Greek tourism in a tough spot over proposed tax changes

PAROS (Greece) - Mr Alexis Kalaitzoglou makes a swift gesture to describe what he thinks about Prime Minister Alexis Tsipras: The shopkeeper of this busy tourist island pulls his leg back and swings it forward as if to give Greece's leader a good kicking.

Mr Kalaitzoglou is angry because his family's shop of jams, honeys and wooden handicrafts - part of a wider tourism industry that is the only bright spot in Greece's struggling economy - may be in for a rough ride.

A rise in consumer taxes on the Greek islands' goods and services such as the ones Mr Kalaitzoglou sells is one of the sacrifices creditors are seeking from Athens to unlock bailout funds that will allow Greece to remain in the euro zone. The tax hike is one of the sticking points thwarting a deal and prompting Mr Tsipras to call a July 5 referendum on the bailout terms.

Yet even before the vote, Greece is likely to default on a debt payment, setting off a financial crisis that could damage an upcoming tourist season expected to be one of the most vibrant in years.

The creditors want to raise VAT rates for services such as restaurants and hotels, as well as ending the tax breaks for islands like Paros in the Cyclades.

The tax breaks are intended to make resorts more attractive and also shield poorer, more remote communities from the higher costs of transporting goods. Raising them would force businesses to jack up their prices at the risk of driving customers away, or face a sharp drop in revenues.

"If the VAT rises to 23 per cent in all goods, we'd better jump into the sea and be done with it," said Mr Kalaitzoglou, 62.

On Paros and other islands, VAT rates are 30 per cent lower than on the mainland. For example, they pay a VAT rate of 9 per cent on food that could be raised to 23 per cent.

The anger of Mr Kalaitzoglou and others underscores Greece's dilemma as it flirts with an exit from the euro single currency.

So far, tourism - which accounts for nearly a fifth of Greek's yearly output - has shrugged off much of the country's economic gloom. The Association of Greek Tourism Enterprises reported a provisional 15.4 per cent increase in tourism arrivals through international airports in the country last year. Year-to-date data by the association put arrivals up by 17.5 per cent in the first quarter of this year.

"We all know the biggest importer of currency is tourism. If tourism is hurt, it will have a knock-on effect on the economy, a recessionary spiral and then how will lenders be repaid?" said Paros hotel owner George Mbafitis.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 29, 2015, with the headline 'Greek tourism in a tough spot over proposed tax changes'. Print Edition | Subscribe