Debate: VAT Rate on Hotels in Greece

The hotly debated value-added-tax (VAT) rate issue has been the main topic of discussion among tourism professional circles for the past months in Greece.

In view of negotiations between Greece and its international lenders concerning tax hikes in tourism, professionals have expressed their concern in regards to the “consequences” the sector would be up against.

According to the creditors’ most recent proposal, the new VAT system in Greece would include a unified rate at a standard 23 percent rate for hotels, restaurants and catering. The creditors also want to eliminate the long-standing lower tax regime that applies on the islands.

There are currently three VAT rates (6.5, 13 and 23 percent) in Greece, as well as a 30 percent discount on each for the Aegean islands. Currently, the VAT rate on Greek hotels is at 6.5 percent and food services are charged with 13 percent.

Considering the creditors persistence for a 23% VAT rate on tourism, the Greek Tourism Confederation (SETE) said it could not comprehend the reasons why the lenders insist on imposing an uncompetitive VAT rate on the Greek tourism product.

“Who stands to win from that?”, SETE wondered in a statement.

The Hellenic Parliament, Syntagma Square.

Greece’s proposal on the VAT rate

Greece’s latest proposal for the VAT reform includes hotels at the 13 percent rate.

The Greek side wants the current 30 percent reduced VAT rate for the islands to remain untouched.

Sector says VAT rate should not exceed 10 percent

SETE and the heads of the country’s tourism sector associations had released a joint statement in May and called for a single VAT rate on the Greek tourism package (accommodation and food services) that should not exceed 10 percent on average nor the levels of competitor countries.

According to research conducted by tourism bodies, if the VAT rate on tourism exceeds 10 percent, the Greek domestic sector would suffer a severe blow and job losses from 2016 and on would surpass 200,000.

Studies have also ascertained that an increase in VAT rates on accommodation would dramatically affect the competitiveness of Greek tourism and consequently adversely affect the country’s tourism demand.

VAT increase should be done gradually

Tourism professionals have voiced the fact that changes to VAT rates, if any, should be implemented with sufficient advance notice, so that they can be integrated into the prices concluded between tourism businesses. VAT increases should also be implemented gradually, since a drastic increase of VAT rates cannot be absorbed by the industry and will be passed on to the consumers, who are highly price sensitive.

With average VAT rates for tourism services in Southern Europe ranging between 4 and 8 percent, Greece can quickly price itself out of a very competitive tourism market as millions of tourists would most possibly choose to travel to competitor countries that offer a cheaper product.

Greek shipping will be affected by VAT hike

The Greek shipping industry has also voiced concern on the possibility of a VAT hike in tourism.

“The consequences of a possible VAT increase will have the opposite effect, the significant reduction in tax revenue,” Greek Passenger Shipping Companies Association (SEEN) President Michalis Sakellis had said at the 3rd Posidonia Sea Tourism Forum held in Athens in May.

Mr. Sakellis stressed that an increase in VAT rates on ferry tickets would hit passenger shipping and the sector would suffer greatly.

European travel professionals get involved and call for certainty

Meanwhile, in mid-June, as negotiations between Greece and its international lenders continued at a slow pace, the group of national travel agents’ and tour operators’ associations within the EU, ECTAA, expressed concern.

In a statement, ECTAA underlined the need for an immediate decision on the future VAT rates for tourism services in Greece as, due to the uncertainty, foreign and Greek tour operators and Greek hoteliers were having difficulty to sign or commit to contracts for the next tourist season in 2016.

“Greece is an important tourism destination for Europeans and tour operators would like to continue selling Greece in their programs”, said President of ECTAA, Lars Thykier.

Study: Lower VAT Can Tackle Tax Evasion

The reduction of VAT can reduce tax evasion and improve competitiveness, according to a study released in May by Nikolaos Artavanis from the Isenberg School of Management, University of Massachusetts, Amherst.

The study contains data following a VAT rate reduction in the Greek restaurant industry in August 2013.

Using large fast-food restaurants as a control sample, the report titled “The Effect of the VAT Rate on Tax Evasion: Evidence from the Restaurant Industry in Greece”, found that tax rate reduction can increase competitiveness within the sector and with foreign competitors, which is bound to improve the long-term prospects of the industry and the economy.

Tourism is the backbone of the Greek economy. Greek tourism contributes more than 20 percent to the Greek GDP and covers 60 percent of the trade deficit balance, while it employs 20 percent of the workforce and generated 40 billion euros in 2014.