Latvia’s national economy would lose nearly 47 million euros from increased VAT on accommodation sector, as reported by Economy Ministry.
The ministry notes that Finance Ministry has plans to raise VAT rate on traveller accommodation services from 12% to 21% to find additional budget finances of EUR 9.7 million. However, Economy Ministry and tourism industry have performed analysis of this decision. Experts came to the conclusion that raising VAT would cost the country’s national economy approximately EUR 47 million.
«Losses will appear because the accommodation sector will be forced to raise prices by at least 10% because of increased VAT. This could potentially decrease the number of tourists in Latvia by 25%. Income decrease from tourists’ expenses in places of accommodation and other associated services (public catering, transports, trade, household services, etc.) will create losses worth approximately 47 million euros,» the ministry explains.
This is why Economy Ministry does not support Finance Ministry’s proposal to cancel reduced VAT rate on accommodation services. Results of the study will be presented to the government during the Tax Reform Management Group’s meeting on 11 April.
Economy Ministry also emphasizes that raising VAT rate for the accommodation sector will reduce Latvia’s competitiveness as a tourism destination, slow down the development of tourism services and create significant losses for Latvia’s budget.
«Raising VAT rate will contribute to the increase of the grey sector. It will impact the profitability of hotels and the ability of businesses to cover their financial commitments before the state and creditors. Reduced income will impact businesses’ ability to invest in improvements of hotel equipment,» the ministry notes.
Considering that hotels’ main costs are associated with labour, in order to reduce losses, hotel owners and tourism operators could decide in favour of reducing labour costs, which would impact service quality.
In addition to the aforementioned, Economy Ministry also sees multiple other risks associated with the cancellation of reduced VAT for accommodation sector. The ministry notes that negative impact on Latvia’s export is also expected – tourism is one of Latvia’s largest service export industry. In 2016, it formed 18.4% or EUR 783 million of Latvia’s exported services.
Economy Ministry also believes Latvia’s competitiveness could suffer as a result of this measure – even now Latvia’s VAT rate of 12% is one of the highest in the EU and the highest among neighbouring countries – Estonia and Lithuania (9%) and Finland (10%).
Most countries around the world reduce VAT on accommodation services to improve tourism development, raise employment and competitiveness of their tourism industry. «If other European member states apply reduced VAT, their tourism businesses are put at a more advantageous position than their counterparts in countries that do not,» the ministry explains.