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Noonan told low tourism VAT rate has ‘done its job’ – and binning it would raise €640m

June 9, 2016

Finance officials have raised doubt over the future of the reduced VAT rate for the hospitality industry, saying it has “done its job” and that scrapping it would raise €640m. 

Minister Michael Noonan’s officials say rising prices in the sector call the benefits of the tax cut into question. VAT was reduced for hotels from 13.5pc to 9pc as a temporary measure to boost tourism back in 2011.

Now Mr Noonan has been told that “all indications are that the measure has done its job with robust growth in visitors and employment in the tourism area.”

In briefing documents for the minister, they added: “The general recovery of the economy and increasing prices in the sector raises questions about its future.”

If the VAT rate for the hospitality industry returned to 13.5pc it “would result in increased revenues of some €640m”.

Last October Mr Noonan singled out Dublin hotel prices in warning that the case for retaining the reduced VAT rate was “diminishing each year with room rates rising particularly during major events”.

Mr Noonan is also told that an EU Commission’s ruling on whether or not Ireland provided State aid to Apple in the form of favourable tax arrangements is expected in the “near future”.

Both the State and Apple reject the claim. “In the event of a negative decision, you will have choices to make about an appeal,” Mr Noonan is advised.

He would also have to decide “what to do with large recovery amounts pending the outcome of an appeal,” the officials say – referring to sums Apple may have to pay to the Exchequer.

The document outlines how – in relation to two Apple companies – the Commission has adopted opening decisions “stating the preliminary view that State aid was provided”.

However, there is “no firm information on what the Commission’s conclusion will be”.

The officials added: “Our consistent position has been that Ireland has done nothing wrong and that we will challenge a negative decision through the courts.” They say such a decision could have “significant negative implications” for Ireland’s reputation and would create “uncertainty around our tax system”.

Separately, officials raised concerns about an “over-dependence” on corporation tax, which accounted for 70pc of last year’s €3.3bn tax revenue over-performance. Around 80pc of corporation tax receipts were from multinationals – attracted to Ireland by the 12.5pc rate.

The Finance officials warn that global risks have increased since the time of the last Budget.

They said that growth in the UK, US and the euro area has “held up” but that the “outlook appears uncertain”. A unit in the department is working on contingencies in the event of a ‘Brexit’ vote in the UK.

The gross fiscal space for Budget 2017 was last year put at €1.4bn, with €900m of that already allocated to make provisions for demographics and implementing the Lansdowne Road Agreement.

That leaves €500m, the document states. However, Mr Noonan has since told the Dáil there is likely to be at least another €400m on top of that.

Other “revenue raising measures” would be needed to make changes to the USC, which brings in €4bn, Mr Noonan is told. Fine Gael has committed to phasing out the USC over a number of years.