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Tourism Needs 2.5% Vat For 'Revenue Neutral'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A 2.5 per cent Value-Added Tax (VAT) rate is required for a “revenue neutral” impact on the Bahamian hotel and tourism industry, with the sector “objecting in the strongest terms” to numerous provisions in the initial legislation.

A letter sent to Prime Minister Perry Christie and his Cabinet by the Tourism Industry Partners group just prior to the 2014-2015 Budget, and the Government’s major revisions to its VAT proposal, called for it to ‘exempt’ Promotion Board levies and mandatory gratuities/fees from the new tax.

While the new 7.5 per cent rate is more amenable to the Bahamian hotel/tourism industry than the initial 15 per cent, the Government has yet to release the revised VAT Bill and accompanying regulations that will reveal ‘the devil in the detail’.

As a result, the industry - along with all sectors in the Bahamian economy - are still waiting to see if the Government has taken their VAT-related recommendations ‘on board’ and included them in the final proposal.

The Tourism Industry Partners Group, in its May 23 letter (just six days before the Budget announcement), told Mr Christie that its favoured 6 per cent rate would “still add to out costs and significantly increase the tax revenue which the Government realises from the tourism industry”.

This is because VAT will be applied more broadly across the whole industry, rather than the burden falling largely on room revenues via the existing 10 per cent occupancy tax.

“Room revenue constitutes 32 per cent of hotel revenue,” the Tourism Industry Partners Group wrote. “The taxable base from all other areas of our industry grows significantly.

“The Ernst & Young report indicates that a 2.5 per cent VAT rate would be revenue neutral for our industry. Six per cent would be acceptable providing the above measures are also undertaken.”

These included exempting Promotion Board levies and gratuities from VAT, plus “rolling back” Business Licence fees levied on the hotel/tourism industry to pre-July 2013 levels.

The Government’s new VAT rate is three times’ higher than the “revenue neutral” 2,5 per cent levy, and also exceeds the 6 per cent that was still deemed to increase costs. Nevertheless, the tourism/hotel sector has said it can live with a 7.5 per cent VAT applied across-the-board.

What remains unknown is whether the industry would receive a concessionary rate lower than the 7.5 per cent, as was proposed under the initial VAT draft, which called for hotels to be subject to a 10 per cent - rather than 15 per cent - levy. The 10 per cent room tax was also to be abolished, as will happen under the new plan.

Thus far it appears that the hotel/tourism industry will not receive a VAT rate lower than 7.5 per cent, but what is even more uncertain is whether the “objectionable” provisions remain in the new Bill and regulations.

The Ministry of Finance had told the hotel/tourism industry these would remain under the 15 per cent VAT Bill, and the Tourism Industry Partners Group said then: “We object in the strongest terms to these proposed measures which will negatively impact our industry and the country.”

Thus ensuring these are not in the 7.5 per cent VAT legislation will be key to gaining hotel/tourism industry’s buy-in, and minimising any distortionary impact on the nation’s largest private sector grouping from the new tax.

When it came to the proposal to charge VAT on Promotion Board levies, the Tourism Industry Partners Group warned: “Eroding the revenue base from our nation’s Promotion Boards would only reduce the dollars available for promoting the destination on TV, radio, in newspapers and print publications, through digital advertising, and promotional events.

“The Bahamas is presently being outspent by key competitive destinations. Currently, the only destination television promotion underway is that by the Nassau/Paradise Island Promotion Board.

“These are dollars which otherwise would be used to generate business and subsequently generate additional tourist arrivals, and the accruing benefits to the economy and government.”

Elsewhere, the Tourism Industry Partners Group called for overseas advertising by the industry to be exempt from VAT.

It added: “Jamaica and other competitors exempt overseas advertising services recognising this is essential to generating revenue for the hotel and the country.

“VAT on any overseas advertising via a Promotion Board or directly by a hotel should not occur. Tourism is an export product. To consider overseas advertising an imported service to which we apply VAT is counterproductive.”

The Tourism Partners Group also warned that levying VAT on gross sales was “effectively layering VAT on overseas sales and commissions”.

It added: “This is unprecedented in the global travel industry, and will result in a significant loss in bookings by travel agents, tour operators, wholesalers, overseas travel agents and intermediaries who will opt to book clients elsewhere.

“VAT should only be applied to amounts received by hotels in order to avoid double taxation on the portion which is paid by guests directly to travel agents and tour operators for their services provided overseas. This would make our hotel sector uncompetitive.”

The Tourism Industry Partners Group also called for advance group bookings taken before VAT’s implementation to be exempted from, the tax, as room rates, food and beverage costs and other service prices had already been “locked in”.

“The group business has become highly cost competitive in recent years,” the Group warned. “Bahamian hotels offer considerable price and value-added incentives to attract this business during the traditionally slower months.

“Consideration should be given to adopting incentives around VAT to attract this business during those periods to boost revenue and support higher levels of employment and hours worked.”

The Tourism Industry Partners Group urged the Government not to levy VAT on complimentary hotel rooms, saying this was not done anywhere else in the Caribbean and would discourage hotels from promoting business and charities.

The Group also called for foundations established by the likes of Atlantis, Baha Mar and Sandals to be exempt from VAT.

“The added burden imposed on our industry by these provisions would severely weaken our price competitiveness, particularly in offering all-inclusive and small Family Island resorts as options in our product offerings, given the unique challenges they face in a VAT scenario,” the Group warned.

The Tourism Industry Partners Group includes the Bahamas Hotel and Tourism Association; Bahamas Hotel and Restaurant Employers Association; all the Promotion Boards; Bahamas Diving Association; Marina Operators of the Bahamas; Bahamas Sightseeing and Tour Operators Association; and Atlantis, Baha Mar and Sandals.

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