​New reform round to make tax system simpler, won't include lower VAT in tourism

A lower VAT rate in the hospitality industry is not being discussed in current preparations for a new tax reform round set for 2019, but it will continue to be considered, Finance Minister Zdravko Maric said at a round table discussion on tax reform as a way of encouraging investments, organised by the Croatian Employers Association (HUP) in Zagreb on Thursday.

"Be patient, details of the new tax reform round, which will include tax breaks, will be known soon, during July, when it will be put to public consultation," said Maric, adding that the new tax reform round would encompass fewer laws than the last round in 2016, which referred to 16 laws.

Even though the round table did not focus on tourism, its participants nonetheless made comments on the sector for which the minister, too, said that it was one of the most important sectors in terms of revenue, employment and investments. Despite demands from the sector to lower the VAT rate on tourism services from the current rate of 13% to 10% for accommodation and from 25% for restaurant services, they will probably not be granted.

Minister Maric revealed only that the new tax reform round would include tax breaks as well as simplify the tax system and make it stabler and more predictable.

HUP director Davor Majetic said at the event that employers wanted taxes to be as low as possible and the tax system to help achieve that goal.

"Employers have already used the tax breaks introduced so far to increase wages and that is what will probably happen with the new tax breaks, but if the tax reform is not accompanied by other reforms, such as in the health and other sectors, its benefits will not be significant," said Majetic.

Also attending the debate were Croatian Tourism Association (HUT) president Veljko Ostojic and Branko Bogunovic of the HD Consulting company, who said that the VAT rate was exceptionally important for growth and tourism development, notably competitiveness, since almost all Mediterranean countries had VAT rates in the tourism sector that were lower than Croatia's.

Bogunovic cited a recent survey by HD Consulting which showed, among other things, that if Croatia did not restore the 10% VAT rate for tourism, it could close 2.5 billion euros of investments in tourism by 2030.

"Croatia has the highest VAT rate for restaurant services in the Mediterranean, of 25%, and one of the highest VAT rates, of 13%, for accommodation. Only Greece has a higher VAT on accommodation but that rate was imposed by the EU and the question is what it will bring to its tourism in the long run," said Bogunovic, noting that the 25% VAT rate on food and drinks had only a short-term positive fiscal impact.

Zagreb Faculty of Economics professor Boris Cota said that the "price elasticity of the Croatian tourism sector is very weak and that if even if the VAT rate is reduced, consumers will not be the ones to feel it, as it will primarily impact corporate profitability and investments."

He noted that more radical measures were needed in terms of tax rates and that investment growth was more impacted by measures reducing the tax burden on labour and capital than by the VAT rate. (Hina) 

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