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14 BUSINESS & FINANCE maltatoday, WEDNESDAY, 13 NOVEMBER 2013 Greece reduced vat on tourism industry – yet we increased it by 40% George Mangion PKF has worked through the summer months to compile a study on VAT and present this to Malta Hotels and Restaurants Association (MHRA) in order to use it as a tool in discussions with the authorities with a view of proving that a reduction in VAT could in general lead to an enhanced gross value added and would in turn have a progressive effect on the viability of hotels. The suggestion to reduce VAT was not considered in the 2014 Budget but of course starting from 2015 hotel owners will look forward to a 25% cut in electricity and a 5% cut in water consumption (energy costs around 6% of hotel costs). Quoting the outgoing president of MHRA Tony Zahra he was careful not to give the impression that because the peak season has shown a record of arrivals (August topping 200,000) the industry is not to be perceived as a never ending jam jar and can be rather volatile. It employs thousands of workers and has been resilient throughout the recession and really and truly one can say that it never received any direct cash from the government as was the case with certain manufacturing firms. Naturally, MHRA has been lobbying hard for such a stimulus. Particularly if VAT is reduced, hotels will maintain their prices constant so the extra revenue can be ploughed back in much-needed general refurbishment of existing amenities. PKF planned the extensive study in the short span over the summer months with the co-operation of a number of hotels which participated in an ad-hoc survey while reliance was placed on the statistics issued periodically by NSO, BOV, MHRA hotel surveys and other technical publications sources. Credit goes to Professor Lino Sant, head of the Statistics Department at University who accepted to supervise the work of three graduate statisticians and other staff through this process. Since its inception in the early 60s, tourism was always a fragile industry which depends on its survival on a number of exogenous factors and thus needs careful nurturing by all its stakeholders. The conclusion of PKF study illustrated the possible consequences on elasticity of demand, given that the government reverses the 40% increase in VAT rate and reverts to charging the lower rate of 5%... but it excludes the computation of the multiplier effect on other industries and consumer institutions as this merits a complete study on its own. A regression model was then used to predict future figures for gross value added generated by hotels as well as gross value added generated by accommodation using both 5% and 7% VAT rates in order to enable a comparison between the two predictions. Certain predictions were made using regression models of which the main assumption was that the VAT rate of 5% came into effect as at October 2013. Due to lack of information in certain areas, a number of assumptions were made to estimate a host of variables. One may argue that reducing taxes on hotels will only render them more profitable and this advantage may not feature in the improvements that are necessary from time to time to improve amenities. The answer to this conundrum is that by motivating hotel operators to external challenges especially during the lean months this will result in larger volumes of tourists and therefore they would be inclined to hire more employees. It is interesting to note that 65.6% of all the hotels surveyed would reduce their prices partially in the event of a VAT decrease but in the opinion of MHRA prices should remain constant and the extra revenue ploughed back in further investment to improve existing facilities. Readers may note that on the 1 January 2011, a higher rate of VAT on accommodation was introduced much to the chagrin of hotel operators. The PKF model clearly showed that using a 5% rate of VAT on accommodation, the values on gross value added on accommodation were much more promising than those when using a rate of 7%. At a 7% rate of VAT, the study shows that gross value added by accommodation is predicted to increase by 19.1%, to €200 million in October 2013 up to September 2014 when compared to October 2011 up to September 2012. Conversely, a 5% rate of VAT applicable as of October 2013 predicted an increase in October 2013 up to September 2014 of 42.7% when compared to October 2011 up to September 2012, giving a total of €240 million therefore, an increase of €40 million. Of course, one must take into consideration the issue of VAT revenue lost by the government however, as mentioned earlier, and the smart move for the government was to capture the multiplier effect and studies have repeatedly shown that this will by far out weight the loss of vat revenue. As the number of tourists will rise, other industries such as restaurant, food and beverage services, public transportation, travel agents, airline and airport operators and retail will also experience an increase in the demand for their products and everything remaining equal this may encourage such industries to employ more and hence increase not only the number of gainfully employed but also the gross domestic product of the entire country. One may well surmise that if the government wants to help the tourism industry, this can be done in many other ways apart from reducing vat and in the budget it has chosen the reduction in tariffs. Yet this study can serve as an indicator that forfeiting tax revenue in VAT collection may lead to a better harvest on a national scale. This has been the proven experience of Greece. In November 2010, the Greek Minister of Culture and Tourism, Geroulanos, officially announced the reduction of VAT rate on hotel accommodation from 11% to 6.5% starting from the beginning of 2011 (this is diametrically opposite to the stance taken by our finance minister). Geroulanos in his speech stressed out that, "Tourism is what will lead the country out of the crisis." He also pointed out that this change will be absorbed by the customers and will increase the arrivals in the country (source: 'Reduction of VAT at 6.5%', 2010). Furthermore, the Association of Greek Tourism Enterprises was satisfied with the government's decision concerning the diminution of VAT on tourist accommodation. They argued that "This measure is the first important decision for development from the part of the government that came after realizing that excessive VAT rate, while it did not boost the public finances in the past, instead resulted in a reduction in the government's revenues and also demotivated individual firms by reducing demand." (source "Reduction of VAT at 6.5%", 2010). After this announcement, the Research Institute for Tourism of the Hellenic Chamber of Hotels conducted an expensive research and extrapolated the estimates that this decrease of the VAT would result in a rise in revenues from incoming tourism up to 25% in the next three years (source: 'Reduction of VAT at 6.5% for Accommodation', 2010). Three years later, according to figures released by the Bank of Greece, in May 2013 tourism income increased by 38.5% compared with the same month of the previous year (2012). This increase in income is reflected by the increased number of arrivals in Greece by 24.4% (Nikas, 2013). It is true that during the past three years the harvest has been plentiful but the trend is not irreversible albeit it is a healthy sign that on a year-to- date basis to July, the NSO statistics reported a 9.8% increase in arrivals, a 12.9% increase in guest nights and an 11.9% increase in total tourist expenditure. This success in numbers overshadowed the negative effect due to the increase in VAT charged on accommodation in 2011. One must pose the question: what would be the consequence had there been no record arrivals? Will a number of hotels and restaurants resort to close down in the shoulder period with loss of jobs? The industry business model merits not only higher airline seat capacity, clean beaches, well kept roads and intelligent adverting by MTA (which is trying hard) but it has to recoup past losses. As a conclusion, one may question why have PKF closed the barn when the horse has bolted (that is the budget is currently being discussed and no VAT reduction was proposed). The answer is that the PKF study constitutes the first step in a long journey to place the industry in its proper perspective. Another question may arise: why was the study not extended to assess the potential multiplier effect on so many external economic operators with multifaceted linkages for both short and long term results? The answer is twofold: time and expense. To conclude any enquiries can be posted to Tiziana Gauci – Head of Surveys on tgauci@pkfmalta.com or call on 21 484373. George Mangion a partner in PKF an audit and business advisory firm

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