A government plan to reduce hotel costs in Germany by lowering the rate of value-added tax on room rates is in danger of having the exact opposite effect, experts warned last week.
German travel management association VDR and the VAT recovery specialist Meridian Global Services each said last week that the planned VAT reduction from 19 percent to 7 percent would paradoxically push up hotel costs. Germany's parliament, the Bundestag, voted to implement the reduction last week and the legislation goes before the Bundesrat, which represents the country's 16 federal states, for ratification on Dec. 18. Meridian is urging its German clients to register their concern with local government representatives ahead of the vote.
The main reason the VAT rate cut could push up costs is that German hoteliers do not intend to pass most of the savings to customers. A survey of members of German hotel and restaurant association Dehoga found that on average hotels expect to pass on only 20 percent of the reduction. They will keep 50 percent for renovations, 20 percent for wage rises and 10 percent for other purposes.
At the same time, businesses only will be able to recover 7 percent of their room rate as reclaimed VAT instead of 19 percent. "In effect, this means that you will have the same hotel costs but when it comes to recovering the VAT, businesses will only be able to recover just over one-third of what is now being recovered and the hotels will keep the other two-thirds," wrote Meridian in a letter to its German clients.
"A similar stimulation approach was taken by the French government, reducing the VAT rate on meals in restaurants from 19.6 percent to 5.5 percent. This reduction was not fully passed on either and actually only reduced prices by 1.4 percent. It is estimated this will cost the French government €2.4 billion, and the finance committee of the French senate has already started to try and reverse the decision," Meridian wrote.
VDR pointed out that the VAT cut will push up costs in other ways. Meals, including breakfast, at hotels will continue to be subject to a 19 percent VAT rate, leading to additional accounting complexity and costs. It also means that many corporate contracts with hotels will have to be rewritten, because hotel rates inclusive of breakfast will need to be re-priced with a specified charge for breakfast so that VAT can be assessed accurately.
Yet another complication for German business travelers is that they are subject to complex laws regarding taxable expenses. The separate itemization of a breakfast charge will lead in some cases to them exceeding their daily allowances for food.
"The VAT reduction creates opportunities for investment and improved quality, but it also creates risks and additional costs for corporate clients and travelers," said VDR president Dirk Gerdom.
A spokesman for Dehoga told EuroBTN, "We expect hotels will offer special corporate packages because nobody wants to lose customers. In addition, investment in hotel refurbishment and better qualifications for employees will result in guests getting more value for their money."