Irish VAT Hike On The Cards

by Jason Gorringe, Tax-News.com, London

13 October 2010

While Irish Finance Minister Brian Lenihan is standing steadfast against European Union assaults over the country’s corporate tax rate of 12.5%, TMF Ireland has asserted that a value-added tax (VAT) hike, of at least 2%, could well be on the cards in the forthcoming budget.

Having brushed off calls for Ireland to seek an internationally-funded bailout and hike its low corporate tax rate, Lenihan has nevertheless warned that further spending cuts and tax rises may be required, and he revealed recently that all budget options remain on the table, including a widening of the Irish tax base.

With the scheduled 2.5% VAT increase in the UK from January 2011, Lenihan will be afforded the manoeuverability to increase the levy by between 2-3%, TMF forecasts.

TMF stated:

“Over the past 15 years, the Irish strategy of offering an ultra-low corporation tax rate has been the cornerstone of Irish industrial policy. It has fuelled the explosive growth of EUR150bn foreign direct investment into Ireland by multinational corporations such as Dell, Intel and Pfizer which have established their European bases there.”

“Since the implosion of the massive property boom at the start of the credit crunch three years ago, corporates have feared a reversal of this strategy as the government fought to combat falling tax revenues. With the news that the further recapitalization of the property-splurging banks Anglo Irish Bank and Allied Irish Bank would take the Irish budget deficit from 12.5% to 32% of GDP, apprehension deepened.”

“However, the Finance Minister spoke up this week to reaffirm the Irish government’s commitment to one of the lowest Corporation Tax rates in the European Union.”

“A common European strategy to pay for low business taxes (payroll and corporation taxes) has been to raise consumption taxes such as VAT. Ireland attempted this at the outset of the financial crisis with a 0.5% increase in VAT to 21.5% in October 2008. However, due to a sharp drop in trade as shoppers crossed the border to Northern Ireland to take advantage of the 17.5% and then 15% VAT rate, introduced by [the] Gordon Brown government as a temporary stimulus, the Irish government was compelled to reduce the rate back to 21% in January 2010.”

“Following the new Conservative & Liberal government coalition’s decision to raise UK VAT from 17.5% to 20% from January 4, 2011, Ireland’s hand is free again to increase VAT. The two countries’ VAT rates have tended to track each other's, with Ireland typically being around 3% above the UK. [On the basis of this trend], this would leave open a potential 2% increase in the forthcoming December Irish budget.”

Kieran Desmond, Managing Director of TMF Ireland VAT Services added:

“Given Ireland’s long-term pledge to maintaining the 12.5% corporation tax rate, a VAT increase subsidizing this strategy is inevitable. Perhaps it will be more aggressive than the 2009 0.5% rise, given the perilous state of the Irish public finances. Recent VAT increases by Ireland's main trading partner, the UK, make a large VAT move here, in Ireland, much more likely.”

On a more local level, Ireland can sustain a VAT premium of 2% or 3% versus the UK without sending consumers in droves across the border, as happened with the temporary 15% UK VAT rate.”

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