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Taking a hit for the government: Uniquely high VAT

By Nathan Greenhalgh. 03.02.2009

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One sector that might be immediately hit with layoffs and bankruptcies is the hotel industry.

 If VAT increases to 21 percent for hotels passes, Latvia will have the second-highest VAT rate for the hotel sector in Europe, behind Denmark. Tourism is vital for the European economy and 22 countries in Europe offer reduced VAT rates for hotels.
Zudovs said that many of his association’s members have only a 10 percent profit margin, so this increase could put them under.
"There are some other estimations that one third of Latvia’s hotels will go out of business," he said, adding that he expected smaller establishments to be the hardest hit.
The deal is not finalized yet and Zudovs and the association’s executive director, Santa Graikste, have had several meetings with government officials to discuss the proposal.
"We are still trying to have an agreement with the government," Zudovs said. "This was done in a hurry; they weren't thinking about the outcome of the decision."
If it passes, Zudovs said the VAT increase coupled with a decrease in tourism caused by the economic slowdown would prevent the further development of Latvia's burgeoning tourist industry.
"It will not help to further develop Latvian tourism. If the VAT stays at the same level, then probably we would have results similar to last year. But with this VAT cutting the costs means there's no further development of the product. There's not so much you can spend to improve your hotel, your restaurant, your staff," he said.
Zudovs pointed out that this increase would give Latvia's hotels the highest VAT rate in Baltic states.
"We are losing our competitiveness in the Baltic region," he said. "We are not the most attractive destination. We do not have perfect all-year-round weather. We have our share of travelers and it would be wise to keep it."
Egle Dilkiene, the managing director of the Lithuanian Association of Hotels and Restaurants, would not comment on the proposed increase at this time, saying only that negotiations with the government are continuing.
Lithuanian hotel owners have mixed reactions to the news. None of the hotels interviewed for this article had yet cut any staff, as an increase of tourists visiting for Vilnius' European Capital of Culture events is hoped for. Kristina Matulevičienė, director of sales and marketing for the upmarket Klaipėda Hotels chain, decried the proposal.
"It's actually destroying the sector, in my opinion," she said. "To do that in one month it's really terrible. If we could have been informed that it would come from June 1 then we would start getting ready but today we are in shock."
However, Evaldas Daunoravičius, junior manager of Vilnius' budget-level Alexa Hotel, said it's too early to sound the alarm.
"There is a big difference between five and 19 percent, but since Vilnius is the European Capital of Culture this year I think that will increase the number of tourists in the Lithuanian capital. So overall I don't think it will make much difference," he said.
Dombrovsky was skeptical that the hotel industry would lose many customers if room rates were forced to rise with the VAT increase.
"It will increase prices a little, but I don't think there will be a very substantial effect. When you make your holiday plans is it really going to make a difference?" he said.


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