Experts say tax rises will hamper competitiveness of Estonian tourism sector
A 10-year vision document to promote tourism has been unveiled by the Estonian Ministry of Economic Affairs and Communications. The vision outlined in the document aims to raise Estonia's profile as an innovative tourist destination as well as double the tourism sector's value added in to further contribute to the Estonian economy. Tourism operators see the vision document as a step in the right direction, but say tax increases are hampering its potential realization.
While the tourism sector currently contributes between five and seven percent of Estonia's gross domestic product (GDP), this contribution could be higher, according to the Ministry of Economic Affairs and Communications.
"The tourism development plan provides a broad framework, outlining Estonia's uniqueness or specificity, with which it can be a role model in the tourism sector, in comparison to other countries or to offer something completely different to tourists," explained Estonian Minister of Economic Affairs and Communications Erkki Keldo (Reform).
"As a concrete example, I have already signed an agreement to direct €2 million to accommodation establishments in order to digitalize their services, thanks to which they will be able to save costs and increase efficiency. We have a lot of data in the tourism sector that can be used to keep tourists here and to offer them more services," Keldo said.
"One of the values of this document is that it allows us to talk about the fact that we don't have a very high level of value added, we don't have a very high level of productivity per person. This is something that definitely needs to be changed, and that is where the need for cooperation comes into play, the need for clarity on what products we should offer and what products we should not offer," said Lenno Uusküla, chief economist at Luminor Estonia.
Tourism sector operators say the vision document is a step in the right direction, while also pointing out tax increases, notably the rise in hotel VAT next year, are working against it.
"If we say that the strategy paper is a vision of where the country wants to be in ten years' time, then certainly not all the actions that are being taken today certainly support this vision. The increase in VAT on accommodation and the high VAT on catering will definitely hamper competitiveness," commented Madis Laid, CEO of Ibis Tallinn Center.
According to Uusküla, the tax increases also work against the aim of promoting Estonia's tourism sector. "Hotels are an area where price competition is quite high. When tourism companies are choosing destinations, they look very carefully at the price of accommodation in a hotel and then decide whether to bring tourists to Estonia or Latvia," Uusküla explained.
"Lithuania tried to raise VAT on hotels a few years ago and it didn't work – there were fewer tourists, so they had to go back to the old system. I think that Estonia will also learn the lesson in a few years' time that it will be necessary to reduce VAT on hotels again, because it is lower in neighboring countries," Uusküla added.
According to Madis Laid, the tourism industry has passed its lowest point, but it is still about around fifth behind the level it was at in 2019, which is why hotel profitability is low.
"Accommodation is definitely not expensive in Estonia at the moment and there is still room for price increases. The problem for accommodation is that profitability is minimal, so it does not allow for investment and does not allow for an increase in charges. On the other hand, prices and the level of VAT in the catering sector are a problem for us, because input prices – labor and raw materials – have reached European levels and VAT is essentially twice the European level. That's where we see a problem, things may remain too expensive for tourists in the future," said Killu Maidla, CEO of the Estonian Hotel and Restaurant Association.
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Editor: Merili Nael. Michael Cole
Source: "Aktuaalne kaamera"