Instead of abolishing the VAT rate for tourist accommodation services, the Estonian government coalition is considering raising it to between nine and 22 percent. However, introducing the new rate would require the abolition of the five percent VAT rate, which currently applies to press publications.
As part of the latest tax reform package, the government plans to abolish the current nine percent VAT rate for accommodation services from January 1, 2025, raising the level to the standard 22 percent.
According to Estonian Minister of Finance Mart Võrklaev (Reform), the concerns of accommodation providers regarding the tax increase are understandable, particularly in light of how hard the sector was hit by the coronavirus crisis. "The tax bills have been submitted to the Riigikogu and the first reading has been held," Võrklaev said.
"I presented them and MPs had many questions and concerns about them. As far as I know, the (Riigkogu's) Finance Committee met again today with the various parties. The process is ongoing, everyone is involved and the deadline for amendments is supposed to be May 31. So, let's see what comes in then," he said.
"What is under discussion is a way to try to find a compromise, so that VAT does not stay at nine percent from 2025, but also does not go up so sharply to 22 percent. So that maybe there is a middle ground," explained Võrklaev.
Representatives of the tourism sector have suggested 12 percent as a possible option for the new VAT rate. Võrklaev said, that while it is not possible to talk about a definite percentage at the moment, the final figure would be somewhere between nine and 22 percent. "It will be agreed in the Riigikogu, but my feeling is that a compromise will have to be sought," he said.
In the European Union, countries can have two preferential VAT rates. The primary one for Estonia is currently nine percent and the secondary rate is five percent. "At the top of the nine is accommodation, medicines, periodicals and books. Then, there is the five, which includes the press. If we were to create a new rate between nine and 22 for accommodation, then essentially it is a toss-up as to whether the others that are at the top of the nine, such as medicines, move up. I myself don't think that changing the VAT rate on medicines is a good idea," the minister said.
What remains then, is to consider whether to abolish the five percent VAT rate, which has applied to press publications since August 2022, raising it back to nine percent.
"From the government's point of view and from the finance ministry's point of view, we've also done various calculations to see what this means in terms of numbers. There has been close cooperation and this move is being seriously considered," the minister said.
According to the calculations made by the Ministry of Finance, rapidly increasing the tax rate to 22 percent could also involve certain risks. "There is a definite risk that there will be a decrease in the [number of] tourists. In any case, we saw that there is [potential for] an additional source of revenue for the state there. However, as the sector is also really worried about its prospects, we are seriously considering this compromise. The other side of this is the press. They again have their own concerns about how this will affect them and what it will mean for their sector. That's where the balance has to be sought," Võrklaev said.
Editor: Michael Cole