Written answers

Wednesday, 4 June 2008

10:00 pm

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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Question 176: To ask the Minister for Finance if the cost of diesel oil indicates the need for adjustment in terms of VAT or excise duty having particular regard to the need to encourage the use of more eco-friendly fuels; and if he will make a statement on the matter. [22285/08]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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While the promotion of biofuels is primarily a matter for the Minister for Communications, Energy and Natural Resources, the Deputy will be aware that the Finance Act 2006 provided for significant tax measures to promote biofuels in Ireland.

Under the scheme, biofuel produced under projects approved by the Department of Communications, Energy and Natural Resources are exempt from excise duty. This serves to reduce the additional costs associated with the production of biofuels and consequently allows them to compete with conventional fossil fuels. This fiscal incentive was designed to kickstart the domestic biofuels industry. Long-term general excise reliefs are not anticipated.

In addition, as a complementary measure, the Finance Act 2008 provided for the VAT rate applicable on the supply of miscanthus rhizomes, seeds, bulbs, roots and similar goods used for the agricultural production of bio-fuels to be reduced from 21% to 13.5%. Furthermore, Budget 2007 provided funding for a national top-up of the EU energy crop payment from €45 per hectare to €80 per hectare. This payment is operated by the Department of Agriculture, Fisheries and Food and provides farmers with a further incentive to grow energy crops.

Regarding VAT, it is important to note that the VAT content of purchases of auto diesel is a deductible credit for business in the Irish VAT system. In relation to a reduced rate of VAT for eco-friendly fuels, there is no mechanism which would allow for reducing the rates solely for such fuels. The VAT Directive does not make any distinction between different types of fuels. The supply of fuels including environmentally friendly ones, is therefore chargeable at the standard VAT rate of 21%. Any change in the standard rate would apply to the sale of all fuel and indeed products at the standard rate. A reduction in the standard rate would cost the Exchequer in excess of €483 million and have little effect on price.

The Deputy might wish to note that there are additional non-fiscal measures that can be used to promote biofuels. To provide further market certainty and encourage projects of scale, the Government has signalled its intention to move to a Biofuels Obligation by 2009 which will require all fuel suppliers to ensure that biofuels represent a certain percentage of their annual sales. I understand the Minister for Communications, Energy and Natural Resources will shortly be launching a public consultation on the proposed biofuels obligation.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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Question 177: To ask the Minister for Finance if he will reduce VAT or excise duty on diesel in view of the recent increase in its price; and if he will make a statement on the matter. [22286/08]

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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Question 178: To ask the Minister for Finance the urgent steps he can take to address the spiralling increase in the price of diesel in view of the extent of excise duty or VAT accruing to the Government from the inflated prices; and if he will make a statement on the matter. [22287/08]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I propose to take Questions Nos. 177 and 178 together.

The increase in fuel prices generally, and the increase in the price of diesel, is an international phenomenon. Fuel prices are driven by a number of factors including the price of oil on international markets, exchange rates, production costs and refining costs. The rise in oil prices over recent periods reflected additional factors such as geopolitical uncertainty, supply disruptions and strong economic growth in countries such as China.

Excise duty rates in Ireland for both auto-diesel and petrol are €368.05 and €442.68 per 1,000 litres of fuel respectively. These rates are lower than the EU 15 average, and our main trading partners particularly our nearest neighbour, the UK. I would also like to point out that excise rates for both diesel and petrol have not been increased in the last four Budgets.

The Exchequer yield from excise, as excise is set at a nominal amount, does not increase as the price of fuels increase. On the other hand, the yield from VAT, as VAT is set as a percentage of the price, increases as the price of fuels increase. However, in this regard it should be borne in mind that to the extent that spending in the economy is re-allocated to petrol and other oil products, and away from other VAT liable spending, and to the extent that the overall level of economic activity is reduced by higher oil prices, there may be little or no net gain to the Exchequer.

In relation to the rate of VAT applicable to auto-diesel, the position is that the VAT rating of goods and services is subject to the requirements of EU VAT law with which Irish VAT law must comply. Auto-diesel is subject to the standard VAT rate which in Ireland is 21%. It would not be possible to reduce the VAT rate applicable to auto-diesel without reducing the rate for all goods and services subject to the standard VAT rate. A decrease of 1 percentage point in the standard VAT rate would cost the Exchequer €483 million per annum. Such a reduction would have little or no impact on the price of fuel.

It should also be noted that the VAT content of purchases of auto-diesel, kerosene, marked gas oil (MGO or green diesel) and fuel oil used in the course of business is a deductible credit for business in the Irish VAT system.

In so far as calls for reduced taxes are concerned, given the impact high oil prices can have on growth rates, the Informal ECOFIN in September 2005, discussed the issue of appropriate policy response to the then price increases. The Ministers agreed that distortionary fiscal and other policy interventions that prevent the necessary adjustments should be avoided. This continues to be the appropriate policy response.

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