Louise O'Reilly (Dublin Fingal, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

419. To ask the Minister for Finance what domestic actions he plans to take to reduce Ireland's VAT gap; and if he will make a statement on the matter. [18110/23]

Michael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

The VAT gap is an estimate comparing a maximum theoretical tax liability (approximated from economic activity in a country) against actual VAT collected. A tax gap can arise for many reasons, including non-compliance but also due to legitimate tax optimisation, insolvencies, bankruptcies and economic activity not fully captured in National Accounts data.   

Since 2009, the European Commission has engaged consultants to estimate the VAT gap in each EU Member State and the EU as a whole. Given its nature, a tax gap cannot be easily or reliably measured. It must be estimated on the basis of limited data and making a significant number of assumptions. While Ireland continues to engage with the Commission on this topic, I am advised that Revenue has concerns around the robustness of the methodology and data used and the accuracy of the results.

Despite these concerns, it is useful to note the overall trends. Ireland’s VAT gap is estimated at 12.5% for 2020 in the most recent study (published in 2022), up from 10.3% for 2019. From an EU perspective, the average VAT gap is estimated at 9.1%, with Ireland ranking as the 8th highest across Member States.

As well as the main VAT gap, the Commission also estimates the policy gap (an indicator of the additional VAT revenue that a Member State could theoretically generate if a uniform VAT rate applied with full tax compliance on all goods and services). Components of the policy gap include the loss in VAT liability due to the application of reduced rates or exemptions.

The Commission’s consultants estimate that Ireland has a 51.9% measure for the policy gap, implying that VAT revenues would increase by 51.9% with the application of a uniform VAT rate to items that are exempt or zero rated, e.g. the provision of medical services, education, food, children's clothing and footwear, etc. The EU average is 45.7%.

The VAT policy gap does not provide a detailed breakdown of the costs within each VAT rate or for VAT exempt activities. Essentially the policy gap measures the total revenue that would be collected if the standard VAT rate was applied to the supplies of all goods and services. For example, I am informed by Revenue that if the standard rate of VAT was applied to the supply of all zero-rated food items, the potential VAT revenue yields would be in the region of €1.6 billion.

Louise O'Reilly (Dublin Fingal, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

420. To ask the Minister for Finance the estimated extra revenue that would accrue to the State if EU proposals on "VAT in the Digital Age" were enacted; and if he will make a statement on the matter. [18111/23]

Michael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

On 8th December 2022, the European Commission published its proposed “VAT in the Digital Age” reforms to amend the European Union VAT system to respond to the challenges of digitalisation.  The proposed reforms aim to make the EU’s VAT system more resilient to fraud and more efficient for businesses.  There are three pillars involved in the proposal.    

The first is the introduction of common standardised Digital Reporting Requirements (DRR) and e-invoicing on business-to-business (B2B) cross-border transactions within the EU.  The proposed changes would replace the current recapitulative statements with a new Digital Reporting System for intra-community transactions and would cover the same transactions that are currently covered by the recapitulative statements with additional reporting requirements.  Member States will also have the option to impose DRR for domestic supplies of goods and services, similar to the mandatory DRR designed for intra-community transactions.  The expectation is that the existing digital reporting requirements in various Member States should converge with the proposed cross-border requirements by 2028. 

The second pillar of the proposal addresses the challenges of the platform economy in short-term accommodation rental and passenger transport services by clarifying existing rules and enhancing the role of e-commerce platforms in VAT collection.  The proposed changes would mean that these facilitation services when provided by platforms to private persons will always be taxable where the underlying transaction is supplied.  It will also place an obligation on platforms to charge VAT where the underlying provider is not VAT registered.  Additionally, the currently optional Import One Stop Shop (IOSS) would become mandatory for platforms when certain imports of goods to consumers in the European Union are facilitated by them.

The third pillar of the proposal would reduce VAT registration requirements in the EU by expanding the scope of the One Stop Shop (OSS) and the application of the reverse charge for B2B transactions.

The proposals are significant.  They will modernise the VAT landscape and will result in increased revenues for Tax Administrations and reduced costs for business if they enter into force, as intended, between 2024 and 2028. 

A number of Council meetings have taken place since January 2023 to discuss the proposals and, in common with all legislative proposals of this nature, some of the proposed amendments may not be agreed or may change significantly from what is proposed.  Unanimous approval of all EU Member States is required for the proposals to enter in force and, even if there is full agreement, it is possible that implementation may be delayed.

It is not possible to estimate the extra revenue that will accrue directly to the State if the proposals are enacted.  The European Commission has estimated that they should result in EU Member States collecting up to €18 billion in additional VAT revenues annually, €11 billion of this as a result of anti-fraud measures, while also reducing administrative costs for business.