The government of Iceland is proposing a whopping increase to its VAT (value added tax) from its current 7% to 25.5%. This tax will apply to accommodation, restaurant meals, and attractions – basically penalizing the tourist, since these are all services most tourists utilize. The proposal has the increase set for May 1 of next year.
According to a release from the European Tour Operators Association (ETOA), two-thirds of Iceland’s population lives in Reykjavik, so hotel use is dominated by visitors: 90% of hotel rooms in July 2012 were occupied by foreigners. This tax is aimed directly at an export market.
The inbound tourism industry has been one of Iceland’s success stories over the last fifteen years. Foreign arrivals in 1997 were 210,000, in 2011 they were 598,000. A lot of this growth is recent: 2012 is set to match 2011’s annual increase of more than 16% growth in foreign visitor arrivals. The number of nights these people stayed increased by 20%.
ETOA’s Chief Executive, Tom Jenkins, said: “Iceland was in a benign state: they were increasing their visitors and length of stay. Much of the drive behind this growth has been Iceland losing its perception as an expensive destination. This tax rise, imposing a sudden price increase of 17%, effectively punctures that impression.
“What is strange is that Iceland has been a text-book example of the virtues of cutting indirect taxation in tourism. In 2007, it halved tax on tourism services from 14% to 7%. By 2008, tax receipts from tourism were 6% higher than they had been in 2006.
“This tax rise is being introduced at the start of the inbound tourism season, just when it will do the most damage. It penalizes any operator who has signed contracts and published brochures featuring Iceland next year. No company can absorb such a surcharge.
“Iceland is a wonderful destination: an extraordinary civilization set in an astonishing geological region. But this tax is a stinging rebuke to anyone who has chosen to invest in promoting Iceland as a destination.”