VAT Is Back

Economic News

22 Jul 2010
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The inexpensive prices that make Bulgaria such an attractive destination for international tourists may begin to erode next year, as new legislation begins to put the squeeze on the industry.

Under a new draft law approved by the cabinet last week, from next year the rate of value-added tax (VAT) for the hotel industry will be gradually increased until it reaches the standard rate of 20% in 2009.

While hotel services are currently charged at the regular 20% rate, there is a 65% rebate of the tax available for hotels selling their services abroad - for example package deals for German or UK tourists. After the rebate, this amounts to what is effectively a 7% VAT rate.

Beginning in 2007, all hotel services will be charged at 7%, regardless of where they are purchased. This lower rate is seen as a victory for the hotel interests lobbying the government for more preferential treatment in an effort to boost tourism. But the lower rate is only temporary, as it will increase to 14% in 2008 and reach the equilibrium level of 20% the following year.

While the move will make it more difficult for operators abroad, it will also level the playing field and put an end to a system that in essence penalised companies that sold packages locally. In addition, the bill indicated that the government had pledged to increase subsidies for the tourism sector and offer preferential funding schemes for resorts that attract foreign tourists.

Through previous efforts of preferential tax structures for hoteliers as well as current and future plans envisioning subsidies and international promotional projects, the Bulgarian tourism industry has thrived.

Beds available in the Black Sea towns of Varna and Burgas have jumped from 38,508 and 28,366, respectively, in 2002 to 60,428 and to 78,113 in 2005, according to the National Statistics Institute. During the same period of time, the number of citizens travelling from abroad to Bulgaria for the purpose of tourism rose from 2,992,590 in 2002 to 4,090,421 in 2005.

But with this phenomenal success comes a few growing pains as well. Overbuilding in certain areas of the country - especially the coastal and mountain resorts - has forced the authorities in some cases to take action to protect both the industry and the local population from overzealous developers looking to capitalise on the trend.

In an effort to slow the unsightly development, the government sent a bill to parliament in February 2006 that is intended to restrict construction in coastal areas. The draft imposes different rules for two different sections of land: coastline and adjacent forest areas - zone A - and inland areas that stretch back two km from the coast - zone B. Under the new law, only 20% of zone A area should be covered by buildings, none of which should exceed 7.5 metres. In zone B, built-up areas are not to exceed 30%, and height is restricted to 15 metres.

In similar fashion, officials in the rapidly expanding ski destination town of Bansko have also implemented restrictions intended to ease the stress on the local infrastructure. The municipality has divided the resort town into construction and villa zones, each with different building height restrictions imposed on them. The Gramadeto, Sveti Ivan, Gurovitsa, Karantia, Asanitsa and Sredoreko areas have been zoned for construction with a three-storey height limit while the villa zones will be restricted to two floors. In a bid to make it more costly to purchase and develop land within the municipality and relieve stress on inadequate infrastructure, the local government also increased property tax by 420%.

For some, the legislation comes too little too late. According to industry expert and former two-term chair of the Sofia Tourism Council Rumen Draganov, the lives of average Bulgarians in these resort towns have already been adversely affected by the growth.

"It's a stupid example of development," Draganov told OBG in February 2006. "In the end those people who sold their property end up being poor servants to rich Bulgarians and foreigners."

Others in the industry agree that the government has reacted tentatively to curtail unsightly and illegal construction projects for a variety of reasons. This in turn has had a negative cumulative effect on the industry as a whole and devalues the product that each operator is trying to sell.

While there is legislation currently on the books designed to prevent just such occurrences, in many cases the law is not enforced or investors are able to find loopholes in the system. For this reason, some in the industry remain sceptical as to how effective the new codes will be.

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