VAT eroding Zim’s tourism competitiveness

VAT eroding Zim’s tourism competitiveness
Walter-Mzembi minister

In 2013, Africa received 56 million tourists up from 26 million in 2000.

THE introduction of the 15 percent Value Added Tax (VAT) on foreign accommodation may not help grow the tourism cake and neither does it guarantee that government will get the desired increase in revenue, writes Walter Mzembi, Minister of Tourism and Hospitality.
TOURISM plays a critical role in the economies of many developing countries and Zimbabwe is no exception.
Currently, the sector is recognised as one of the pillars anchoring Zimbabwe’s economic recovery and growth alongside agriculture, mining and manufacturing.
The new economic blueprint, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim-Asset) places tourism under the Value Addition and Beneficiation cluster.
This aptly recognises the sector’s potential as a quick win able to provide contribution towards value added services and export earnings.
International tourism in Africa has been growing steadily in recent years.
In 2013, Africa received 56 million tourists up from 26 million in 2000.
International tourism generates US$34 billion in exports in Africa, accounting for as much as seven percent of all exports and 56 percent of the region’s services exports.
Yet despite such progress, tourism in Africa is still in its early development stage, accounting for only five percent of international tourism, and faces several barriers impeding its further growth and competitiveness.
Over decades, tourism has experienced continued growth and deepening diversification to become one of the fastest growing economic sectors in Zimbabwe.
Currently, the sector contributes 11 percent to Gross Domestic Product (GDP) on the basis of 1,88 million arrivals and tourism export earnings amounting to close to a billion dollars.
It is my ministry’s objective to grow the tourism economy to US$5 billion from five million arrivals and 15 percent contribution to GDP by the year 2020.
However, before we can think of achieving that long term target, we need to realise the need to recover lost market share where our policy interventions have to emphasise in the interim.
The essence of our marketing and promotional activities should be taken in the context of the fact that we intend to push through a recovery strategy to recapture the glory days of 1999 where 27 percent of our visitors were from overseas markets.
It is important to note that as a destination our arrivals are falling under the High Volume Low Value bracket largely derived from African transit market, hence our concerted efforts to ensure we attract the High Spenders from European, Asian, the Middle East, Americas and other emerging markets.
Our performance as a destination is also telling when compared to how other key destinations in the region are faring in terms of attracting foreign visitors.
When matched with competitors, Zimbabwe is currently attracting more of the regional tourists who are low spenders compared to the overseas visitors.
Most of the visitors from the region are transit visitors travelling to destinations like South Africa and hardly spent meaningfully in our destination.
Therefore the introduction of a 15 percent tax on foreign tourist’s accommodation can easily tax to extinction the overseas market we are seeking to recover.
We have done a benchmark study of other countries in the region and the conclusion is that most do in actual fact charge VAT on foreign accommodation with variations observed on the quantum of the percentage charged.
However, Zimbabwe is emerging from a different background of debilitating European Union economic sanctions applied over the last fifteen years only repealed in November 2014 with Zimbabwe Democracy and Economic Recovery Act (ZIDERA) from the US still in force.
Zimbabwe still needs to win the perception war in its traditional source markets and hence needs to overcome much more than hospitality and products to regain its overall competiveness.
In Zimbabwe the 1988 Sales Tax Act recognised tourism as an exporter and zero rated accommodation services in order to encourage effective Foreign Direct Investment (FDI) and enhanced arrivals.
In 2003 the Ministry of Finance again exempted the sector when VAT was introduced.
It is our submission that the incentive was retained in order to grow effective FDI and enhanced tourist arrivals into Zimbabwe with huge downstream benefits such as the hospitality sector activities, curios, airport landing fees, parks entry fees etc.
Other countries such as Tanzania have actually repealed charging of tax on foreign accommodation.
Zambia is a telling case.
For many years travellers have been averse to travelling to Zimbabwe and a great deal of business has gone into other countries notably Zambia in the Victoria Falls area.
Instead of instituting a 16 percent VAT on all tourism services and which has proved extremely onerous to their tour operators and there have been a number of group cancellations, Zambia and Zimbabwe should take advantage of the legacy of a successful 20th Session UNWTO General Assembly they co-hosted to build critical mass into both destination instead of cashing in on the recovery.
The introduction of VAT is thus eroding our competitiveness. South Africa is a US$12 billion to US$13 billion tourism economy not by accident (exempts VAT on accommodation and has tax reimbursable policy on all tourists upon departure).
UNWTO position on taxation
The United Nations World Tourism Organization (UNWTO) expressed concern over attempts by the African Union (AU) to impose taxes on air transport and hotel stays in Africa, saying this will negatively impact the growth of the tourism industry.
The secretary general of the UNWTO, Dr Taleb Rifai is thus quoted: “Tourism tax in Africa is a threat to the competiveness of the region and to all African economies, which have tourism as a key pillar to their development”. On the basis of this, he has advised intelligent taxation urging cost-benefit analysis and opportunity cost studies before the imposition of added taxation on tourism.
UNWTO is instead urging us to look at tourism and travel facilitation, visa liberalization and connectivity as key policy issues to be addressed.
Furthermore, following the 56th UNWTO CAF Meeting and the Regional Seminar on Tourism and Air Connectivity in Africa held in Angola on April 28-30, 2014, discussions pointed to the urgent need to waive added taxation of air travel on passengers and hotel guests, as suggested by the AU in order to improve our competitiveness.
AU position on taxation
The position by the AU on Tourism Tax was adopted in principle during its 50th anniversary of the African Union Heads of States meeting in 2013 on the Alternative Financing Proposal Framework to introduce US$10 levy on all airlines passengers to, from and within Africa and a US$2 levy on hotel guest accommodation.
This was done without collective and broader consultations with African tourism ministers. Representations have been made to the AU Commission chairperson in the past (Indaba 2014 Ministerial Roundtable) and more recently Indaba 2015 Resolutions to use the office of CAF chair to engage the AU chairperson to look into this matter if we are to sustain African growth of tourism registered in the last few years.
We all agree that the African Union needs sustainable and sovereign funding and this should happen based on clear financial modelling, cost-benefit analysis and then provide creative means of raising money without having to over-burden one sector as the target for taxation.
The answer in this instance lies in Africa undertaking serious industrialisation, value addition and beneficiation to increase its export competitiveness that can generate additional income going forward.
While the proposed tourism taxation has the potential to raise substantial income for the AU budget, it also has the potency to fatally hurt the tourism sector to the extent that the envisaged monetary gains, coupled with our own country level taxes, will hurt us badly.
Local authorities attitude on taxing tourism assets
Recently, the Victoria Falls Municipality reviewed its rates on tourism operators by 650 percent. Efforts to engage the municipality through the Zimbabwe Tourism Authority, have not yielded positive results. This matter has been escalated to me and I will soon engage my local government counterpart to bring sanity to the discourse.
The general principle of keeping rates moderate, transparent and fair should be practiced, and local authorities should be carefully guided in treating tourism assets as partners as opposed to treating them as the cash cows to meet various competing financial interests of local authorities. Sector-specific disincentives should be reduced or eliminated over in favor of regionally comparable, and evenly applied rate system that help to increase the tourism asset base backed by investment incentives from which local authorities can have a bigger and more reliable revenue base.
Critical observations
? Tourism is a highly competitive market in which fixed products (destinations) are selected by mobile consumers with multiple destination choices, a dynamic that may increase the price elasticity of demand. Thus, the sector is particularly sensitive to issues related to imposed taxes and tax competition. A close analysis on how money could be made lies in the following generic illustration, in which we seek to show and justify that this is an already heavily taxed industry and again has multiplier effects in terms of contributing to the entire spectrum of the economy. The most critical point is that taxation should not prevent tourists from coming in the first place because we lose revenue across the value chain in terms of value added tax on products and other economic sectors.
? The outputs of the tourism industry are services, but many inputs are not. Tourism services meet both final demand (consumption by a tourist) and intermediate demand (purchase by a firm that also pays money to the government through tax).
? Taxing tourism may seem appealing and the easiest thing to do, however, it is important to take note that already this sector is contributing the most towards revenue when the bulk of taxes along the multiplier-value chain are aggregated. Hence, taxing inbound travel is akin to taxing exports and it erodes competitiveness. The distinction can be blurred between taxes principally paid by tourists as end users and those that mostly affect tourism businesses, depending on the degree to which taxes are directly passed on to tourists.
? The tax regime should treat sectors differently. Most of the tourism sector’s activities are generated by hotels, tour operators and others, who are particularly sensitive to compliance costs.
Effect of VAT on Zimbabwe’s accommodation
VAT charged on non-residents would have the effect of making accommodation prices more expensive than the competing entities.
This is especially so at a time when the tourism sector is trying to find out a way to peg prices competitively in the region in the presence of various constraints such as innumerable licences from various authorities in addition to other high input costs.
Research has shown that most leisure tourists prefer three to four star hotels and Zimbabwe is currently not very competitive in the SADC region when it comes to this category of hotel star rating.
The introduction of VAT on accommodation services for foreign tourists would have the effect of fuelling the already repellent pricing in the country and thus reduce the competitiveness of the country as a destination and ward off potential tourists.
It should be observed that destinations are different in that our competitors have not gone through the circumstances that characterise Zimbabwe as a destination. Zimbabwe has gone through a decade of international isolation and is reeling under the effects of sanctions.
Ideally, Zimbabwe is considered as an add-on destination among other highly competing tourism brands in the region at the moment, and we are working to get out of that stereotype to be the destination of first choice.
This explains our thrust on re-engagement, aggressive marketing and repositioning of our brand in the traditional and emerging markets.
The economic challenges experienced have also not spared the tourism product offering whose standard has gone down.
All this needs to be taken into consideration when introducing additional taxes on the sector. Add to this the use of multiple currencies and the absence of our own currency but more importantly the use of the US dollar as the anchor currency whose unintended consequences on price stabilization have wrought havoc to price competiveness and one begins to understand why a 15 percent tax in this currency makes our destination very expensive.
Call for intelligent taxation
The ministry is not against the implementation of the proposed VAT as we concur that taxation is indeed one of the primary tools for resource mobilisation by government.
However, we observe that implementing a VAT charge such as this, may only serve to boost government coffers in the short term, but the long term implications are serious.
The South African rand is taking a heavy knock from the US Dollar resulting in successive 15 percent declines in arrivals to Zimbabwe.
South Africa is a source market to Zimbabwe and the region, accounting for 70 percent of arrivals. Adding a full blown VAT will most certainly result in further decline.
The tourism sector contracts business a year or two in advance and an abrupt announcement such as this, leaves operators in a quandary with no option than to absorb the costs in order to avert booking cancellations.

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