Hotels cling to preferential VAT in 2012

KLAIPEDA - The hotel sector’s preferential exemption from the 21 percent VAT rate, at 9 percent for 2011, aims to boost the tourism sector’s performance. Hoteliers claim it has done exactly that, but the Conservative-led government doubts this and is mulling over new tax tools to fill the shallow budget coffers. It is reluctant to extend the privilege into 2012.
In lobbying for the tax reduction, Evalda Siskauskiene, president of Lithuania’s Hotel and Restaurant Association (LHRA), had pledged that hotels would slash their rates and give jobs for more hotel employees, as well as increase their often minimal pay. She maintains this has been done.

“Over the year, over 1,600 hotel workers have been employed. According to the data of the State Tax Inspectorate, in 2011’s first half Lithuanian hotels have seen 21.2 percent more check-ins, year-on-year, and hotel revenues surged 30.5 percent, up to 201.6 million litas (58.2 million euros). The hotel industry has filled the state budget with an extra 7 million litas this year already, a 21.2 percent hike compared to last year. More importantly, with the lower VAT, Lithuania has regained its competitiveness in the market. The hotel sector has performed extremely well this year and met all its commitments. If the government reinstates the 21 percent VAT, it will mean death for the sector,” the LHRA president warned.

However, Finance Minister Ingrida Simonyte, along with several influential government members and MPs, slag off the LHRA president for not fulfilling promises and misinterpreting the numbers. The government’s stance on the tax reduction for one sector through the troublesome economic times has always been the same: not to favor any sector, Simonyte reiterated following the 2012 budget deliberations in Seimas.
“Occupancy has increased, but I have seen neither hotel employees’ pay increase, nor investment growth in the segment,” the minister stresses.

Lithuanian PM Andrius Kubilius supports her, claiming the government, notorious for the austerity cutbacks, has never supported the initiative. “Contrary to the supposed boost due to the VAT slash for the hotel sector, I possess other very profound facts pointing out that the preferential exemption from the 21 percent VAT has benefited neither the sector, nor the hotel customer,” Kubilius said recently.

Both the prime minister and the minister indicated that the government will not suggest extending the reduction, but noted it is up to the Parliament to decide on the privilege. With the 2012 parliamentary election producing more populist-like decisions, a fierce battle over the hotels’ wishes is anticipated in the 2012 budget adoption session, as a bunch of austerity-weary MPs rev up their lobbying efforts for retaining the 9 percent hotel VAT in 2012.
“I do not know how to blow the Holy Spirit into the Finance Minister to make her think not as a bookkeeper, but as an economist. Because of her stubbornness, the government makes a big mistake planning not to prolong the preferential VAT rate for hotels,” Dainius Budrys, Seimas’ Economics Committee chairman, a Liberal Centrist, said, chiding the minister.

Siskauskiene is also engulfed in rallying the preferential VAT supporters and keeps lambasting Simonyte: “Her public claim that excess profits have ended up in the pockets of hotel owners don’t match the reality, as hotels have not had any excess profits. Furthermore, most are in debt,” Siskauskiene argues.
Nine percent VAT supporters respond that most European countries apply a VAT reduction for hotels. “Does Simonyte consider all those European countries to be fools?”asks Budrys. He has already submitted a draft on the preferential VAT prolongation for 2012.

According to the data of Creditinfo, a high overdue payment risk is being forecast for 15 percent of accommodation sector enterprises while, according to the assessments, 24 percent of them can encounter solvency problems over the next 12 months.

“Accommodation enterprises are one of the market sectors that have been hit most by the crisis,” Arturas Vainora, owner of several hotels, said to the daily Lietuvos Rytas.
Creditinfo data reveal that the accommodation sector’s debts have decreased by 24 million litas during the first half of the year, and hotel turnover and profits have increased.  It is estimated Lithuania has seen a 12 percent increase in tourist flows this year. “It is believed that the European Basketball Championship held in Lithuania has impacted growth the most this year. We cannot expect a major event like this, capable of attracting tourist hordes into Lithuania, in the near future,” notes Creditinfo Credit Risk Management head Alina Buemann.

Some trends are especially worrisome – the sector, in 2011’s first 10 months, compared to the same period in 2010, registered 40 more cases of hotel property forfeiture procedures.
“While other sectors keep rebounding and the general bankruptcy rate goes down by 17 percent, the hotel sector has seen a 10 percent increase of bankruptcy cases this year. Most of them were related to the collapse of relatively large accommodation enterprises,” Buemann notes.

“We have been working in a loss-making way over the last two years. Our income fell by 29 percent in 2009, and 15 percent last year. This year, our situation is better, however, we still have not waded out from the loss,” Centrum Hotel Group head Vainora says. He added: “Lithuanian hotel owners do not do without bank assistance, and the future of most hotels depends on banks.”

The LHRA president says that she has got a 14-name hotel list where all of the hotels are for sale.
“How can we speak about attracting investments if we are going to strangle the business? How can we dream of having global hotel chains building their hotels in Lithuania if we do not allow the sector to gulp down some fresh air? The government has forgotten that tourism equals export services. It is ridiculous to say that I have to puzzle over how to prove to the authorities, the government and everyone else that the VAT reduction has boosted the sector’s activity,” Siskauskiene frets. She is convinced that, with the 21 percent VAT reinstated, foreign tourists will bypass Lithuania, choosing Riga and Tallinn instead.

Palanga, the Lithuanian resort on the Baltic coast, would also “suffer immeasurably,” Gintaras Siciunas, Palanga Hotel and Restaurant Association (PHRA) president, claimed to The Baltic Times.
“A return to the previous level of VAT would mean the demise of Palanga, as hotel prices would inevitably go up and the entire hotel business will be forced to retract to the shadows,” Siciunas asserted.
He says the preferential VAT for hotels was a sign of temporary relief for Palanga hotels. “In our resort, 85 percent of all hotel guests are foreigners. Therefore, accommodation providers, as well as all export services, have to be exempt from VAT,” the PHRA president says.

He says the VAT reduction has paid off 100 percent in his own hotel, Vila Diemedis. “Because of the lower VAT, I employed 17 new workers. Most of them worked in the new restaurant. I cannot grasp the logic of the government: when you start to recover, are engaged in improving working conditions, reconstruction and look forward to making investments in the business, you hear the incoherent biased harangue from the policy-makers against the benefits of the preferential value added tax. It really annoys [us],” the association president says.

Another Palanga hotel owner, Sigitas Soblickas, compares the VAT reinstatement for the accommodation sector as a “knife along the throat.”