in the public service. This is a potential loss of 90 jobs which the Revenue Commissioners say will be in excess of their needs after the 1st January. Does the Minister agree with the figure of 90 jobs? Given the fact that he acknowledges that this is a whole new system which is being put in place — just as the motor vehicle registration is a new system — and that there is a potential loss to this country, would it not be better to retain the 90 jobs and, indeed, increase the number of jobs so as to police the new system? It obviously will have teething problems in the initial stages.

I come back now to the customs clearance agents. Two years ago the gun was put to their heads, literally, to provide a computer system up to the standards of the Revenue Commissioners. The customs clearance agents quite rightly asked "why should we put this system in when, on 1st January 1993, we might be without an industry because the industry might no longer be there?". But they put that system into place. They spent quite a lot of money on a very costly computer system to tie in with the Revenue Commissioners. That computer capability will be redundant if everything works out the way the EC officials and our own officials say it will. Is there anything there that could help the customs clearance agents? Is there any role that the Minister and his officials can see for them? I appreciate that there are EC funds. We have plenty of them in the border areas. There is the inter-region fund which was supposed to assist border areas which suffered potential loss of jobs by the advent of 1992. These funds are no use to people like customs clearance agents. Would it not be preferable for the Government — and I have said this on previous occasions — to exhort our colleagues in Brussels to decentralise part of the bureaucracy that they have in Brussels and Strasbourg to places like Dundalk and to border areas throughout Europe which would have similar problems to ourselves? That would be far better. There would be less disadvantage as a result of the advent of 1992.

The Minister touched on some of the physical problems when he said the lorries would not even have to change gear. I do not look forward to that time because of the speed at which some of them travel through the town. I would think there would have to be some check on them. Thankfully, we are putting in a by-pass. There is a small bridge. Most of you probably know it but you do not realise it is there. It is on the main Dublin-Belfast road. It was condemned in 1906 as being unsuitable for the carriage of horses and carts over six tonnes in weight. Virtually no work has been carried out on that bridge since 1906. That bridge is now carrying loads well in excess of 50 tonnes per day. The figures that have gone to the Department of the Environment have proved that there is as much traffic on that bridge per day as there is in O'Connell Street at rush hour.

Mr. B. Ahern

That engineer must have been pessimistic.

Chairman

We are straying slightly from harmonisation.

Mr. D. Ahern

These are all the physical problems that have been caused as a result of the economic border. As I said, thankfully a by-pass is being constructed. Hopefully, that will be in place when the disadvantages and advantages of 1993 become evident. Despite all that there would have to be fairly intensive policing of what is going on and of what is crossing the Border daily.

Chairman

We will excuse the Minister from giving an answer on the bridge replacement, but I would like to point out that under this heading we have 34 sections. Maybe we will start to go through the sections.

Mr. B. Ahern

On the interregnum programme, Commissioner Schrivener expressed sympathy about the plight of the custom clearance agents. On the budget side, we are not aware of any programmes to assist them. Perhaps that point might be raised under the interregnum programme. The computer system could possibly be used for interstats. There are opportunities in this area. Perhaps the customs clearance agents could look at some of this work. The customs clearance agents are not State employees. Their offices are an important source of employment. They are used by the private companies to facilitate import and export transactions. It is really up to them to start looking at the areas of possible employment.

To answer the Deputy's question, I think the clearance agents could consider some of the possibilities that exist in regard to the EC statistics and try to get involved in that area. I believe they have not shown such a desire but there is no official objection if they wish to get involved on behalf of the traders in making the new returns. It might be possible to consider the computer network that is there which could be used in some way for this purpose. I will ask the Revenue Commissioners to look into this, but ultimately it is a commercial decision for themselves.

I was asked about the customs proposals and the administrative documents under SAD. I will give a brief note on that: for custom purposes, every import and export consignment, both for EC and Third Country trade, must be entered on the single administrative documents. The necessary statistical data relating to the goods is supplied on the SAD. For the most part, the statistics of foreign trade are generated from this data. The current arrangements will continue to apply after 1992 in respect of trade with Third Countries, but the abolition of the SAD on 1 January 1993 is part of the process of completing the Single Market by removing the present mechanisms regarding the statistics on EC trade. As I said, that is an adoption of the Council Directive of 7 November. The EC has provided an alternative method of collecting the statistics of intra-community trade from January next. It does not rely on frontier controls. It is a new system known as Interstat, which will involve the periodic submission of information to Revenue by importers and exporters. It is in that area that I think there are some possibilities for the staff and the agents to get themselves involved. All traders who register for VAT and who engage in import or export trade with other EC countries will have to complete two addition boxes in their ordinary VAT 3 return showing the global value of their imports and exports, or whatever, in the member states and for the relevant period. In addition, traders whose total imports from other member states exceed £100,000 annually and whose total exports to other member states exceed £500,000 would be obliged to provide a more detailed statistical return each month. The customs clearance agents are involved and experienced in this particular aspect of the work and have knowledge of the importers and exporters. There is no official objection to them following up this work on a commercial basis.

Chairman

Could I move to some of the sections? Perhaps we could go down and pick up the specifics then? No. 144 is the interpretation.

Mr. Noonan (Limerick East)

Deputy B. Ahern, in his contribution, was interesting. The customs and excise office in Limerick is effectively being closed down even though they are not being affected by this process of rationalisation which was caused by the 1993 changes. For one reason or another, the place has closed down and the work has been re-allocated to Galway and Cork. This was unfair, because they were not directly affected by the changes. They were not dealing with intra-community trade. They were dealing with imports. I would like the Minister to rectify that.

Deputy Martin asked about the possible loss of revenue as a result of moving to the new VAT system. The financial correspondents have been referring to a loss of £200 million as VAT at the point of entry is abolished. There have also been suggesting that, in the second Finance Bill, the Minister will move to monthly returns for larger companies, as distinct from the bi-monthly returns which exist at the moment, and that there would be a once-off cash flow advantage in that, in effect, in the year of introduction you would gain one month. That is the belief at the moment through the trading sectors of the economy. I do not know whether there is a basis for that belief.

Mr. Martin

I would like to return to that issue. Earlier the Minister made a very good point when he argued that we were putting certain elements of our tax regime at risk, such as VAT and the motor registration tax. Have we mechanisms in place for a review of the situation? Is the Minister confident that his officials have got this right? Is the earliest review date 1995? I would like an answer to this. We have put quite a substantial amount of revenue at risk. As the Minister has said, it is a major change. We should be in a position to review it because there could be a dramatic reduction as a result of this. We have made these dramatic changes in our taxation collection systems, because of our wish to be part of the Single Market. Would the Minister consider making a case in Europe? The Minister said that the Delors package was essential. The Delors package and Structural Funds are direct funding for structural projects. There is a great case to be made for funding from Europe being taken off our overall debt position. All the revenue we are collecting through VAT and income tax will be reduced. A quarter of income tax, for example, is simply servicing the ongoing national debt. If we could reduce that debt and the servicing costs we would be releasing money on an annual basis, which would be of ongoing benefit to the economy as opposed to the once-off benefit from Structural Funds and Cohesion Funds. Given that our major revenue collection system will be put at risk because of our wish to converge, there should be a corresponding case made for alleviating the national debt. This would be of permanent value and benefit to us and would greatly assist us in the area of convergence when the Single Currency System comes into effect at the end of the decade.

Mr. Quinn

I appreciate that the chairman wants to proceed seriatum on the various sections, but perhaps the Minister would address himself to the following points.

We are discussing the domestic limitation of an EC Directive. Therefore, what we are talking about will be implemented, by and large, in every other member state. The concerns expressed here must, by the extension of logic, be applied to the UK economy, for example. They are major importers of goods in particular. I am not sure if they apply VAT at the point of entry, but the UK still has a very large VAT base and similar risks are involved. The Minister has explained the risks very clearly. Perhaps we will have to wait and see how things go. I do not think there is any argument about the extra powers for VAT inspection. A couple of amendments in my name relate to extra powers for the Revenue Commissioners provided they are related to VAT. Initially, that was the purpose of the legislation.

How are other countries responding to the shift? Every country is making the shift. What has been said in the context of the debates leading to this Directive?

Mr. B. Ahern

I will answer Deputy Noonan's question first. The Limerick position was raised at the last Question Time. Some union members have been in touch with me also. It is an internal matter. I have asked them to look at it within the context of the Revenue Commissioners. A few days after I put this question some of the first staff arrived from the Revenue Commissioners in Dublin to the Collector General's Office in Limerick. The Revenue Commissioners have made a fair commitment to Limerick. I gather from the individuals concerned that they feel they carried out an important task, and that they were not only covering Limerick but a strip through the midlands also. They felt that the district officials ignored some of that, but the Revenue Commissioners would feel that that was not the case. I have asked them to look at the position. Some staff from the Collector General's Office have moved in. I think there are 26 people involved.

Regarding VAT at the point of entry, I notice that the financial columns in the newspapers are informing the world as to what we have decided on. I would inform the committee that we have not decided on anything as yet. We are looking at how we can get over the cash flow difficulty. The two month basis would be one of the items to be considered. This would not be a great difficulty. Any system would create difficulties, but we must introduce some mechanism for handling this.

Mr. Quinn

The sooner you do that the better.

Mr. Noonan (Limerick East)

Is the cash flow difficulty about £200 million?

Mr. B. Ahern

It is about that. The monthly payment arrangements are not over-popular, from what I am told by business people. Whatever arrangement might be reached might not be over-popular, but I take Deputy Quinn's point and I will deal with it as soon as possible because people will be putting their projections for next year together at this stage.

Mr. Quinn

You can gear up for it.

Mr. B. Ahern

In my Second Stage speech, I indicated to the House that a valuation of possible measures to replace the VAT have been completed. The aim now is to provide for these in the second Bill. We must find a reasonable way of dealing with this. There is an acceptance by business people that we must deal with it.

There is also the question of VAT revenue. Everybody is concerned with this as are other countries because there are different revenue bases. This concerns a number of my colleagues. I spoke to my Spanish colleague on Saturday night on some of these matters. I also spoke to Mr. Fergal who mentioned this as part of the 49 other problems. For a small country, it is proportionately a far bigger problem. The view is that we must do our utmost to implement this system. There was a lot of haggling concerning the system but if there is a difficulty with the review process I, along with others, will be calling for this review to be brought forward. If any of these mechanisms are wrong or misplaced, this will be the only protection available in the short term. That is why the 1995 review will have to be brought forward. Speaking informally to members of ECOFIN, will give us an opportunity to show our concern and fear in different areas. We can see how it goes. An important point for us in the passing of this Act would be to get all our mechanisms in place. We must get Dundalk, Rosslare and Wexford up and running. We must get our staff trained and devise our various mechanisms with the gardaí. There is no arguing against the fact that it is a major shift. These handy devices brought in substantial revenue over the years, whatever the controversial arguments about which political party brought them in. They have gone, and we now have to find alternatives to deal with them.

The EC Commission and the individual member states are committed to systematically examining and evaluating the operation of the regulation arrangements with the aim of improving their effectiveness in tackling new means of tax avoidance and evasion. There will be regular meetings in Brussels to coordinate policy arrangements. Many of us could think of ways people will try to get around these arrangements. In the pre-82 position it is fairly clear what happened. The important aspect is that we should have co-operation within the Community countries. That is why it is important.

The Commission have also undertaken to introduce a directive on mutual assistance to amend and broaden the scope of the present 1977 Directive. That Directive will extend the scope of administrative co-operation to ensure compliance with all aspects of the law in indirect tax matters, including VAT, instead of merely the correct assessment of the taxes due. In addition, it would provide that action by member states on behalf of another member state would be governed by the same legal provisions as those who govern investigations by the requested member state on its own behalf. Finally, the new directive will provide for the possibility of co-ordinated tax examinations between member states. I was not in on all the discussions last year, but I was present at some of the final ones in December and will be present at the ongoing ones which we will deal with in the second Finance Bill. I cannot see how they would work if there is not very close co-operation and co-ordination. It is not difficult to see ways in which people could get around them. Tight co-operation, co-ordination and continual monitoring of changes, and closing loopholes wherever they arise will be the order of the day, certainly for the next few years. They will also influence greatly what the 1995 position will be, how people will feel about moving on and trying to resolve the clearing system and looking ultimately at the Community VAT system.

Acting Chairman (Mr. Dennehy)

Could we move some sections and get down to specifics? We have 34 sections. We could end up with a whole ramble of "agreed, agreed, agreed."

Mr. Rabbitte

I agree, but I would like to pose my question again which is an economic rather than a fiscal or taxation one. There is probably a very simple answer to it but, if there is not, perhaps the Minister would comment on it at Report Stage. It goes back to the question of the economic argument and the relative merits of the destination system as compared to the origin system. Deputy Noonan remarked that it was a harmonisation problem and that if we had harmonisation it would not matter. Is that strictly the case or are we in a situation where, much larger and much better developed industrial economies which can source much of their supplies in their own domestic economies have an advantage over a country that has to import much of its raw material? I am sorry for using the terms "import" and "export", as I understand they are out of date. Having regard to the nature of our economy and having regard to the nature of a lot of the processes that are carried on in the manufacturing sectors, in particular, and other sectors, are we at a competitive disadvantage? Is that the kind of thinking behind the political arguments that resisted the original Commission proposal and ended up in a situation where VAT must now be paid in the country where the goods are used rather than in the country where they are purchased? It is an economic point rather than a taxation one, but I would appreciate hearing the official thinking on it.

Mr. B. Ahern

The answer to Deputy Rabbitte's question is "yes". When you import and export a high volume of goods, the high percentage of consumption and production is naturally going to affect it. As I said earlier on, nobody has confidence yet that the system will work. If one is in a country where there is very little movement of one's production and consumption one is not at the same risk. That is the major difficulty with clearing houses. If the Deputy requires a more technical detailed note I will get it, but "yes" is the clear answer.

Question put and agreed to.