PKF is one of the corporate sponsors to MHRA, a major association in the tourist sector representing 70% of all hotels in Malta and 35% of all restaurants, which over the past 50 years has striven to improve the quality of the tourist product.
PKF has accepted to compile a study and present this to MHRA in order to use it as a tool with the authorities with a view of proving that a reduction in VAT could in general lead to an enhanced gross value added and would also have a progressive effect on the viability of hotels. The preparation of this extensive econometric study could only be achieved in the short span over the summer months due to the co-operation of a number of hotels which participated in an ad- hoc survey. Reliance was placed on the statistics issued periodically by NSO, BOV, MHRA hotel surveys and other technical publications sources. Credit goes to Professor Lino Sant, head of the Statistics Department at University who accepted to supervise the work of three graduate statisticians and other staff through this process. It was a team effort to finish this study for evaluation by MHRA council members. This study can be instrumental to galvanize the mindset among stakeholders that the hospitality industry faces many challenges but if adequate investment is secured it is capable of producing a respectable multiplier advantage due to its many linkages with other sub sectors of the economy. It is a fragile industry which depends on its survival on a number of exogenous factors and thus needs careful nurturing by all its stakeholders.
The PKF study illustrates the possible consequences on elasticity of demand given that the government reverses the (5% to 7%) 40% increase in VAT rate and reverts to charging the lower rate of 5% but it excludes the computation of the multiplier effect on other industries and consumer institutions.The results obtained suggested that Value Added Tax (VAT) had a negative elasticity in relation to the gross value added (Refer to Section 6.3 of the study). Hence by decreasing VAT, an increase in gross value added would be recorded. The econometric model was then used to predict future figures for gross value added generated by hotels as well as gross value added generated by accommodation using both 5% and 7% VAT rates in order to enable a comparison between the two predictions. Certain predictions were made using the time series models of which the main assumption was that the VAT rate of 5% came into effect as at October 2013. Due to a lack of information in certain areas, a number of assumptions were made to estimate a host of variables. It is interesting to note that 65.6% of all the hotels surveyed would reduce their prices partially in the event of a VAT decrease. By attracting larger volumes of tourists, hotels would be inclined to hire more employees in order to cope with the larger amounts of visitors and 56.2% of hotels surveyed said that they would increase the number of employees marginally if there was a VAT decrease. Again 65.6% of those surveyed believed that there were other factors governing any change in accommodation prices, besides VAT.
On the 1st of January 2011, a higher rate of VAT on accommodation was introduced. The model clearly showed that using a 5% rate of VAT on accommodation, the values obtained were much more promising than those when using a rate of 7%. At a 7% rate of VAT, gross value added by accommodation was predicted to increase by 19.1%, to €200 million in October 2013 up to September 2014 when compared to October 2011 up to September 2012. Conversely, a 5% rate of VAT applicable as of October 2013 predicted an increase in October 2013 up to September 2014 of 42.7% when compared to October 2011 up to September 2012, giving a total of €240 million therefore, an increase of €40 million. Of course, one must take into consideration the issue of VAT revenue lost by the government. However, as mentioned earlier, the multiplier effect will also come into play. As the number of tourists will rise, other industries such as restaurant, food and beverage services, public transportation, airline and airport operators and retail will also experience an increase in the demand for their products and everything remaining equal this may encourage these industries to employ more and hence increase not only the number of gainfully employed but also the gross domestic product of the entire country.
Readers who are interested in reading the study may apply to MHRA for an advance copy of the Executive Summary. Once the publication is presented to the members at the Annual General Meeting planned to be held next month the full document will be published. Further enquiries can be posted to Tiziana Gauci - Head of Surveys on email [email protected] or call 21484373.
The writer is a Head of Surveys dept in PKF an audit and business advisory firm.