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CONSTANTINE PORPHYROGENETUS INTERNATIONAL ASSOCIATION

Journal of Management Sciences and

Regional DevelopmentISSN 1107-9819

Issue 7, December 2011 Editor-in-Chief: John Karkazis ()

TAXATION AND COMPETITIVENESS IN THE HOTEL BRANCH: THE CASE OF 4 AND 5 STAR HOTELS OF KOS ISLAND, GREECE

Theodoros Vlachos

MSc in Tourism Management

Ministry of Finance / Taxation Auditor

e-mail:

Dr. MihailN.Diakomihalis

AssistantProfessor, EpirusTEI

Address: Laskaratou 6, Preveza, 48100, Greece

e-mail:

Dr. Dimitris G. Lagos

Assοciate Professor of Tourism Economics and Tourism Business Administration,

Department of Business Administration,

University of the Aegean, Greece

e–mail:

Abstract. The present paper investigates and evaluates all kinds of taxes, municipal dues and other tax charges imposed on the hotel businesses, and determines the influence of taxes to the hotel competitiveness. This research goal is pursued, with the implementation of a methodological frame for the definition and assessment of taxes, fees and other charges, regarding four and five-star hotels on the island of Kos, by means of a suitably structured questionnaire and an interview. Based on the empirical results, our analysis reveals the great size of tax charges imposed to hotel sector, noting they also have a non-reciprocal nature regarding the hotels. Furthermore, the research on a theoretical basis, suggests ways of obliteration obstacles and forwarding the development of hotels such as: tax facilitations, reduction of bureaucracy, abolition of certain municipal dues and charges and their incorporation as a percentage form into the hotels profits. Finally, alternative policies for improved structural programming and effective application of a tax policy are suggested, along with the improvement of the provided services quality and the creation of competitive advantage in the hotel branch.

1. INTRODUCTION

The tourism product is levied directly and indirectly by a large number of taxes and duties that are paid either by tourists or by tourism businesses.

The objective of taxation is to collect income that will be used to fund infrastructure works which will improve the service provided both to foreigners and resident tourists and “to maintain the environmental quality of a tourism destination high” (Brida1 & Pereyra, 2009:55). Tourist taxes have become an important source of revenue for many tourist destinations (Bonham and Gangnes, 1996:1281). The nature of the tourism industry makes it an ideal target for tourist taxation (WTO, 1999:7). Taxing tourism is relatively less politically conflicting since tourists are not taxpayers (Gooroochurn 2004:2) and they are rarely voters in the destination country they visit (Gooroochurn and Sinclair, 2005:479). Taxing became in fact a very common policy instrument, with the aim of controlling the negative impact of tourism on the environment (Brida1 and Pereyra, 2009:48).

Each branch of the economic activity that takes part in the tourism activity has its own particularities and faces a different taxation treatment. Brida1 and Pereyra assume the existence of a lump sum tax in the accommodation sector. Taxes on hotel rooms have become a popular tax instrument for many states and localities. They are seen as a ready and politically palatable source of revenue by proponents, but as a significant tax burden by the hotel industry (Bonham. and Gangnes, 1996:1290)

Gooroochurn and Sinclair in their research on tourism taxation (2005:479), define that “taxes can be both inefficient and inequitable, if not set at optimal welfare maximizing levels, and may lead to retaliation by other countries. Clearly, tourist taxation has become a contentious issue and, given its growing importance in both developed and developing countries, greater understanding of its economic underpinnings and effects is necessary”.

Among the many economic studies concerning tourist taxation, we have searched those of the following researchers: Schubert, (20090, Bridal and Pereyra, (2009), Gooroochurn and Sinclair, (2005), Aguiló et al., (2005), Gooroochurn, (2004),Warnken et al., (2004), Palmer and Riera, (2003), Piga, (2003), Jensen and Wanhill, (2002), Forsyth and Dwyer, (2002), Bonham and Gangnes, (1996) and Himiestra and Ismail, (1992).

In Greece, over the past few years, overregulation increases in an impressive manner. Within the Tax sector, whereas theoretically measures are taken to have the legislation simplified, reality shows exactly the opposite. Every year more and more tax legislation, decrees and interpretative circulars are being issued. More specifically, with regards to VAT, the necessary legislation texts have multiplied since 1998, whereas revenues taxation also registers increase, but to a lower degree. The overregulation and the great volume of administrative texts that interpret the legislation, although they form an intensive source of occupation for the professionals (tax specialists, accountants, lawyers) render difficult the functioning of the businesses, increase the costs of the management of the taxation for the Government, as well as the cost businesses’ adjustment to this environment. Parallel, within this net of various adjustments, mediation, special relations and corruption mentality is preserved. At the same time a legal framework is formed that although is aimed to eliminate tax unfairness, in reality it introduces many inequalities. The extensive area of the legal work in the tax sector is deemed absurd. Although new activities and needs are created, the excessive volume of the legal work is not justified. The tourism legislation is separated without having a codification of the different laws that refer to tourism and more precisely the hotel branch yet.

It is therefore necessary that the State assumes initiatives in order to limit bureaucracy, providing to hotel businesses incentives and facilities in order to contribute essentially in the economic development and become more competitive in a healthy tax environment. This does not only entail a more favourable treatment of the hotel businesses, but it also requires a stability of the taxation system and avoidance of sudden changes in the taxation charging.

The purpose of this work is on one hand to explore, record and assess the taxation system (direct and indirect taxation) in force in the hotel sector in Greece and on the other hand to express the views of the sector’s business community regarding the role of taxation in the competitiveness of the tourism product, as well as their appreciation about the taxation reform through the decrease, merging or abolition of certain taxes.

2. STRUCTURE OF HOTEL BUSINESS TAXATION

According to The World Tourism Organization, 45 different types of taxes applied to the tourism industry, 30 of which are directly payable by tourists and 15 levied on businesses (Gooroochurn and Sinclair, 2005:479).

Table 1 includes the taxes applied to the Hotel sector, both, payable by customers and levied on businesses, according to the typology of WTO.

TABLE 1. Tourist tax Typology
Borders Hotels/Accommodation
Name of Tax / Payable By
1 / Bednight tax / Customer
2 / Bed tax / Customer
3 / Occupancy tax / Customer
4 / Differential VAT rate / Customer
5 / Surtax / Customer
6 / Sales tax / Customer
7 / Service tax / Customer
8 / Turnover tax / Business
9 / Hotel and restaurant tax / Customer
10 / Temporary lodging tax / Customer
11 / Hotel accommodation tax / Customer
12 / Lodging tax / Customer
13 / Fringe benefit tax / Business
14 / Payroll tax / Business
15 / Customs and excise / Business

Source: WTO (1998).

According to the study conducted by the Economic University of Athens published in 2000 (Patsouratis, 2000), the taxes that are imposed in the tourism activity amount to 40, 28 of which are paid directly by tourists and 12 are imposed to the tourism businesses.

The taxes imposed to hotel businesses in Greece are the following:

2.1 Direct business taxation

In terms of revenue taxation, hotel businesses belong to the service provision business sector. However, according to the economic theory, they are included in the secondary production sector, because the purpose of the business exploitation of residential facilities is tourists’ satisfaction through the transformation or processing of goods and services included in the productive process of the tourism product. Due to this perception, the legislation in Greece considered the revenues collected from the exercise of such activity as revenues from commercial activities.

2.2 Indirect taxes imposed to hotel businesses

The prevailing trend towards general indirect taxation started with Governor Regan in California during the late 1970s (Rghbendra, 1998) and was spearheaded by the supply-side economics of President Regan and Prime Minister Thatcher in the 1980s, under the intellectual influence of the Chicago School associated with Milton Friedman (Jensen and Wanhillm 2002:69).

A) Value Added Tax (V.A.T.). .

This is a general indirect tax that burdens domestic consumption and it is imposed in all stages of the production process, in the value added stage. VAT in the European Union has become a price parameter for international tourism flows within and from without the region, allowing countries to compete on the basis of lowering VAT rates (Jensen and Wanhill, 2002:78). In the Dodecanese region, and consequently in Kos island, the VAT coefficients are applied and are in force reduced by 30%.

B) Municipal Tax (stay tax)

The tax coefficient is 2% and it is imposed to all hotel revenues, whereas the duty on the purchase of temporary residence in short-stay accommodation is imposed only to the income from the food and beverage sections of the hotel.

C) Municipal Tax of Dodecanese (MTDO)

The Municipal tax is calculated by applying the coefficient of 0.60% to the gross revenues of the hotel unit of the Dodecanese islands. The aforementioned is paid every three months and is increased by adding 5% on a monthly basis in case of late payment.

D) Large Property Holding Tax (LPHT) (as it was in force until 2006)

Exempted of tax are property buildings and the other components of land property that also comprise the equipment and constructions in general that are solidly associated to the land property and are own used for the production and commercial exercise activity. Especially in the case of hotel businesses, the exemption also covers 50% of the value of the land that belongs to them and is used for their operational needs (i.e. the main hotel building, the car parking areas, sports areas etc.).

E) Property Surplus Value Taxation (PSVT)

The surplus value (Law 2065/1992 and Law 2443/1996), which is defined by the readjustment every 4 years of the property value, which is mandatory by law for hotels that function under the form of corporations and keep mandatory C-category records according to the Greek Code for Accounting Books and Records (Presidential Decree 186/92). Surplus value coefficients are for land properties between 1.80 and 1.10 and for buildings between 1.60 and 1.05.

F) Real Estate Tax (RET)

The tax coefficient is established by decision of the Municipal or Public Council and is in force for the following years until the application of a modification varying between 0.25% and 0.35%,unified for their entire administrative district. Pursuant to Law 1080/1980 the common part duty was imposed in favour of Local Authorities (i.e. placement of tables and chairs) (Finokaliotis, 2001:194).

G) Foreshore Usage Duty and Public Areas Duties

The Foreshore usage Duty and the Public Areas Duties are defined according to the lowest room price in combination with the business number of beds. From this duty are exempted the hotels that are located on the foreshore and have been allocated to GTO. In this case the charge is paid to GTO.

H) Potential Duties

According to Law 1828/1989 no. 25 paragraph 14, Local Authorities may apply duties to services or local works in their area that contribute to the quality of life and development of the area in order to better serve citizens. For example, the drilling duty that is imposed as standard.

I) Advertisement Duties

A tax attributed to the Municipality is imposed to a percentage of 2% for all advertising expenditure incurred by the hotel group in question.

Apart from the aforementioned taxes, the hotels are also charged with special taxes, but such charges are not applied only to hotels, but to all businesses, such as:

  • Capital Accumulation Tax
  • Stamp Duty
  • Intellectual PropertyandCopyrights levy ( IP&C)
  • Advance Tax payment

3. STUDY METHODOLOGY

The methodological framework of the structured questionnaire used in the empirical study was based on one hand on the analysis and recording of the legal taxation framework in force in the hotel sector and on the other hand on the assessment by the businessmen of the degree of charges of each tax category.

The study sample refers to the 4 and 5-star hotels of Kos island, which is the second developed tourist destination of the Dodecanese islands (after Rhodes) and its airport ranks fourth nationwide concerning international tourist arrivals. The study was conducted in the interval April to May of 2006. The 5-star hotels that were used in this sample were three (3) covering 100% of the total number of 5-star hotels in Κos. Respectively, the 4-star hotels included in the sample were eighteen (18) out of 35 available on the island, namely a percentage 51.4% of the total of this particular category. We believe that the sample (21 hotels, representing 84%) is satisfactory and representative with regard to the 4 and 5-star hotels. The used sample in terms of percentage of the total number of hotels (249 hotel units) operational on the island corresponds to 8.4%. The percentage of the sample of the empirical study in terms of the total number of 4 and 5-star hotels amounts to 62% of the total number of rooms and 50% of the total number of beds.

4. STUDY RESULTS

The first part of the results which come from the analysis and assessment of the existing tax framework that establishes the total taxes and duties levied on hotel businesses is synoptically presented below:

  • The percentage of taxes levied on the total of revenues is 8.21%
  • The percentage of taxes and municipal duties corresponding to expenses, is 8.89%, depreciation not included
  • The percentage of taxes and duties of expenses, is 6.84%, including depreciation
  • The percentage of taxes and municipal duties on expenses, depreciation and short term and long term loan interests not included, is 10.15%
  • The percentage of employers social insurance contributions on expenses is 34.92% and for the revenues it is 37.88%

The second part of the results comes from the analysis of the opinions of 21 hotel businesses that took part in the empirical study filling in the questionnaire regarding the research of taxes and duties and each type of tax charges in favour of third parties imposed to hotels.

OPINION ABOUT THE TAX CHARGES

A) / Positive opinion / 10/21 / Positive percentage / 47,5%
b) / Negative opinions / 8/21 / Negative percentage / 38%
c) / Rather positive / 2/21 / Percentage / 9,5%
d) / Neither positive nor negative / 1/21 / Percentage / 5,0%

It is evident that the 47.5% of the sample have positive opinion about the tax charges and 43% negative. 9.5% answered neither positive nor negative, whereas the rest of the percentage has rather positive view.

OPINION ABOUT MUNICIPAL TAXES

a) / Positive opinions / - / Positive percentage / 0%
b) / Negative opinions / 19/21 / Negative percentage / 90,5%
c) / Rather positive / - / Percentage / 0%
d) / Neither positive nor negative / 2/21 / Percentage / 9,5%

In this particular case the overwhelming percentage, amounting to 90.5% has negative opinion about municipal duties, whereas 9.5% expresses neither positive nor negative opinion. It is noteworthy the fact that not even one positive opinion about municipal duties has been recorded.

HIGHEST CHARGE: TAXES or MUNICIPAL DUTIES

a) / Taxes - / 8/21 / Percentage / 38%
b) / Municipal duties / 13/21 / Percentage / 62%
Total / 21 / 100%

This question explores which charge is deemed higher by hotel businesses between taxes and duties. Based on the recorded opinions, we can conclude that municipal duties represent more, with a percentage 62% due to the businesses (13 out of 21) than taxes, that represent 38% (8 out of 21).

HOW DO TAXES AND MUNICIPAL DUTIES AFFECT BUSINESSES

A LOT / ENOUGH / A LITTLE / NOT AT ALL / PERCENTAGE
a) / VAT / - / 9.5% / 90.5% / - / 100%
b) / Income Tax / - / 29% / 71% / - / 100%
c) / LPHT / 19% / 19% / 14% / 48% / 100%
d) / PSVT / 9.5% / - / 24% / 66.5% / 100%
e) / Freelancer tax / - / - / 14% / 86% / 100%
f) / Employees Income Tax / - / 9,5% / 14.5% / 76% / 100%
g) / MTDO / 100% / - / - / - / 100%
h) / Duty on the purchase of temporary residence in short-stay accommodation / 86% / 14% / - / - / 100%
i) / Municipal duties / 81% / 19% / - / - / 100%
j) / Hellenic Chamber of Hotels (HCH) levy / 9.5% / 9,5% / 14% / 67% / 100%
k) / IP&C levy / 14% / 9.5% / 76.5% / - / 100%
l) / Lighting-Public Areas / 14% / 67% / 19% / - / 100%
m) / Foreshore usage / 67% / 28.5% / 4.5% / - / 100%
n) / Advertisements / - / - / - / 100% / 100%

In the case of this question, the Municipal Tax of Dodecanese (MTDO) is the Duty affecting business 100%, the Duties on the purchase of temporary residence in short-stay accommodation represent 86%, Municipal duties (Bill issuance fees) - 81%, Foreshore usage - 67% and LPHT represents less, with a percentage of 19%. The IP&C tax and Lighting-Public Areas with a percentage of 14%, whereas the HCH Levy and Surplus value tax with 9.5%. Business is affected enough by the Lighting- Public Areas with a percentage of 67%, the Foreshore usage with 28.5% and Income Tax with 29%, LPHT and Municipal duties with 19% whereas the Duties Duty on the purchase of temporary residence in short-stay accommodation with 14%. In the end, VAT, the IP&C tax and HCH affect the business only with a percentage of 9.5%. It seems that the hotel businesses are affected little by VAT with a percentage of 90.5%, the IP&C tax with 76.5% and Income tax with 71%. Next come the Surplus value tax with 24%, the Lighting- Public Areas with 19%, Employees Income Tax with 14.5%, LPHT, the Freelancer tax, the HCH Levy with 14% whereas the Foreshore represents a percentage of 4.5%. It is not proved at all that the Freelancer tax with a percentage of 86%, Employees Income Tax with 76%, HCH Levy with 67%, Surplus value tax with 66,5% and LPHT with 48% affect them.

DEGREE OF INFLUENCE OF TAXES AND DUTIES OVER PRODUCT COST

A LOT / ENOUGH / A LITTLE / NOT AT ALL / PERCENTAGE
a) / VAT / 76% / 14,5% / 9,5% / - / 100%
b) / Revenues / - / - / - / 100% / 100%
c) / LPHT / - / - / 9,5% / 90,5% / 100%
d) / Surplus value tax / - / - / 9,5% / 90,5% / 100%
e) / Freelancer tax / - / - / - / 100% / 100%
F) / Employees Income Tax / - / - / 95% / 5% / 100%
g) / MTDO / - / 67% / 33% / - / 100%
h) / Duty on the purchase of temporary residence in short-stay accommodation / 100% / - / - / - / 100%
i) / Municipal duties / - / 76% / 14,5% / 9,5% / 100%
j) / HCH levy / - / - / - / 100% / 100%
k) / IP&C levy / - / 81% / - / 19% / 100%
λ) / Lighting- Public Areas / - / - / 95% / 5% / 100%
μ) / Foreshore usage / - / 9,5% / 9,5% / 81% / 100%
ν) / Advertisements / - / - / - / 100% / 100%

In the case of this question the duty on the purchase of temporary residence in short-stay accommodation comes first with a percentage 100% because this particular tax charges 2% directly onto rooms. Next comes VAT with a percentage of 76% because it may not represent cost as far as accounting itself is concerned, it is however a tax charge that increases the price of the offered product and more exactly the price of the rooms by a 6% making each hotel business to be less competitive as compared to its direct competitors. The results show that room prices are affected enough by the IP&CLevy with 81%, Municipal duties with a percentage of 76%, MTDO with 67% (it represents 0.6% to 0.8% of the total turnover of each hotel unit), VAT with 14.5% and Foreshore usage with a percentage of 9.5% (it is ½ of the declared price of the rooms of their total for each hotel). Little affect the Lightning and Employees Income Tax with a percentage of 95%, MTDO with 33% and with 9.5% VAT, LPHT, Surplus value tax and Foreshore usage. In the end, rooms are not affected at all with a percentage of 100% by Advertisements, Income tax, Freelancer tax and HCH Levy. Next come LPHT and Surplus value tax with 90.5%, Foreshore usage with 81% and IP&C Levy with a percentage of 19%. So the only taxes that are levied directly on rooms of the hotel business are VAT and the Duty on the purchase of temporary residence in short-stay accommodation.