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THE SO-CALLED tourist tax is on the Canary Islands agenda, the first local economy in the European Union for the number of nights spent in tourist accommodation. They were 100 million in 2018, thirteen million nights more than in Paris, the second European destination for this metric (Eurostat). The new regional government, formed in July 2019 by a coalition of nationalist and center-left parties, has foreseen that, during its mandate, it will establish an occupancy tax, similar to those already applied in the Balearic Islands and Catalonia. The revenues will be invested in improving infrastructure and public services linked to the tourism industry, and in the conservation of natural and cultural heritage –the president of the region, Ángel Víctor Torres (PSOE-Social European Democrats) has promised. The outlook of the occupancy tax in the European Union shows for twenty years a tendency to its application: 19 of the 28 Member States currently regulate it, and among European regions, it is applied in five of the nine outermost regions.
In 2017, the European Commission hired Price Waterhouse Coopers in London to study the impact of taxes on the competitiveness of the European tourism industry. Tourism represents 10% of the GDP of the block. The arrival of tourists to the Member States will grow at an annual rate of 2% until 2030, and the Commission expects that, in that year, 557 million European and non-European tourists will arrive in the EU countries.
The PWC Report for the Commission includes a scheme of the implementation and the range of rates of the Occupancy Tax or Tourist Tax. In a chapter dedicated to tourism taxation of its biennial Report on Tourism Trends in the world, in its 2014 edition, the OECD includes the Occupancy Tax among indirect taxes specific to the tourism sector (page 76), following Durbarry and Sinclair (2001).
This is a tax paid by the client of a tourist accommodation, either as a fixed amount for each night spent, or as a percentage of the total price of the stay. In its report to the Commission, PWC describes that, in the EU Member States that have established it, “it typically applies per person per night, with a significant municipal discretion over the rate. Normally, it varies, depending on the category of accommodation, location and local authority. Children under 18 usually enjoy reduced rates or are exempt”.
The tourist rate in the outermost regions of the EU
During the collection of data for this article, we have observed that in Guadalupe, La Reunion, Martinique and Guyana, the local communes and the Departmental Councils have a certain discretion to set the rates of the “taxe de séjour”, but a provision of The Republic that is common to all territories establishes that those under 18, employees with an eventual contract forced to reside for a time in a tourist accommodation, and those who are staying due to an emergency situation or a temporary relocation of their residence. They are exempt from paying the tax.
The OECD identifies, among the trends of the taxation of the tourism industry in the last 15-20 years, a “general increase in taxes related to tourism”. It appreciates, in particular, a tendency to establish taxes related to aviation, such as the Departure Tax, or with an environmental focus, such as the eco-tax. Among the specific lodging taxes, the OECD registers as a trend the local management and administration of this figure. He also notes that “in general, there has been little monitoring, evaluation and analysis of the impact of tourism-related taxes and incentives, to ensure that their stated objectives are being achieved without adversely affecting tourism competitiveness” (for all these notes, page 73 of the OECD Report).
The experts consulted by the European Commission recommend announcing as soon as possible the intention to introduce the tax and get the participation of the industry in its design
In its analysis for the Commission, PWC reviews the academic literature on the impact of taxes on tourism competitiveness. The evidence «suggests, in general, a high degree of transfer and high elasticity of demand, particularly for destinations with close substitutes» (page 11). Price-elasticity is the ability of the market to respond to an increase in the price of a good or service as a result of the application of a tax or an increase in its rate. The more elastic the demand (greater responsiveness, choosing another destination, for example), the greater the impact on the competitiveness of an industry. The academic research cited by PWC concludes that coastal leisure tourism is the most price-sensitive, compared to business tourism, the least elastic, and non-coastal tourism, with an average elasticity. The concept of transfer refers to the percentage of a tax that the supplier «transfers» or allocates to the customer. «The magnitude of the economic impact» of a change in tourism taxation «depends on the elasticity of demand (…) and the transfer rate,» says PWC in its study for the European Commission. One of his conclusions is that «price and quality have become increasingly important forces of competition» in the tourism industry.
Tourist tax: the case of the Balearic Islands
Spain is the world’s most competitive economy for the tourism industry, followed by France and Germany, according to the Tourism Competitiveness Index of the Davos Forum. The direct and indirect contribution of the sector to GDP was 159,000 million euros and 2.6 million jobs in 2016, according to data from the World Tourism Council cited by PWC. This strength in the global competition may suggest that there is some scope for an application of the Tourist Tax, as provided by the Canary Islands authorities, the Valencian Community and other tourist destinations in Spain. PWC puts the Balearic Islands as an example of good practice. In 2016, its regional Parliament passed the Tourist Stays Tax Law, a canonical Occupancy Tax that was designed in dialogue with industry stakeholders. The study done for the European Commission dedicates a chapter among the success stories of the implementation of this tax in the European Union. For the European Commission consultants, the regulatory process was exemplary, due to the involvement of the sector and the mechanisms of transparency and co-decision of public and private actors in the investments that are executed with the collection of the tax.
The teaching of the Balearic case –experts summarize– is that “the way in which a tourist tax is introduced and administered has important implications on how the sector responds to its introduction” (page 12).
If a tax has to be established to reverse the collection of infrastructure and public services linked to the tourism industry, and to preserve the natural and cultural heritage, the authors of the study for the Commission recommend following two principles: early notification of the intention to regulate, and an «engagement process» of the industry.
«Although from an economic point of view it may be sub-optimal, from a public policy point of view» it may make sense to apply the occupancy tax and make it «better received and accepted by the industry, if the proceeds are destined to support the tourism sector and it is done in a transparent way and with the involvement of the sector ”, the analysts point out, which, in any case,“ emphasize the need for regulators not to make their tax strategies by isolating themselves ”from the industry (page 13).
Another of its recommendations is the «visibility of the tax.» Its regulation should ensure that the tax is reflected in the final price that the client receives during the search for offers for their vacations. The purpose of this clause is to prevent the tourist from receiving upon arrival of the accommodation charges that he did not have and for which, in some cases, he will not have prepared funds. The impact of these situations on the reputation of a supplier and a tourist destination can be very negative, according to the study of the impact of taxes on tourism competitiveness.
There is one more recommendation, addressed to the regulators of the tourist tax. In general, experts consulted by the Commission believe that it is best not to introduce new taxes and even lower those already applied to tourism. “Our analysis” –they note– “is that there is a case so that in countries that compete hard for tourism, reduced taxes are applied to the sector”. Even so, the authors of the study also admit that the introduction of a tax on tourist stays to invest the proceeds to improve the quality of the destination can be justified, by the same logic of competitiveness. They recommend that their design scrupulously follow the principle of equity. By its very nature, the occupancy tax favors some tourists over others. A group of friends or a family will see the cost of their vacation more than a business traveler and a tourist traveling alone.
“Governments that are thinking of introducing or redesigning an occupancy tax should explicitly consider the implications of equity in their design. Although the tax rate may seem low, when applied per night and per person, you can add a considerable cost to leisure tourists traveling as a group, for example, family members ”(page 163).
There are alternative options to an application «per person and night», such as applying the room tax, as in Romania. Other Member States – France and its outermost regions, among them – offer discounts and exemptions for children, as exemplified by the authors of the study published by the European Commission.
Sources consulted for this article
- PWC London (2017), The Impact of Taxes on the Competitiveness of European Tourism, Brussels, European Commission.
- OECD (2014), “Taxation and tourism”, chapter III in OECD Tourism Trends and Policies 2014, OECD Publishing, pages 73-97.
- Minister of Action and Comptes Publics, République Française.
- Bulletí Oficial de les Illes Balears (2016), Law 2/2016, of March 30, on the Tourist Stays Tax in the Balearic Islands and measures to boost sustainable tourism, number 42, April 2, 2016.
- Eurostat (2019), “Nights spent at tourist accommodation establishments by NUTS 2 regions”, Brussels, 2019.
- World Economic Forum (2017), “The Travel & Tourism Competitiveness Index”, in The Travel & Tourism Competitiveness Report 2017, Genoa.
- Durbarry, R. and Sinclair, M.T. (2001), Tourism taxation in the UK, Discussion Paper No. 2000/0. Christel DeHaan, Tourism and Travel Research Institute. Nottingham: University of Nottingham.
- Peng et al. (2015) «A meta-analysis of international tourism demand elasticities», in Journal of Travel Research, 2015, Vol 54 (5), pages 611-633.
- Semeral E. (1994), “Economic models”, in Witt S., Mountinho L, editors, Tourism Marketing and Management Handbook, second edition, Prentice Hall, New York, pages 497-503.