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Noonan Confirms Irish VAT Hike

by Jason Gorringe,, London

28 November 2011

The Irish Finance Minister has confirmed that a 2% value-added tax hike (VAT) included in recently-leaked proposals is on the cards.

Speaking to the Dublin Chamber of Commerce, Michael Noonan admitted that some of his proposals for Budget 2012 were released early. He noted the focus on the issue of VAT that has followed the leak to the German parliament, but did refer his audience back to the commitment outlined in the Programme for Government to increase the standard rate of VAT to 23%.

He then went on to explicitly acknowledge his intention to propose a VAT hike of 2%. Nonetheless, in line with the comments made by other government members, Noonan stressed that he is still to discuss this specific proposal in Cabinet, and that no final decision has been made.

Noonan acknowledged that the measure he is considering will not be popular. But he pointed out, in opposition to his critics, that international economic analysis shows that an increase in VAT that simultaneously avoids a rise in labour taxes, is actually a more employment-friendly policy. "In other words, increased income taxes have a more negative effect on economic growth and jobs than increases in indirect taxes," he said.

He also stated that, until recently, the UK operated a standard VAT rate of 17.5% while Ireland’s rate was 21%, meaning that a 3.5% differential always existed between the two jurisdictions' rates. That the UK increased its rate to 20% in January allowed Noonan to stress that, in this context, the 3% gap that will emerge once the Irish hike takes effect, will remain lower than the one which had been in place over the past two decades.

He also addressed the claim that the proposed changes will increase cross- border shopping, arguing that an informed debate on this issue is required. "Previous studies have shown that the key driver of cross-border shopping is the currency exchange rate – not VAT rates. If tax plays a role in driving cross border shopping, it is the overall level of taxation – which combines income tax, corporation tax, excise duty, VAT and other charges."

Noonan concluded by clarifying that there are no plans to change the various other rates of VAT which apply in Ireland. The zero rate of VAT, which applies to a range of goods and services including most food, children’s clothes and footwear, and oral medicines, will remain unchanged. There are no plans to alter the 9% rate introduced in his Jobs Initiative earlier this year, which applies mainly to tourism services including hotel and holiday accommodation, restaurant services, and various entertainment services. Equally, the 13.5% rate, applicable to residential housing, home heating oil, labour intensive services and general repairs and maintenance, will stay in place.

The Cabinet recently met for three days of discussions on the Budget, which is due to be announced next month

TAGS: tax | economics | value added tax (VAT) | Ireland | fiscal policy | budget | food | currency | services

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