As assured by Prime Minister Taavi Rõivas before Chamber of Commerce this Wednesday, the more than double VAT for accommodation services is indeed coming. Coupled with fuel excise rise, this is a serious blow to rural tourism.
«When the state makes its business environment more complex, grey economy will rise, we will be unable to fight wage poverty, and the good idea how to gain extra revenue for state budget will in all likelihood flop,» said Estonian Hotel and Restaurant Association deputy chairman Feliks Mägus to comment words by Prime Minister.
Signe Sarah Arro, owner and CEO of the Saaremaa based Pilguse Manor, said that the companies close to hubs are not overly affected by tax rises. «But Saaremaa and Hiiumaa have lots of tourism farms. Can you imagine what the prices will be like?» she asked.
In addition to the doubling VAT, rural tourism will also be affected by the rising fuel excise. According to Ms Arro, these changes will be especially hard on the small accommodation enterprises which have up to ten places.
According to Estonian Institute of Economic Research, the abolishing of VAT exception will equal an average of seven percent rise to accommodation service prices. The numbers of visitors would shrink by six percent i.e. 180,000 people. This a bit more than the combined population of Tartu, Narva and Võru.
«For years, the occupancy and profitability of smaller accommodation enterprises in rural areas has been poor, and with the tax rise gray economy would increase or the enterprises would cease to operate; definitely, jobs would be thinned out,» said enterprise minister Urve Palo who underlined that tourism is in decline as it is. In the beginning of 2015, numbers of visitors have dropped 11 percent year-on-year.
This is confirmed by Estonian Rural Tourism Union member Toomas Pärle, an engine for canoe trip organising Veetee project and host to Annemäe Holiday House. He said these past years reveal an increase of small players who offer «grey» services.
«This is what the tax rises have done,» he said. Such services are used by the especially price-sensitive clients. According to Mr Pärle, these enterprises do not last too long – an average of two –three years – but do manage to roil the market.
As pointed out by Ms Palo, we are not competing for tourists with the other Baltics alone, but with all of Europe, and all nations are keeping a close eye on price fluctuations.
For years, Lithuania has kept changing VAT for accommodation enterprises – in 2010, it was 21 percent, the year after that nine. In 2012, it was raised back to 21 percent, and this year was lowered to nine percent again. Statistics show that during the higher VAT ranks of visitors did thin, while the enterprises never lowered their prices once VAT came down again.
At the end of last year, Estonian Institute of Economic Research did a survey as ordered by Estonian Hotel and Restaurant Association, asking what the entrepreneurs would do if VAT were raised from 9 percent to 20. 116 enterprises responded, 52 percent of whom said they’d raise prices by the VAT; 30 percent said they would raise the prices by a bit less; and 18 percent would not raise prices at all. However, the research also revealed that in Viljandi and Rapla Counties, for instance, accommodation prices have not increased since 2004.
Mr Pärle is also active in organising hiking trips and will be gravely affected by fuel excise rise because he is daily driving about 200 kilometres in a large vehicle with a trailer.
Though the services are geared towards the above-average wealthy customer, even these have become price-sensitive in the current situation. «They are having to make their leasing payments and pay taxes, not much invested into holidays anymore,» said Mr Pärle.
Mr Mägus predicted that a whole lot of enterprises will have to shrink their activities due to the tax rise, leading to social problems.
According to Mr Pärle, it is highly likely for many a small rural tourism company to go bankrupt, as even the small turnover they currently have will disappear. Not limited to affecting tourism, live will flow out of rural areas thus impacting Estonia strategically. «Obviously, rural tourism has been created in the periphery,» said Mr Pärle.
The entrepreneur understands that if a state is poor, taxes have to be raised; even so, in this case the state will get some few millions but will miss much more. «It is a pity that people who ought to be responsible and are handing out such promises during the elections fail to discern such issues,» said Mr Pärle.
Ms Palo thinks that instead of doing away with the tax exception, a contemporary conference and fairs centre should be built. «If at long last we’d get this done, it would bring 20,000 additional tourists a year, create 400 new jobs, and yield €20m of extra income i.e. the same sum that is hoped to be earned from abolishing of the VAT exception,» said the minister.
According to a super-optimistic timeline, such a centre would be completed by 2018 when Estonia assumes EU presidency.
Commerce Chamber head Toomas Luman said the tax exception ought to have been removed in a manner more cautious, as the doubling of a tax will alter tax logic and tax behaviour alike. «It would be prudent to try and do it gradually somehow; see, how it affects the sector, and then take the next.»