The Icelandic government is planning to raise the value added tax (VAT) on accommodation from 7.0 to 25.5 percent as of May 2013. While currently among the lowest, the change would make the VAT on accommodation in Iceland the highest in Europe.
Hótel Aldan in Seyðisfjörður, East Iceland. Archive photo by Páll Stefánsson.
SAF, the Icelandic Travel Industry Association, has harshly protested the plans but Minister of Finance Oddný Harðardóttir reasoned in an interview on RÚV that it is necessary for the industry to grow under realistic conditions and not with an advantage over other industries.
Oddný explained that the tourism industry is state-funded and the VAT on accommodation is exempt from the full VAT rate.
Helga Kristjánsdóttir, an economist at the Icelandic Tourism Research Center (ITRC), said there are two sides to the issue.
“The industry is doing well and there has been significant upturn and growth,” she stated, adding that the exchange rate of the Icelandic króna is currently favorable for tourism.
“However, the exchange rate of the króna can change quickly in the future and it has also been proven that taxation can often achieve the opposite of what it is supposed to. The government may therefore not necessarily profit from it,” Helga reasoned.
In addition, higher taxes may repel foreign investors, who might, for example, be interested in constructing hotels in Iceland, she concluded.
“All must be added to the price of tickets, the blessed passengers keep the wheels turning. We have reached the tolerance limit, some time ago,” commented majority owner of Eagle Air Hörður Guðmundsson to Morgunblaðið on increased taxation on domestic airlines.
New aviation taxes have been introduced and others significantly increased. The company has responded with tighter saving measures, laying off ten employees at the end of last month.
“There isn’t a chance of putting everything into pricing. The flights cannot cope with that. I believe there is a loss at all domestic airlines due to exorbitant taxation,” Hörður stated. “We will try to uphold the service but don’t have the manpower to keep it unchanged.”
The company BlueWest Helicopters has registered one helicopter in Denmark and is planning to register two other helicopters there as well, according to Sigtryggur L. Kristófersson, the company’s owner.