East-Viru tourism cluster: Estonia's planned VAT hike to paralyze sector

TALLINN - The East-Viru County tourism cluster has turned to Estonian Prime Minister Kaja Kallas with regard to the new government's plan to eliminate the reduced VAT rate applied so far to accommodation establishments, as according to the local businesses, such a move would paralyze tourism in East-Viru County and result in the region lagging behind compared with the rest of the country.

The new government has agreed upon eliminating the reduced VAT rate at 9 percent for accommodation establishments starting from Jan. 1, 2025. Together with plans to also raise the general VAT rate, the tax rate applicable to accommodation establishments would more than double to 22 percent.

"We conducted a flash survey from April 11 to 12 among accommodation providers in our cluster. It appears that essentially all of the VAT hike by 13 percentage points needs to be added to the cost of accommodation because there are no internal reserves for covering it. The sector's profitability is low. In 2019, the record year for tourism, the sector's profit in Estonia totaled just 29 million euros, which does not enable the state to collect the planned additional revenue of 40 million euros," member of the cluster's management board Pille Soot said.

Soot added that the sector saw a loss of 39 million euros in 2020 and 2021.

"We don't have the data for 2022 yet, but it was characterized by the constraints of the energy crisis. The situation of East-Viru County is most problematic because we've lost Russia as our main foreign market and with it around a quarter of our accommodation customers," she said.

Expanding to the markets of other neighboring countries is not realistic, according to Soot.

"Entering the Finnish market would take years even under normal circumstances, but with the inflation, it is no longer realistic," she said.

The East-Viru tourism cluster said that the planned tax hike has significant negative consequences that, contrary to the state's expectations, will not increase public revenues but reduce them instead.

"It will increase regional underdevelopment because tourism is one of the few credible employers in outlying areas, and it will hinder the implementation of the just transition in East-Viru County as it impedes tourism as a service sector and a force improving the quality of the living environment," Soot noted, adding that this would conflict with the coalition agreement, which aims to reduce regional underdevelopment.

The cluster proposes that in order to determine a realistic tax rate for accommodation establishments that is also beneficial for the state, an impact analysis should be conducted that factors in rates in the neighboring countries. The cluster also requests that the state raise the minimum salary at a slower pace than planned because a salary hike will increase prices even further. The state aims to establish the minimum salary at 60 percent of the median salary by 2027 and pursues a faster growth in the minimum salary than in the average income.