Tourism’s 9% special VAT rate is a ‘deadweight’, says report

The Department of Finance has calculated that the special 9 per cent VAT for tourism has cost €2.6 billion since its introduction in 2011, including €490 million in tax foregone last year.

In a review of the rate, which has been published on the department’s website, officials question whether the rate is still “relevant” given the booming state of the tourism sector, which is at record highs.

The rate was originally cut from 13.5 per cent in 2011 as a temporary stimulus for the sector at the height of the recession.

However, successive governments have retained it under intense lobbying from the tourism industry, which argues that the 9 per cent rate is closer to the international average.

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The Irish Tourist Industry Confederation (ITIC) has warned against raising the rate, suggesting it would damage future growth prospects and reverse an initiative that the industry credits with helping to create thousands of jobs.

The department’s report suggests that the rate’s economic usefulness has declined since its introduction, and decries the scale of its cost in tax foregone as a “deadweight” when set against “the limited benefits” of retaining the rate.

Scope to increase

The report suggests there is scope for increasing the rate in the upcoming budget without damaging employment or demand from tourists to visit Ireland, which last year welcomed a record 10 million overseas guests.

Officials also warn that leaving the stimulus rate in place risks overheating the tourism sector and damaging overall economic productivity.

This tax subsidy is unnecessary in a sector which is booming and whose larger firms are doing best of all

“With an economy at close to full capacity, further stimulus in the sector can lead to a misallocation of [capital and labour resources],” the report states.

The Irish Congress of Trade Unions (Ictu) said a “fairer rate” of 13.5 per cent should be applied for hotels and restaurants, which it described as highly profitable businesses.

“It is a rare day when trade union representatives of workers across the hospitality sector and Government officials reach the same conclusion, but today is one such day,” Ictu general secretary Patricia King said.

Nine reasons

Ictu has identified nine reasons why the special VAT rate should be scrapped. Ictu lead researcher Ger Gibbons said: “The conclusions of our research are that this tax subsidy is unnecessary in a sector which is booming and whose larger firms are doing best of all; where prices are still among the highest in the EU; where workers are three times more likely to subsist on the minimum wage than the average Irish worker; where the alleged impact on employment has been greatly exaggerated and, finally, where essential tax revenue is diverted from essential services like housing or childcare.”