Equity……………………………..........NO

Efficiency…………………………........YES

Simplicity…………………………........YES

Fair Revenue Generation………....NO

Effective Stimulus to Growth…...YES
 

While there are legitimate arguments that can be presented both in support of and in opposition to reduced VAT rates on the accommodations sector in the EU, the argument that a reduced rate is necessary to exploit tourism’s job creation potential discounts the importance of all opposing arguments. Unemployment rates in the EU Member States are relatively high and persistent, and are projected to remain problematic into the foreseeable future. Such high levels of unemployment have significant negative individual, economic and social consequences. A high unemployment rate is not only indicative of an economy which isn’t taking full advantage of its human resources to produce valued goods and services, but high unemployment is also positively correlated with rates of drug abuse, crime and a plethora of family problems. These collectively divert government resources from more productive uses (e.g., education and infrastructure development) to programs to mitigate the negative consequences of high unemployment (e.g., more police and social welfare programs). Such program investments, while necessary, are typically only marginally effective since they address the symptoms of unemployment and not its causes. And, abnormally high unemployment is often cited as the root cause of social unrest of various forms to include both World War I and World War II.

Although Travel & Tourism is a large and growing industry across the EU, there is ample evidence to suggest that it is not reaching its jobs creation potential. In the early 1970s, the EU captured nearly 70% of the international tourism market, but its market share had slipped to barely 50% by 1998. Projections by WTTC and others suggest the EU will lag behind the rest of the world in terms of tourism growth over the next 10 years. The causes for the EU’s loss of market share include:

1. Global expansion of air transportation and declines in air fares.
2. Rapid development of tourism globally which in some cases is being subsidized by the EU.
3. The financial ability of EU residents to travel and a growing propensity to travel to destinations outside of the EU.
4. And, importantly, the relatively high costs associated with traveling in most EU countries.

The Travel & Tourism industry in the EU faces many intractable cost disadvantages associated with conducting business in highly developed countries. These include high costs of real estate and labor which are a natural consequence of governments’ regulations to protect the environment and the health and safety of the citizenry. These governments in turn require more tax revenue to achieve high regulatory standards as well as to provide for the generally higher level of government services expected in developing countries. The EU’s laudatory tendency to assist less developed countries around the world and their impoverished peoples to develop their economies via low-interest loans and outright grants of financial assistance also works to the disadvantage its own industries. This is especially true for the EU’s Travel & Tourism industry because Travel & Tourism is a popular recipient of the EU’s generosity to developing countries.

One of the few options available to offset these disadvantages is a reduced VAT across the EU for its tourism industry. Few other industries offer tourism's employment generating potential. A reduced VAT rate would better position the accommodations sector to realize its job creating potential and thereby mitigate unemployment problems across the EU.

Reducing VAT rates will also enable EU Member States to remain competitive with non-European destinations, many of whom apply tourism-related taxes at a much lower rate.

It is our recommendation to the Task Force that they support a VAT system where the hotel industry receives the lowest possible rate and that reduced rates are mandatory rather than optional for eligible goods and services. A harmonized VAT rate would

We would also strongly suggest that a new policy to rebate (or even better, to waive) hotel VAT paid by non-EU residents in accordance with the stated EU policy to not apply VAT to exports to non-EU countries. This would put its tourism industry exports on equal footing with exports from its other industries.

RESOURCES USED IN THIS REPORT:

Commission of the European Communities. COM (2001) 559 Final. Report from the Commission in accordance with Article 12(4) of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws if the Member States relating to turnover taxes– Common system of value added tax: uniform basis of assessment. October 22, 2001.

Commission of the European Communities. COM (1999) 62 Final. Proposal for a Council Directive amending Directive 77/388/EEC as regards to the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services. February 17, 1999.

Confederation of the National Associations or Hotels, Restaurants, Cafes and Similar Establishments in the European Union and European Economic Area (HOTREC). Letter to Commissioner Monti (PC/708) on the November 1997 Communication : “Job creation: Possibility of a reduced VAT rate on labour intensive services for an experimental period on an optional basis.” 1997.

Confederation of the National Associations or Hotels, Restaurants, Cafes and Similar Establishments in the European Union and European Economic Area (HOTREC). Letter to Commissioner Monti (DB/089) on the Commission's Report on the scope of the reduced rate. December 1997.

Confederation of the National Associations or Hotels, Restaurants, Cafes and Similar Establishments in the European Union and European Economic Area (HOTREC). Comparison between the transitional and proposed definitive systems. 1998.

Confederation of the National Associations or Hotels, Restaurants, Cafes and Similar Establishments in the European Union and European Economic Area (HOTREC). Arguments in favour of a reduced rate for hospitality and catering. 1998.

Confederation of the National Associations or Hotels, Restaurants, Cafes and Similar Establishments in the European Union and European Economic Area (HOTREC). VAT rates in the hospitality and catering sectors as of October 2001 in the EU and other European countries.

European Parliament Fact Sheets. Value Added Tax.

European Union in the United States. EU Law and Policy Overview. Value Added Tax: Practical Aspects.

Joumard, Isabelle. “ Tax Systems in European Union Countries”. No 301 in OECD Economics Department working papers from OECD Economics Department.

McMahon, Michael. “Tourism Taxation: No Such Thing as a Free Lunch?” University of Dublin Student Economic Review.