Tax Strategy Group may support VAT cut

The State's most senior civil servants and political advisers are likely to approve a recommendation to reduce the standard VAT rate of 21 per cent to foster e-commerce in the Republic.

The issue is currently being examined as part of a study, commissioned by Forfas, IDA Ireland and Enterprise Ireland, on foot of growing concern that the existing standard VAT rate is a disincentive to companies choosing the Republic as a location to "set up or do business".

Papers obtained by The Irish Times under the Freedom of Information Act show that the Government's Tax Strategy Group concluded that depending on the outcome of the study, it would consider recommending action to reduce the standard 21 per cent rate.

Following a meeting on November 2nd, the Tax Strategy Group - which comprises senior civil servants from a range of Government department as well as political advisers - said it would consider a possible indirect tax package that would comprise increases in excise duties which might offset a 2 per cent reduction in the VAT rate.

The issue is being examined in the context of the massive growth in electronic trade here and the Republic's bid to become a European e-commerce hub.

Although the option of cutting the VAT rate was not addressed in last month's Budget, the group said it would reconsider such action for "future budgets".

The Tax Strategy Group expressed concern that the high standard rate of VAT, coupled with expected EU rules on digital supplies to private consumers, would have a "detrimental impact" on the Republic's aim to be a key e-commerce player.

The FoI documentation also shows that the group considered the Irish Software Association's (ISA) proposals to reintroduce tax relief for share option schemes. An ISA report proposed that tax relief be restricted to the software sector. It suggested the introduction of a single charge taxing share options at the capital gains tax rate of 20 per cent. At the moment share options are charged at the income tax rate in the year the option is exercised.

The ISA argues a 20 per cent charge would have the combined effect of curbing salary inflation and high staff turnover, attracting returning emigrants, and increasing global competitiveness in the face of skills shortages. However, the Tax Strategy Group concluded it was unclear how taxing share options at 20 per cent would address the underlying problem of a skills shortage.

The Minister for Finance, Mr McCreevy caused considerable upset within the Irish technology industry when he failed in the Budget to change the ruling on share option taxation. However, he indicated that the matter would be addressed in the forthcoming Finance Bill.

The Tax Strategy Group similarly concluded the ISA proposals on share options might be reviewed at a later date in conjunction with separate proposals on profit share legislation as part of the Finance Bill, or any Partnership 2000 national agreement.