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Rethinking taxing tourism

Sir Ronald Sanders

Sunday, June 23, 2013    

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ARE governments in the Caribbean killing the goose that lays the golden egg? This question relates to the number of taxes that governments are applying to the tourism industry and, particularly, to the cost of aeroplane tickets for flights originating in their countries.

In some cases, the cost of government taxes far exceeds the actual fare charged by the airline. Intra-Caribbean travel has been seriously affected. For instance, it is cheaper to travel from some Caribbean countries to New York, Miami and Toronto than it is to journey to nearby Caribbean states.

This, of course, has a harmful effect on tourism apart from the fact that people-to-people contact, which should be at the heart of a Caribbean "community", is also undermined. Caribbean people are also tourists. For some Caribbean countries, Caribbean tourists represent their second largest market.

The taxes applied by governments on tourism-related activity is akin to adding costs to exports making them more expensive and less competitive in the global market. In other words, it is like shooting yourself in the foot, and thereby giving your competitors in a race for tourists an unrestrained opportunity to beat you. This leads to tourists choosing less expensive destinations. The consequence is that fewer tourists come to the Caribbean, foreign exchange earnings decline, income of tourism-related businesses falls, and workers are laid off.

Vincent Vanderpool-Wallace, the former tourism minister of The Bahamas and also former head of the Caribbean Tourism Organisation (CTO), recently produced an important paper on Caribbean tourism in which he pointed out the following: "Hotel occupancies across the region average 60 per cent annually and tourism represents some 15 per cent of regional GDP. In some Caribbean countries, the tourism contribution to GDP is as high as 80 per cent. It does not take much arithmetic to see that if occupancies could be advanced to 90 per cent, the tourism contribution could be increased by some 50 per cent."

He also makes this telling point: "It is very odd that world trade agreements have removed so many of the taxes on goods travelling across borders, yet we have seen steady increases in tariffs on people crossing borders."

For Caribbean countries, increased taxes on people travelling is not good for any of their economies — certainly not good for the countries that are highly tourism-dependent, such as Antigua and Barbuda, The Bahamas, and Barbados, and not good for countries that have lost preferential markets for their main agricultural products and are trying to develop a tourism industry to earn foreign exchange and create jobs.

Vanderpool-Wallace, in his carefully argued paper, drew attention to a PriceWaterHouseCoopers study on the effects of the Airline Passenger Duty (APD) on the economy of the United Kingdom. Apart from the negative effects of the APD on travel to the Caribbean, the study showed that "the removal of that APD would result in a US$788 million net gain in UK taxes".

That study has lessons for Caribbean governments that now apply taxes to their vital export — tourism.

But maybe finance ministers, hard-pressed to find monies to pay for myriad demands, need convincing that the removal of these taxes would bring in greater revenues. In this connection, perhaps the secretariat of the Caribbean Community (Caricom) might join with the CTO and the Caribbean Hotel and Tourism Association (CHTA) to conduct such a study for governments. The European Union and the Canadian International Development Agency have regional funds to which application could be made to finance such a study. Why not take advantage of the opportunity and get an informed and scientific basis for the judgement being made about taxes on the tourism industry, including air travel?

On the subject of the APD that the United Kingdom Government has applied to Caribbean travellers, while Caribbean governments and tourism officials have been fighting this issue at the political level for some years, it should be evident now that no amount of political lobbying will shift the British policy position. The Caribbean grievance has to be taken to an independent body for redress or, with polite apologies and offers to address the problem as soon as the UK's own economic circumstances improve, nothing will be done.

Caribbean governments that are complaining about the APD could also lead the way in influencing the British Government by eliminating or reducing their own taxes. Such action would also have the beneficial effect of lowering the cost of air travel to the region, making it more competitive, bringing in more visitors, increasing foreign exchange and revenues, and producing more jobs.

On a related matter, 10 Caribbean countries (nine Caricom states and Cuba) have "Approved Destination Status" for tourists from China, now the world's second largest economy with a middle class that will overtake the size of the US middle class in a few years. The number of Chinese tourists was 70.3 million in 2011, expected to rise to 82 million this year. Yet, no real effort has been made to develop this market.

To its credit, the Barbados Tourism Authority has recently started doing so by inviting representatives of three Chinese tour operating companies to visit. They are: Shanghai Airlines Tours International, China CYES, and Huamei Holdings. Barbados is trying to target the wealthier end of the Chinese market.

But three vital steps remain. The first is to remove the requirement for Chinese to have visas to visit the designated Caribbean countries; the second is to create awareness of the Caribbean in China; and the third is to build strategic partnerships with tour operators and China Airlines to bring tourists to the region.

China Airlines flies to New York and to Brazil. Part of the strategy should be either to encourage China Airlines to fly on to different Caribbean destinations in the course of a week, or to work out arrangements for other airlines to pick up Chinese passengers bound for the Caribbean from New York and Boa Vista.

Removing taxes on tourism in the Caribbean would also help to reduce the high costs of travel from distant China.

Getting tourists from China is a big leap. It requires attention now to build the structures to make it work. Meanwhile, the Caribbean continues to have nearby markets in North America and traditional markets in Europe from which they can still benefit. But the benefits won't come if taxes on tourism discourage tourists. It's time to rethink taxing this vital export.

Sir Ronald Sandersis a consultant, visiting fellow at London University and former Caribbean diplomat

Responses and previous commentaries: www.sirronaldsanders.com

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