New taxes could freeze tourism in Iceland

The government of Iceland is planning a significant increase in taxes that could affect the nation’s tourism industry.

The government said that it was planning to increase its VAT (value added tax) very significantly, from its current 7 percent to 25.5 percent. The new tax increase would affect all aspects of tourism, including accommodation, restaurant meals and tourist attractions. Critics said that tourism would be badly hit by the increase since all amenities used by tourists would become more expensive. The government is planning to increase the rates from May 1 next year.

According to the European Tour Operators Association (ETOA), two-thirds of the island nation’s population lives in Reykjavik, which means that foreign visitors are the main users of hotels. It was estimated that foreigners occupied 90 percent of hotel rooms in July 2012, so they will be hit the hardest.

Some analysts are concerned that the price rise will affect the nation’s economy, as the inbound industry has become the country’s main income earner over the past fifteen years. Figures indicate that foreign arrivals in 1997 were 210,000, and in 2011 they had risen to 598,000.

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 percent, effectively punctures that impression. What is strange is that Iceland has been a textbook example of the virtues of cutting indirect taxation in tourism. In 2007, it halved tax on tourism services from 14 percent to 7 percent. By 2008, tax receipts from tourism were 6 percent higher than they had been in 2006.

Jenkins is also concerned that the price rise will come into effect at the start of the inbound tourism season, and will therefore have maximum impact on the tourism industry. It will also penalise any operator who has signed contracts and published brochures that feature Iceland for next year.