Ireland likely to raise VAT by 2%

As the Irish Finance Minister, Brian Lenihan, moved this week to reassure the €150bn foreign direct investment community that the Corporation Tax rate will remain at 12.5%, focus will now turn to other tax raising measures to help combat the ballooning government deficit.

VAT will most likely be near the top of the options for the embattled state say TMF Ireland, the world's largest VAT, GST & IPT network.

TMF say that following the UK's announced 2.5% VAT increase from January 2011, this will free the Irish to reattempt the thwarted 2009 rise and raise the VAT rate by as much as 2%:

Rocketing fiscal deficit causes concern for foreign inbound companies

Over the past 15 years, the Irish strategy of offering an ultra-low Corporation Tax rate has been the cornerstone of Irish industrial policy. It has fuelled the explosive growth of €150bn foreign direct investment into Ireland by multinational corporations such as Dell, Intel and Pfizer which have established their European bases there.

Since the implosion of the massive property boom at the start of the credit crunch three years ago, corporates have feared a reversal of this strategy as the government fought to combat falling tax revenues. With the news that the further recapitalisation of the property-splurging banks Anglo Irish Bank and Allied Irish Bank would take the Irish deficit from 12.5% to 32% of GDP, apprehension deepened.

However, the Finance Minister spoke up this week to reaffirm the Irish government's commitment to one of the lowest Corporation Tax rates in the European Union.

VAT increase to come back onto the agenda following the UK's rise

A common European strategy to pay for low business taxes (payroll and corporation taxes) has been to raise consumption taxes such as VAT. Ireland attempted this at the outset of the financial crisis with a 0.5% increase in VAT to 21.5% in October 2008.

However, due to a sharp drop in trade as shoppers crossed the border to Northern Island to take advantage of the 17.5% and then 15% VAT rate - introduced by Gordon Brown government as a temporary stimulus – the Irish government was compelled to reduce the rate back to 21% in January 2010.

Following the new Conservative & Liberal government coalition's decision to raise UK VAT from 17.5% to 20% from 4th January 2011, Ireland's hand is free again to increase VAT.

The two countries' VAT rates have tended to track each others, as the table below demonstrates, with Ireland typically being around 3% above the UK. This would leave open a potential 2% increase in the forthcoming December Irish budget.

Written by Gary Howes