The Impact of Tax Reform on the Hospitality Sector: Some Evidence of the Republic of Croatia

Abstract

In this paper authors argument that the increase in VAT for restaurant/catering services will have negative influence on the tourism sector and consequently slow Croatian economy which is heavily dependent on tourism. This increase will negatively influence the price competitiveness and the overall competitiveness of the tourism sector. According to the latest Travel and Tourism Competitiveness Report 2015, Croatia has been ranked 33 rd out of 141 countries (scoring 4.3 of 7). Looking at the price competitiveness pillar which measures how costly it is to travel and invest in the country, Croatia has been placed on 101 st place. Claiming that business operating in the catering industry did not take advantage of the preferential (lower) VAT rate of 10% (01/01/2013) and 13% (01/01/2014) to increase its competitiveness cannot be accepted. The employment cycle in the tourism sector began with the targeted VAT relief on catering services in 2013. The research results have shown the existence of strong correlation between accommodation and catering services, particularly when it comes to the creation of new jobs and protection of existing ones. Delving into the relationship between taxation and the profit margin, authors conclude that Croatian businesses operating in the restaurant and catering industry do not have space to amortize shocks derived from the increase of VAT tax to 25%. The only way to amortize shocks would be the price increase or the decrease of product/services quality. This can only result in the loss of the competitiveness of the tourism sector.