PARIS—“We have a dogmatic socialist government, which is against luxury and feels that it is OK to penalize hotel clients.”
That is how Francois Delahaye, COO for Dorchester Collection and GM of the palatial Hôtel Plaza Athénée, sums up the reasons behind the spiraling value-added tax rates for French hotels. From 1 January, VAT on French hotels rose from 7% to 10%—a move that many consider surprising for a country that in 2011 had one of the lowest rates of VAT on hotels at 5.5%.
“The previous (conservative) government reduced the VAT,” Delahaye said. “We asked Jacques Borel and his VAT Club to lobby for us in Paris, Brussels and London. Despite that we lost.
“It is a catastrophe and very bad for employment,” he said.
Since the French hotel industry managed to overturn the former 19.6% VAT in 2009, the rates have crept up with four progressive jumps. They are still just below the European average rate of 10.8% for hotel accommodation, but critics say the hike is crippling for the greater economy and tourism as well as hotel revenue.
“It is insupportable for our businesses, and will see many companies falter,” said Roland Heguy, president of hospitality union, UMIH, and owner of Hôtel The Windsor in Biarritz. “Thousands of jobs in small businesses are at stake. It will be a social and economic disaster.”
Heguy estimates one tax point to represent 10,000 job losses. Thus, the UMIH predicts 30,000 job cuts as a result of the latest hike.
The only solution for the sector is to either increase prices at the risk of losing some customers or accept cuts in profit margins, according to the union.
Passing the buck
Hoteliers have shown no reticence in passing the buck onto their customers, according to Delahaye.
“It is the customer who is going to pay the price. We have raised the price of the room and immediately recuperated the cost. There is no question of us bearing the burden ourselves.”
All hotels, he said, should do the same. Hoteliers in the budget sector, where customers traditionally wince more at increased prices, have not been slow either at deferring the cost to guests.
Nearly 90% of French hoteliers intend to raise their daily room rates to offset the new VAT, according to a December survey. To compensate, regional hotel associations immediately advised member hotels to lift nightly room prices by 3%. Many Ibis hotels already have done the same. In the case of the Ibis Gerland in Lyon, a standard room rose from a VAT-inclusive €69 to €71 ($95 to $98) to absorb the cost.
“The sector must remain united through this price increase,” said Pierre-Frédéric Roulot, president of the Louvre Hotels Group. “The VAT increase will certainly have repercussions on the price our clients pay. Our margins have been so reduced over the last few years that we no longer have any choice.”
The elevated VAT “will be very painful for French hotels,” he said, with independent hotels faring worse. “The decrease in revenue, especially for independent hoteliers, will certainly have consequences on employment.
“Our managers are lucky enough to be able to rely on a group, which is solid despite a difficult economic context,” Roulot continued. “In particular, they benefit from tools we have implemented to improve revenue, such as yield management systems, which independent hoteliers don’t have.”
The fallout depends more on geographical areas than brands, he added.
“Nonetheless, we would expect Première Classe hotels to suffer from the effects of this tax reform, as they are located in important catchment areas and have a very tight price structure.”
VAT variations by country
The European Union sets some VAT rules for its 28 member states, including minimum standard rates and reduced rates no lower than 5%. Within those limits, individual countries are free to determine their rates.
Denmark and Sweden have the highest VAT rates on hotel accommodation at 25%, followed by Spain and Lithuania (both with 21%) and the United Kingdom and Slovakia (both with 20%).
Despite virulent protest by the British Hospitality Association and a big pre-London Olympics bid by Travelodge UK—which is not affiliated with Wyndham Hotel Group’s U.S.-based Travelodge brand—to cut hotel VAT to 5%, it has remained at that level since January 2011.
“The high rate of VAT makes the U.K. very uncompetitive as a tourism destination,” the BHA said in a statement. “Tourism is the only export industry which is subject to domestic VAT.”
In 2011, the BHA pointed to France as an example of such job creation through lower hotel VAT. That was when France’s rate was 5.5%—beaten only by Luxembourg with 3%. Belgium, the Netherlands and Portugal offer the next lowest rates at 6%.
For an example of the benefits of shrinking VAT on hotels, all eyes are on Germany. In 2010, it dropped its hotel VAT from 19% to 7% in response to the economic crisis. Within a year, the German Hotel and Restaurant Association (also known as DEHOGA) claimed the tax relief had created more than 6,000 jobs and allowed its 5,000 members to invest nearly €858.9 million ($1.2 billion) in new acquisitions, as well as renovations and extensions, energy efficiency measures and staff training.
The situation is the same today, according to DEHOGA CEO Ingrid Hartges. “An ongoing survey by our Bavarian branch shows that state alone has so far invested nearly €600 million ($828 million) of savings.
“Hoteliers have used the VAT reduction not only for capital investment but also to create new jobs. According to Germany’s Federal Employment Agency, some 26,000 jobs were added to the hotel industry in two years from June 2009. That is an increase of 10.2% compared to 6.9% for the overall economy,” she continued.
“The VAT tax cut gave an important boost to the German economy and to employment. It has been a resounding success for the tourism industry and for the whole country. It benefited regional suppliers, guests and employees alike."
Hartges said 24 of 28 EU member states have a reduced VAT rate for the hotel industry—something she claims has swept in greater tax fairness and competition across the continent
