Pearse Doherty (Donegal South West, Sinn Fein)
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Question 46: To ask the Minister for Finance his views on the impact to business in the Border regions arising from the programme for Government commitment to increase the top rate of VAT to 23%; and if he will make a statement on the matter. [22820/11]

Michael Noonan (Limerick City, Fine Gael)
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The EU/IMF Programme provides for a 1% increase in the standard VAT rate to 22% with effect from January 2013, and a further 1% increase in the standard VAT rate to 23% with effect from January 2014. The Programme for Government continues this VAT policy by limiting the top rate of VAT to 23%, but does not specify the timeframe for this increase. The level and timeframe of any increases in the standard VAT rate will be determined in the context of the annual Budget cycle. In recent years, 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. Sixteen of the 27 EU Member States have increased their VAT rates over the last 3 years, so that the EU average standard VAT rate now stands at 20.7%. Nine Member States have a higher standard VAT rate than Ireland with 20 of the 27 EU Member States having a standard VAT rate of 20% or higher. VAT increases continue to be considered, as the recent announcement by the Italian parliament suggests. In this context, any increase in Ireland's standard VAT rate is not out of place.

A number of studies into cross-border shopping have been undertaken in the last few years to determine the level of cross-border shopping and how much this affects Exchequer revenue. The Report on the Implications of Cross Border Shopping, which was undertaken on behalf of the Minister for Finance by the Revenue Commissioners and the Central Statistics Office, was published in March 2009. This was followed on 4 December 2009 by the results of a survey of cross-border shopping as part of the CSO Quarterly National Household Survey (QNHS) Quarter 2, 2009. Finally, on 12 November 2010, the QNHS cross-border shopping survey for Quarter 2, 2010 was released.

The statistics in the QHNS Reports were broadly in line with the results of the March 2009 Report on the Implications of Cross Border Shopping, which noted that the main causes of price differentials between goods in Northern Ireland and the Republic were operating costs, profit margin (mark-up), taxes and a significant depreciation of Sterling against the Euro. While variations in the VAT rates widened some price differentials, their impact remained small compared to the size of the change in the exchange rate.

The differential between the standard VAT rates in both jurisdictions reduced from 6.5 percentage points in 2009 to just 1 percentage point since the start of this year. Any increase in this differential due to VAT increases in Ireland is however likely to be offset by the relative strengthening of Sterling against the Euro since 2009, providing less incentive for people to shop outside the State.