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Irish banks to lose out in VAT hike

Financial institutions could be the biggest losers if the Irish government carries out its plans to raise VAT by two percentage points.

While most businesses can recover VAT on the costs of goods and services they purchase, banks and insurance companies are not entitled to do so, meaning their costs will increase.

Brian Butler, head of VAT at A&L Goodbody, said: “It would be reasonable to assume that most banks with a domestic focus will not have more than 10% recovery on VAT.

“So if the rise were imposed, it would mean added costs of 1.8% for them.

“Expenditure attracting 23% VAT would include most professional services, telecommunications, advertising, office equipment and rent on leases.”

The new 23% rate was revealed on Friday in leaked documents seen by the German Parliament.

The hike, which is set to be officially announced in next month’s budget, was seen by a parliamentary committee as the Irish prime minister, Enda Kenny, held talks with his German counterpart, Angela Merkel.

The leak has also led to speculation in the retail sector that cross-border shopping will hit company profits.

The Irish government last raised VAT in 2008, increasing rates by half a percentage point to 21.5%. However, the government retracted this the following year, largely due to pressure resulting from cross-border shopping issues.

But Torlach Denihan, director of Ibec’s Retail Ireland, an industry body representing Irish retail businesses, says these claims are exaggerated as there have been several key developments since 2009.

“I don’t think we are going to see anything like the numbers going over the border (to Northern Ireland) to shop in comparison to 2009,” said Denihan.

“In 2009 the exchange rate was far more favourable but the Euro is weaker against sterling now.

“Ireland has also seen deflation, with companies forced to make aggressive price cuts to compete in the difficult economic climate.

“The third point is that excise duty was cut by 20% in the last budget. If the government were to raise this as well then it would be a problem but there is no indication this will happen,” said Denihan.

The Irish government’s planned VAT increase – which was agreed in negotiations with the ECB, the European Commission and the IMF – is projected to raise an extra €670million ($907million) annually.

Breen Cassidy, partner for indirect tax at Ernst and Young, believes the VAT hike is an easier target for generating revenue than increasing the country’s 12.5% corporate tax rate.

“With regard to raising corporation tax to generate the extra revenue, there is no way I could see that happening,” said Cassidy.

“The 12.5% corporate tax rate is almost seen as sacrosanct between political parties in Ireland. There is a fear that even a small increase would lead to speculation it might start creeping up and up leading businesses to leave the country.”

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