Seán Fleming (Laois-Offaly, Fianna Fail) | Oireachtas source

The first financial resolution provides for a temporary reduction in VAT on gas and electricity. At present, gas and electricity have a 13.5% VAT rate applied. This will be reduced to a 9% VAT rate from 1 May to 31 October 2022.

The second financial resolution provides for an extension and enhancement of the excise duty decreases on mineral oil taxes the Government provided for in March. The VAT-inclusive 20 cent reduction in the mineral oil tax rate for petrol and the 15 cent reduction on auto diesel, with a proportionate 2 cent reduction for marked gas oil, MGO, also known as green diesel, were due to last until 31 August 2022. The cost of this measure was €320 million. The purpose of this financial resolution is to extend these temporary reductions until budget day, with effect from 1 May. The estimated cost of this change is €80 million. In addition, the financial resolution provides for a further VAT-inclusive reduction in mineral oil tax of 3 cent per litre on MGO, with effect from 1 May until budget day. The estimated cost of this change is €17 million.

The Government recognises the impacts of the current energy crisis and understands how it has contributed to a rise in the cost of living. While the energy crisis is driven primarily by global factors, the Government has taken the decision to reduce VAT on gas and electricity to alleviate some of these impacts and to extend the temporary reduction in mineral oil tax.

Regarding VAT, Ireland has maintained a historical derogation in respect of the VAT rate on gas and electricity since 1991. This has allowed us to apply a reduced rate of 13.5% but also prevented us from lowering the VAT rate below 12%. Following lengthy negotiations, amendments to the VAT directive were provisionally agreed in December 2021, with final sign-off on the amended text taking place at an ECOFIN meeting in April 2022. The new agreement came into effect on 5 April 2022. Under this agreement, annexe III of the VAT directive has been expanded to include gas and electricity. This means Ireland can apply a reduced rate of 9% to these products in line with other goods and services to which a reduced rate applies. The Government has made a decision to avail of this flexibility from 1 May, which is the start of the next VAT returns period. The VAT reduction from 1 May and the extension of the reduction in mineral oil tax will add to the already substantial support provided by the Government to help with the cost of living. In terms of revenue impacts, the six-month decrease in VAT is estimated to cost €46 million.

I turn now to the amendments to Financial Resolution No. 1 tabled by Deputy Doherty of Sinn Féin. I note that amendments Nos. 1 and 2 are contingent on amendment No. 3. I therefore propose to address all three together. The purpose of these amendments is to give effect to a VAT reduction on kerosene, bringing it from 13.5% to 9%. Deputy Doherty provides in amendment No. 3 that the amendments will only go ahead if the European Commission confirms that such a change would not impact on Ireland's historical derogation. As he will be aware, amendments to the VAT directive came into effect on 5 April 2022. While annexe III was expanded to include gas and electricity, it does not include any mention of home heating oil.

However, this new agreement on VAT rates also preserved Ireland's historical derogations in respect of fuel and oil despite them not being included in annexe III. It is on that basis that Ireland applies its 13.5% reduced rate of VAT to the supply of fuel and oil for domestic and commercial purposes. The current 13.5% VAT rate applied to energy products is a parked rate and cannot be reduced below 12%. It should be noted that other member states must apply their standard rate of VAT to this product.

The first issue that arises with Deputy Doherty's approach is that lowering the VAT rate on kerosene under 12% would be a breach of the EU VAT directive. The Deputy may be aware that Commissioner Gentiloni issued a letter to all EU finance ministers about the energy crisis, responding to points the Minister for Finance, Deputy Donohoe, and his European counterparts have raised seeking greater flexibility. The Commissioner highlighted the current flexibility provided by EU directives, including the newly agreed amendment to VAT rates. The Commissioner indicated that the Commission does not envisage any further revisions of the EU taxation framework to respond to the current crisis. In circumstances in which the Commissioner has been clear that he does not envision further flexibility in respect of VAT being adopted, a deliberate breach of the VAT directive would lead to infringement proceedings.

The second issue arising from the Deputy's approach is the suggestion that clarity would be sought from the Commission on the retention of Ireland's historical derogation on kerosene into the future. There are conditions attached to all historical derogations when it comes to VAT. One of those conditions is that if it is no longer being applied, it is deemed to be removed and cannot be returned. Another condition is that the historical derogation cannot be lower than 12%. Therefore, in addition to being a breach leading to an infringement, the move of kerosene to 9% by definition would remove it from the historical derogation we currently apply.

The fourth amendment from the Deputy proposes various further rate reductions from 1 May until budget day. The Deputy is seeking to reduce the mineral oil tax rates on petrol and diesel to the minimum rates as prescribed in the energy tax directive and to reduce further the rate on marked gas oil by 2 cent. The amendment also seeks to remove the carbon component on kerosene, reducing the overall rate to zero. The proposed mineral oil tax rate for diesel would not be compliant with the minimum rates set out in the energy tax directive. The combined effect of the measures the Government has already provided means that the current mineral oil tax rate for diesel, in addition to the diesel rebate scheme, is effectively at the minimum allowable under the energy tax directive. Any further excise reduction, as the Deputy proposes, would bring the effective rate below the minimum permissible rate. To apply a mineral oil tax rate of 33 cent per litre would mean that the Government would have to scrap the diesel rebate scheme, which is a targeted support for hauliers and public transport operators.

Mineral oil tax on kerosene for home heating has a non-carbon component rate of €0. The carbon component is currently €84.84 per 1,000 l. The Deputy proposes removing completely this carbon tax element, thus reducing mineral oil tax to zero. Similarly, the reductions we are providing for this evening to the rate of mineral oil tax on marked gas oil mean that the non-carbon component will also be €0 from 1 May. This means that the further reductions to mineral oil tax Deputy Doherty is proposing would also involve reducing the carbon component on this fuel.

Deputies will be aware that the 2020 programme for Government committed to increasing the amount that is charged per tonne of CO2 emissions from fuels to €100 by 2030. The Government followed through on this commitment by introducing legislation in the Finance Act 2020 to provide for a ten-year trajectory for carbon tax increases to reach €100 per tonne of CO2 by 2030. This measure is a key pillar underpinning the Government's climate action plan to halve emissions by 2030 and to reach net zero no later than 2050.

A further component of the Government's carbon tax policy is the hypothecation of revenues raised from these rate increases to fund important just transition measures. It is important to note that a significant portion of carbon tax revenue is allocated for expenditure on targeted welfare measures and energy efficiency measures, which not only support the most vulnerable households in society but also, in the long term, provide support against fuel price impacts by reducing our reliance on fossil fuels. We raised €652 million in carbon tax last year. To seek to reduce that to zero in certain circumstances would undermine this entire proposal. The Sinn Féin pre-budget submission for 2022 included the figure of €650 million to be collected in 2022 as part of its submission. I am therefore interested to hear if the Deputy is now choosing to scrap his own party's pre-budget submission with his move to reduce carbon tax here. If he proposes to do that, it does mean he is not accepting or standing by his own party's pre-budget submission, which it put to us before the most recent budget. We cannot have budget submissions that contain elements of collecting carbon tax and then have the same party coming in here proposing to remove carbon taxes as if there were no consequences to that.

These measures will help people with the cost of electricity and gas and are one part of the Government's response to the energy crisis. Accordingly, I cannot accept the amendments.

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