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Government’s Tax Plans Controversial

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Government’s Tax Plans Controversial

Icelandic money

Photo: Geir Ólafsson.

Iceland’s finance minister, Benedikt Jóhannesson, has put forward plans to increase VAT on tourism related services, while lowering the overall highest VAT rate.

Currently touristic services from hotel rooms to guided tours are taxed at 11 percent VAT in Iceland, which is the same as everyone in Iceland pays on essentials such as food. Meanwhile, the higher rate of VAT, payable on most items, including new cars, washing liquid, cinema tickets and clothes, is currently 24 percent.

The FM plans to move tourism into the higher bracket, but then to lower that bracket to 22.5 percent—making tourism services more expensive, but most other things slightly cheaper.

The plan has been criticized by the parliamentary budgetary committee, which claims the lower VAT rate would threaten the country’s economic stability, as there are already significant pressures, including the strong króna and rising house prices. Stimulating consumer spending with lower VAT might not be wise, they warn.

The plan is also criticized for the potential harm it could do to the tourism industry, RÚV reports.

Tourism operators warn that the strong króna is already making Iceland an expensive destination and that the industry’s stability is at risk. A consortium of small tourism businesses this week wrote to Benedikt with their concerns.

Among several examples given, one accommodation provider in the East Fjords stated that a rise in VAT would need to be paid for internally, as prices charged to visitors are already at their maximum sustainable level. He foresees, therefore, having to lay off his year-round staff member and close the business for the winter half of the year—a shame, he says, while Iceland is trying to broaden its appeal outside the summer season, and outside of the capital region.

Another small hotel owner told reporters he has never known so many cancelations before the summer season as this year, and the reason is clear: the Icelandic króna exchange rate. A VAT hike would be very damaging at this time, Hótel Bláfell’s Friðrik Árnason claims.

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