Denis Landy (Labour)
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I welcome the Minister of State. I also welcome Councillor Brian Collins from Kells who is in the Visitors Gallery and who is one of the driving forces behind the campaign for VAT reform.

As a businessman, the Minister of State is very familiar with the various VAT rates which obtain here in respect of goods and services. There is a need for a comprehensive review of the VAT regime. Such a review has not been carried out and what has happened is that the various rates of VAT have evolved over time. Some of these rates have been in existence since prior to our entry to the EU and some have arisen as a result of the emergence of new goods and services. This matter was not discussed by previous Governments, nor has it been discussed to any great extent by the current Administration. The only change introduced in recent times was the reduction in the rate of VAT which relates to tourism. It has been proven that this reduction has been of major assistance to the tourism industry. Those in the tourism sector lobbied strongly for the reduction and they have proved that what they requested has borne fruit. In the first six months of the year, the number of tourists coming here was up almost 20%. Some of this increase was due to The Gathering but a great deal of it reflects the value for money available in Ireland at present.

I wish to provide a number of examples of the ludicrous situation which obtains in respect of VAT at present. The rate of VAT on fruit juice is 23%, while that relating to frozen pizzas is 0%. The rate on walking sticks is 23%, while that relating to limousine hire is 0%. The Minister of State can clearly see that there is no connection between the services people need and the system of VAT currently in place. If we carry out a review of and reform our VAT regime, this would give rise to great job creation opportunities. I alluded to tourism and it is important to note that the number of jobs and the packages on offer from hotels, restaurants and others in the sector have both increased.

The rate of VAT on wool is 23%, whereas the rate which applies in respect of purchases of gold for investment purposes is 0%.

If one wishes to buy gold for investment, it is VAT-rated at 0% while something we all have to use, toilet roll, is rated at 23%. A tax manual is rated at 0%. I could go on with other examples, but given the weather we have at the moment, I will focus on that. Sun cream, sun hats, bottled water and ice are rated at 23%. One could imagine that we would almost prefer if the sun did not shine in this country since we have to pay 23% to protect us from the sun's rays.

The VAT rate in the tourism section which is in place at the moment is only temporary and must be reviewed. In that light I call for all rates of VAT to be reviewed before the next budget and for a reduction on the VAT rate on aids for the elderly, for example, which is currently at 23%, to the minimum rate of 4.8%.

On a lighter note - I cannot give it as the reason Tipperary were beaten last Saturday night by Kilkenny - surely VAT-rating a hurley at 23% does not help the hard-pressed tax hurlers in Tipperary. With that, I hope the Minister of State will have some good news about a review.

John Perry (Sligo-North Leitrim, Fine Gael)
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I am taking the debate on behalf of the Minister for Finance, Deputy Michael Noonan, who conveys his apologies to the Senator for not being here to reply. I am pleased to have the opportunity to contribute to today's debate and to respond to Senator Landy's motion concerning the equity of Ireland's VAT rates.

The VAT rating of goods and services is subject to the requirements of European Union VAT law, with which Irish VAT law must comply. The EU VAT directive provides that each EU member state must apply a standard VAT rate to the majority of goods and services. The standard VAT rate must be set at a rate not lower than 15% and there is political agreement that it does not exceed 25%, although it is possible to set the rate higher. Hungary has introduced a standard rate of 27% in recent years. In addition, member states may apply up to two reduced VAT rates of between 5% and 15% for a range of goods or services which are set out in annex III of the VAT directive. Member states also have the option of maintaining, at a reduced rate of not less than 12%, any items not listed in annex III, provided they applied a reduced rate to those items on 1 January 1991. This is known as the parked rate. Member states may also continue to apply the zero rate, or a rate lower than 5%, known as a super-reduced rate, to goods and services provided they applied at a zero rate or a super-reduced rate to those items on 1 January 1991. However, it is not possible to introduce a zero rate or a super-reduced rate on any new items. That point must be made.

In the context of the rules at EU level regarding VAT, the structure and scope of Ireland's VAT rates are as follows. The standard VAT rate in Ireland is 23% and applies to such goods as cars, petrol, diesel, alcohol, tobacco, electrical equipment, CDs and DVDs. Ireland applies two reduced VAT rates of 9% and 13.5%. The 13.5% rate applies mainly to residential housing, labour-intensive services and general repairs and maintenance. In addition, the 13.5% parked rate applies to fuel used for heat or light and commercial construction. The 9% reduced rate applies mainly to tourism services including hotel and holiday accommodation, restaurant services and various entertainment services. The rate was introduced as part of the jobs initiative and applies from 1 July 2011 until end December 2013. Those services at the 13.5% rate that had been parked were prohibited under the EU VAT directive from availing of the 9% rate. The zero rate applies to most food, children's clothes and shoes and oral medicines. Ireland also applies a super-reduced VAT rate of 4.8% but this is limited to livestock sold by VAT registered persons. In addition, services provided by non-profit organisations, transport operators, medical professionals, undertakers and certain financial services are exempt from VAT, as are schools and hospitals, etc. Exempt suppliers do not generally charge VAT on the services they provide and cannot reclaim VAT incurred on the goods and services they purchase.

As of 1 July 2013, a total of 23 of the 28 EU member states have a standard VAT rate of 20% or higher. The average standard rate in the EU is 21.5%. Six member states have a higher standard VAT rate than Ireland, namely, Hungary at 27%, Denmark, Sweden and Croatia at 25% and Finland and Romania at 24%. This means Ireland has the joint seventh highest standard VAT rate, along with Portugal, Greece and Poland, at 23%. A further 13 member states have a rate of between 20% to 22%.

The trend among EU member states has been to increase VAT rates as a means of covering the budgetary shortfall generated by the economic downturn. A total of 23 of the 27 member states, not including the recently acceded Croatia, have increased their VAT rates since 2008, with 18 member states making an increase in their standard rate alone. Of the member states that have not increased their VAT rates during this period, two already have in place the maximum standard rate of 25%.

VAT increases continue to be considered. In October 2013, Italy is due to increase its standard VAT rate to 22%. In January 2014, France will increase its standard VAT rate to 20% and its reduced rate from 7% to 10% and Cyprus will increase its standard rate to 19%. In addition, Luxembourg, which has the lowest standard VAT rate in the EU, also plans to increase its standard rate in 2015. At 13.5%, Ireland has the fourth highest reduced VAT rate in Europe after Hungary, at 18%, the Czech Republic, at 15%, and Finland, at 14%. However, we apply reduced rates to an extensive range of goods and services relative to other member states. In addition, Ireland, along with the United Kingdom, is unique among member states in applying a zero rate of VAT to a sizeable proportion of economic activity. In contrast, for example, Denmark applies a rate of 25% to all taxable activity, as it does not have any other VAT rates in operation.

There is equity in the application of Ireland's VAT rates. While the system of VAT rating in Ireland is often historic, the application of Ireland's VAT rates is none the less very equitable. In applying the zero VAT rate to basic foods, medicines and children's clothes and the 13.5% reduced rate to domestic fuels, the burden of VAT is reduced on basic commodities and utility services, which results in a lower tax burden on the less well off. The application of the 13.5% reduced rate to construction and labour intensive services and general repairs as well as the maintenance and the application of the 9% reduced rate to tourism services encourages employment through the reduced VAT burden on service related businesses. The VAT system encourages good health by applying the 23% standard VAT rate to alcohol, tobacco and sugary foods. The environmental benefits of applying the standard rate to cars, petrol and diesel are also evident. I point to the equity of Ireland's VAT rates. It is also made apparent in the context of the scope of VAT rates in other EU member states. Ireland applies reduced and zero rates of VAT to a much higher proportion of goods and services than any other member state. Ireland is one of a small number of member states which apply the zero rate to basic foods and medicine. Ireland is also among a small number of member states which apply a reduced rate of VAT on domestic fuels.

I wish to draw the attention of the House to the fact that Ireland's VAT rates, their scope and their structure, are revised on an annual basis in the context of the annual budget. Such reviews takes into consideration the equity of VAT rates, along with the EU legislative constraints and the Exchequer and economic impact of any potential changes. Accordingly, the scope of the VAT rates will be reviewed in advance of the upcoming budget in this context. That is a comprehensive reply in a complex area.

Denis Landy (Labour)
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I thank the Minister of State for what was, as he said himself, a comprehensive review of the VAT situation in Ireland. I accept that we have made great strides in this area and we are ahead of many other EU countries. I have highlighted some particular items. A fisherman needs lobster pots to go fishing for lobster and he must pay 23% VAT on the lobster pot. However, when a customer buys lobster over the counter he pays 0% VAT. There are some areas we can improve. I welcome the fact that there will be a full review. It is timely that I brought forward this Adjournment topic because we have made great strides in tourism by reducing the rate. We could demonstrate more equity and fairness, especially to vulnerable people in society. For example, I have outlined that the rate for aids for the elderly, currently at 23%, should be reduced to the minimum rate.

I hope we can look at all those areas in the review before the budget 2014. I thank the Minister of State.

John Perry (Sligo-North Leitrim, Fine Gael)
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As regards the 9% VAT rate, it is important to note that every reduction costs a considerable amount of money. As to the numbers employed in the tourism sector, research was carried out by the Department and published in the medium term fiscal statement in November 2012. This report entitled Measuring the Impact of the Jobs Initiative examined where the VAT reduction had been passed on and where jobs were created. It contains detailed information on the impact of the 9% VAT rate on prices and employment numbers. The report is available on the website.

Using the statistics from the CSO, the report indicates that an additional 6,200 jobs have been created in the accommodation and food sectors for Q2 2011, and there was an increase of 6% in Q2 2012. While other factors impact on employment rates in these sectors, I have no doubt the 9% VAT rate has contributed in no small way to those employment gains. Furthermore, these figures underline the positive impact of the 9% VAT rate as comparable sectors experienced a decline in employment numbers over the period concerned. This indicates that employment in the accommodation and food sectors may also have declined without the introduction of the 9% rate.

With regard to prices in the tourism sector, the response to the 9% VAT rate has been positive. The report indicates that the VAT reduction was for the most part passed on to consumers. While tourism numbers fluctuated over the period since the introduction of the 9% rate in July, expenditure by overseas travellers in Ireland in 2012 increased by €37 million over 2011. This excludes transport and air travel costs which are exempt from the VAT rate.