Death, taxes and the tourism industry

The tax, proposed in Budget 2010, has already been met with varying responses. Some disagree with it, saying it will affect Malta’s competitive edge. Others argue that an increase in VAT is the only way to ensure further investment by the MTA which will positively affect tourist arrivals.

Reactions to the tax have so far been mixed. The Malta Hotels and Restaurants Association (MHRA) expressed their dismay at the untimely manner the increase in VAT was implemented, saying the association had an agreement signed by Finance Minister Tonio Fenech that – should an increase in VAT on accommodation materialise – the association should be notified at least 18 months in advance, so that hoteliers could adjust their prices to pass on the burden of the tax onto the end user and not absorbed by businesses.

Hotelier Michael Zammit Tabona does not agree with the increase in VAT. “As things stand, with our hotel prices already set for the May-October 2011 season, hotels will have to absorb the cost of this VAT increase.”

“If Air Malta cuts down on UK flights we will have less VAT to pay the government because we will lose thousands of bed nights.”

Commenting on the proposal of a departure tax, Zammit Tabona said a tax of between €4 and €5 would have generated revenue from everybody, Maltese travellers included. “The Maltese are still enjoying weekend breaks in Maltese hotels - so they will be paying the increased VAT anyway. But everyone benefits from tourism. With a VAT increase and less airline capacity, fewer tourists will make it difficult for everyone to reap the benefits from tourism.”

‘Pay as you go’

The UK tourist market represents 30% of our total market, as well as a strong source of tourists during the winter months. Most of these rely on tour operators. The increase in VAT will make the island less competitive as a destination.

A UK tour operator who specialises in tours to Malta, shares Zammit Tabona’s views saying tourists nowadays have such a huge choice of where to go that increasing hotel prices are going to have a negative effect on the destination they choose for their holidays.

One local hotelier who prefers to remain anonymous says that an increase in VAT was always the only solution, as it is as clean a system as ‘pay as you go’.

He agrees with the VAT increase as this was the only way to finance the MTA investment. However the problem lies in the untimely manner that it was sprung upon the hotel industry. As hotel prices for the following year are already fixed, and up to 40% of business is pre-contracted, the increases in cost are going to have to be absorbed by the hotels.

This decision should have been taken a year ago, to allow hoteliers to budget for the increase and not have to absorb the costs themselves.

As things stand, VAT on accommodation is the lowest in Europe at 5%, with the exception of Luxembourg at 3%. When the increase is implemented Malta will still retain its position at the lower end of the scale just behind Cyprus and France which have lower rates of 5% and 5.5% respectively. VAT accommodation rates in Spain are as high as 8%, in Italy 10%, in Greece 11%, in the UK 15% and in Denmark up to 25%.

However these are the rates paid by tourism establishments across the board. For example restaurants in Malta pay an astounding 18% in comparison to Spanish restaurants at 8%.

Staggered increase

To mitigate the circumstances, some hoteliers advise that the government could increase VAT to 6% this coming January, and a further 1% to the proposed 7% the following year. In this way the increased VAT would not have to be absorbed completely by the hotels and can be passed on to the end user next year.

However Finance Minister Tonio Fenech said the VAT increase would not be postponed, “unless the MHRA wants to postpone additional funding for marketing and new routes.”

The hotelier in favour of the increase in tax says, “I am much happier paying the 2% increase in VAT, as the money generated is going into investment in more travel routes. Tourism can only increase if seats increase. This year seats increased resulting in and increase in arrivals of 13% in the second quarter compared to the same time last year. Without appropriate routes the tourists just will not come.

“People in Europe travel frequently. They shop online and will only decide on a holiday if there are available flights to that destination. Without investment in more seats there will no increase in the tourist industry.”

He disagreed with the departure tax from the beginning, describing it as a “non-starter.”

“We are living in a world working around convenience. People not only buy tickets online but are also checking in online. The last thing we want to do is make them stand in a queue to pay the few euros in departure tax. It is completely uncontrollable and ridiculous.”

The increase in VAT is to be implemented as of 1 January instead of having a 50cent bed tax that was discussed two years ago but never implemented.

The original tax proposed in November 2008 was a bed tax of 50 cents to be levied against every night spent in hotel accommodation. The expected yield from the tax was in the region of €5 million. Due to the financial crisis, implementation was postponed though it was never employed.

In the meantime departure tax was proposed though this was not deemed beneficial by the government as it would negatively affect Maltese travelling abroad.

The expected yield from the increase in VAT is €6 million which will be partially invested in the Malta Tourism Authority’s (MTA) marketing budget. An additional €4 million will be added to form a total of €35 million making it the biggest budget ever awarded for the purpose of seeking out new tourists.

Gozo will have a separate half a million euro fund for promotion of the island as a separate tourist destination.