Róisín Shortall (Dublin North West, Social Democrats)
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87. To ask the Minister for Finance the discussions he has had with EU partners regarding the overly restrictive nature of the EU VAT directive, Council Directive 2006/112/EC and the inability of member states to respond to emerging needs of their population through significant VAT reform; if Ireland has adopted a formal position on seeking greater flexibility; and if so, if he will outline this position. [31344/16]

Michael Noonan (Limerick City, Fine Gael)
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The EU VAT Directive, with which EU Member States' VAT law must comply, sets out the general rules and conditions of VAT based on the origin principle, where VAT is taxed in the Member State of the supplier. In order to minimise distortion of competition when goods or services are purchased from suppliers in different Member States, the VAT Directive restricts the flexibility of Member States in setting VAT rates, while ensuring the neutrality, simplicity and workability of the VAT system.  VAT rating is restricted with lower limits on the levels of the VAT rates and a list of the goods and services which could benefit from reduced rates.

The VAT Directive provides that Member States must apply a standard VAT rate, generally between 15% and 27%. Ireland's rate is currently 23%.  The Directive also allows Member States to apply up to two reduced VAT rates to goods and services as listed in Annex III of the Directive. The application of the 9% VAT rate to tourism activity is possible because of this provision. Article 110 allows for the continuation of the application of a zero rate or a rate less than 5% to goods or services where that rate applied on and from 1 January 1991.  Ireland takes advantage of this provision in our application of the zero rate to most food, books, medicine and children's clothing, as well as our application of the 4.8% VAT rate on livestock.  

Furthermore, Article 118 of the Directive allows Member States to retain the application of a reduced VAT rate of 12% or more on goods and services not contained in Annex III that had applied at a reduced VAT rate on and from 1 January 1991. The application of the 13.5% VAT rate in Ireland to domestic fuels, commercial construction and some labour intensive services is based on this provision.

While the VAT Directive places restrictions on VAT rating to avoid distortion of competition where VAT is based on the origin system, the VAT system is in the process of moving towards a destination principle, where all supplies are taxed in the Member State of the consumer and not the supplier.  In such a scenario a consumer would pay the same VAT on purchases made from any Member State, and as such, there is less of a need for harmonisation of VAT rating among Member States. In this context, the European Commission's Action Plan on VAT was adopted on 7th April 2016 and contains a proposal to look at VAT rate policy across the EU in 2017. The Action Plan's proposal on rates may offer Member States more flexibility in the future in determining VAT rates applicable to goods and services. This forum will provide an opportunity to discuss VAT rates applicable to goods and services, and my Department will engage fully in this process. However, the Deputy will be aware that any proposed changes to the current EU VAT Directive would require unanimous agreement from all Member States.