How Will Iceland VAT Increase Affect Tourism Numbers?

The cost of visiting Iceland is likely to rise next year after the country’s government announced plans to triple its VAT on accommodation, restaurant meals and tourist attractions, the Telegraph is reporting.

The proposal, which would see VAT increase from seven percent to 25.5 percent from May 1, 2013, has been criticized by tour operators, who have suggested that travelers could be put off visiting the country.

Iceland’s long-established reputation as a costly holiday destination was transformed by the global financial crisis and the country’s banking collapse, which saw the value of the krona plummet against the pound and the euro.

That, combined with the eruption of the Eyjafjallajökull volcano in 2010, which increased interest in Iceland’s geological attractions, has seen the country soar in popularity with foreign travelers: Iceland reportedly attracted 210,000 overseas travelers in 1997, according to the ETOA. That had increased to nearly 600,000 in 2011, and is expected to rise by a further 16 percent this year.

Tom Jenkins, chief executive of the European Tour Operators Association, said 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 seven percent. By 2008, tax receipts from tourism were six percent higher than they had been in 2006.

Minister of Finance Oddný Harðardóttir says that the tourism industry will be given more scope to absorb the tax hikes but that canceling the tax has not been discussed and the budget now assumes revenues from the new tax, IcelandReview adds. The tax is expected to generate ISK 2.6 billion (USD 21.4 million, EUR 16.6 million) next year and ISK 3.6 billion (USD 29.6 million, EUR 23 million) in state funds annually after that, Icelandic website reports.

The Icelandic Travel Industry Association has harshly criticized the plans but Oddný argues that it is necessary for the industry to grow under realistic conditions and not with an advantage over other industries. The tourism industry is currently exempt from the full VAT rate.