Reduction in VAT on overnight stays: Deceptive packaging or an engine for growth?

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Reduction in VAT on overnight stays: Deceptive packaging or an engine for growth?

September 7, 2015, In Press Releases

The press photographs showed Chancellor Merkel relaxed and smiling when Germany’s liberal-conservative coalition government passed the so-called Growth Acceleration Act on December 4, 2009. After all, it was already the third stimulus package in the difficult times following the global financial and economic crisis. The cut in VAT for hotels was anchored in the legislation that the new Government’s announced in its coalition agreement on October 24, 2009. “This takes into account the current situation of the European competition in the hotel and catering industry. This regulation strengthens the German tourism industry, which is dominated by small and medium-sized companies”, the Federal Government’s 2009/10 annual report stated. From the outset, the reduction in hospitality industry VAT was accompanied by a fierce polemic discussion. ”Complete and utter nonsense” was the judgment of Dieter Ondracek, former head of the “Deutsche Steuergewerkschaft” (German Tax Officials’ Union). “Pork-barrel politics”, said Gerhard Schick, former Treasury spokesman of the Green party in the Bundestag (lower house), and in mid-December 2009, Michael Sommer, the leader of the DGB (trades unions’ federation) was still appealing to Germany’s federal states to block the package of legislation in the Bundesrat, Germany’s upper house. The “Wachstumsbeschleunigungsgesetz” (Growth Acceleration Act) even made it onto the German Language Society’s “Words of the year” list for 2009. With this tax cut, the industry had been hoping for investments at a time of significant falls in sales. This was the only way the German hotel industry could finally have a level playing field with its European competitors again, claimed the Federal Association of the DEHOGA (Hotel and Restaurant Association), summarizing its position on 9 November 2009.

In all the heated discussions, one concrete question arose: had the reduction in VAT for hotel stays really had made up for hoteliers’ earlier losses in terms of room rates and RevPar (revenue per available room) due to the 2009 financial crisis? Charging less VAT on hotel services meant increaseing the net room rate for hotels, provided they kept their gross prices constant.

The results of Fairmas’ own analyses in cooperation with the Allgemeine Hotel- und Gasttätten-Zeitung (AHGZ) in Germany help to answer the question. Fairmas experts processed data on 229 hotels of all categories that had been constantly active in the marketplace throughout the period (2006-2014). These included all types of hotels, from privately owned ones to global hotel chains. The figures ensure reliable reflection, since the results were not affected or distorted by any hotels that opened later. A total of 31 two and three-star hotels, 140 four-star hotels and 58 five-star hotels were included in the investigation.

The analytical view of the figures

Even though the ink on the legislation had not yet dried, the financial decision-makers in the corporations began negotiations with the business hotels to have the tax cut swallowed up in the prices that had already been negotiated. Greater financial leeway in difficult times? Hardly. In the leisure hotel trade, the picture was a little more differentiated: Here, the tax cut was not only passed in part on to the guests in the form of price reductions but the savings were also used by hoteliers to invest in their hotels or in their employees (for wage increases, recruiting new staff or training programs). As the DEHOGA’s Federal Association was able to determine (according to a survey on how the tax savings were used), far more than €2 billion has been invested by hoteliers in Germany since 2010. What effect did the tax reduction actually have on room rates? The answer: much less than had been intuitively assumed from the postulated acceleration in growth. From 2006 to 2014, RevPar growth was largely depressed throughout the country due to a welcome and steep boost in demand. However, in every hotel category, the increase in room rates was less than inflation. Only the five-star hotels managed to achieve RevPar growth that exceeded inflation. However, up to 2014, ADR was still below the inflation-adjusted value.

To arrive at these conclusions, Fairmas compared the RevPar actually achieved (nominal RevPar) during this period (in other words the figures that the company obtained from the hotels) with the inflation-adjusted RevPar figure. This inflation-adjusted RevPar is the RevPar, as it would have developed from the start of 2006 when the rate of inflation is taken into account. This is equivalent to zero growth. Likewise, the net room rate measured (the actual ADR) is compared to the inflation-adjusted ADR, which has only grown in line with inflation since 2006. The graphs show the average overall results for all hotel categories, as well as separately for the two, three, four and five star categories.

The two and three-star hotels reported a RevPar of €41.80 in 2006. Taking inflation into account, this was worth exactly the same in 2014 as the (inflation-adjusted) RevPar of €47.40. However, the actual RevPar was only €45.20. It follows that RevPar in this category fell in real terms, even if it was nominally higher than the 2006 figure. On average, the annual increase due to inflation alone amounted to 1.6%. However, the real annual increase was just 1% in this case. In addition, real growth occurred only when the average annual rise in the actual value exceeded the 1.6% inflation rate. Room rates have not changed since the starting year, and the effects of the weak price development on RevPar were only mitigated by the higher occupancy, which grew by a mean 0.7% per year.

In terms of the RevPar for all the hotels investigated, real growth could only be observed from 2013. In other words, nominal RevPar was higher than the inflation-adjusted RevPar. Annual average RevPar grew by 2%. At the same time, ADR was well below the amount needed even to ensure zero growth. Room rates rose by only 1.2% per year. Growth was thus only due to the distinct average increase in demand of 0.8% p.a.

Five-star hotels were able to achieve real growth in RevPar as early as 2012. This amounted to an annual average increase of 2.4%. Here too, demand increased above all (0.8%). But a glance at the graph also shows that (at least last year) room rates, which had been consistently below the inflation-adjusted room rate, caught up with the inflation-adjusted value.
Following the 2010 VAT cut, room rates in the four-star hotels almost reached the inflation-adjusted comparative value of nominal ADR, but then fell below it again.

Conclusion:

The VAT reduction in 2010 was a political signal and compensated for competitive disadvantages affecting the German hotel industry, because lower rates of VAT applied in 21 of the EU member states.

However, the harsh verdict pronounced by the figures does prove that the 7% boost for the hotel industry since 2010 has been unable to compensate for the losses from the 2009 financial crisis in terms of lower room rates. So is it just a lot of fuss about nothing? That would be putting it too narrowly, as many businesses took advantage of the tax savings to fund building and reconstruction work, as well as renovation, modernization and new purchases.

At the same time, the change in the tax rate in the winter of 2009/10 did encourage work on another of the industry’s long-term “construction sites” – to finally achieve equal tax treatment in the gastronomic trade – irrespective of the place of consumption and the type of preparation. Because, this way, the creation of new scope for investments and jobs is indisputed.

 

Contact:

Fairmas Gesellschaft für Marktanalysen mbH

Nadine Kilian
Sachsendamm 2
10829 Berlin

T +49 30 322 940 5 43
F +49 30 322 940 5 21
E nadine.kilian@fairmas.com

 

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