Do tourist companies support a greater direct tax burden? The case of Spain

1 Do Tourist Companies Support a Greater Direct Tax Burden? The Case of Spain Ángela Pilar Granados Bernala, Pedro Atienza Monteroa* (ORCID: http://orcid.org 0000-0002-5347-511X) and Luis Ángel Hierro Recioa (ORCID: http://orcid.org/0000-0002-5868-5589) aDepartment of Economics and Economic History, University of Seville, Faculty of Economics and Business, Avda. Ramón y Cajal, 1, 41018 Seville (Spain). *Corresponding author, email: [email protected] Abstract Most of the literature on tourism taxation focuses on indirect taxes, on their use as a policy to promote tourism or as a system for collecting and controlling revenue. This document addresses an issue which has thus far remained almost unexplored; the direct taxation of tourism through the corporate tax borne by companies in the sector. The proposed objectives are twofold: first, to verify whether direct taxation leads to an additional tax on the tourism sector, which compensates for the lower collection due to the application of reduced rates in indirect taxation; and second, to ascertain whether there are differences between the different subsectors of the tourism sector in this regard. For this, a random sample of 16,266 Spanish companies for the period 2014-2018 is used, taken from the SABI (Iberian Balance Analysis System) base. Results show that Spanish tourism companies are taxed above average, although less than most subsectors of the services sector, such that it cannot be said that there is compensation for the lower VAT tax burden. However, the exception is travel agencies, who bear a much higher levy on corporate tax whilst at the same time enjoying a special VAT regime. Keywords: corporate tax, tourism companies, Spain, indirect taxation, tourism subsectors 2 1. Introduction In countries which see substantial tourist influx, and where the tourism industry contributes a high percentage to GDP, taxation of the tourism sector has the status of strategic taxation for two reasons: because of the sensitivity of public sector revenue to changes in tourism demand, and due to the strategic use made of it to generate incentive or disincentive effects, depending on governments’ desire to incentivize tourism production or to control its possible excess. Tax charges can be direct or indirect. They are direct when they are defined such that the tax is paid according to the individual characteristics of each taxpayer, and they are indirect when the tax is applied to transactions between subjects (Atkinson, 1977). Based on this distinction, direct taxes are those levied on income (personal income tax, corporate tax,…) or wealth (taxes on wealth), whilst indirect taxes are those levied on consumption, generally (Value Added Tax, VAT) or specifically (taxes on fuel, tobacco, alcoholic beverages, ...), or asset transactions. The tax policy applied to the tourism sector often revolves around indirect taxation on the basis of arguments such as: its low distorting impact, the exportability of the burden, the application of the principle of profit, and its use as a mechanism to correct negative economic effects (Gago et. al., 2006, 2009). The result is the proliferation of myriad excise duties, up to 40 types, which are applied by different countries depending on government priorities (World Tourism Organization, 1998). Special tax treatment is also often given within general indirect taxation, usually VAT, by applying reduced rates so as to favour the industry (European Commission, 2005; World Travel and Tax Policy Center, 2002).The relevance of these favourable tax treatments makes the literature on them relatively broad, from the early works of Combs 3 and Elledge, 1979, Mak and Nishimura, 1979 and Fujii, Khaled and Mak, 1985. However, there is an almost total lack of work addressing direct taxation. In general, countries often give direct tax treatment to the tourism sector that is similar to the one applied to other companies. However, favourable tax deals in indirect taxation may end up being partly absorbed by higher direct taxation. This latter question is relevant for two reasons: first, because part of the reductions in indirect taxation would have no impact on lower prices for tourists but would be having an impact on higher revenue for tourism companies: in other words, favourable tax treatment would not improve the international competitiveness of the sector; and second, because the public sector, which receives the tax revenue, would be recovering a part of the tax revenues lost due to the favourable tax treatment of indirect taxation. Both are fundamental questions when designing tourist tax policy. Based on this reasoning, two objectives are pursued in this work: first, to determine whether tourism companies are over-taxed in direct taxation and whether government obtains a return that compensates for the favourable indirect taxation through VAT; and second, to ascertain whether the situation is the same in all tourism subsectors or whether there are specific cases, given that there are singular cases of VAT taxation. In both instances, hypothesis H1 is tested: "Tourism companies bear a greater direct tax burden in corporate tax (CT), producing a tax return that compensates favourable treatment in VAT". To do this, the case of CT in Spain is taken, a global tourism power, and one which affords favourable treatment to the tourism industry in indirect taxation and which does not establish any favourable regulation in direct taxation. According to the 4 Spanish Tourism Satellite Account 1 , tourism production reached EUR 147,946 million in 2018, which accounted for 12.3% of GDP, and generated 2.62 million jobs, 12.7% of the economy's total employment. Likewise, based on data from the World Tourism Organization 2 , Spain ranks amongst the leading countries both in the number of arrivals of non-resident visitors and in said visitors’ expenditure. For the average of the 1995- 2018 period, Spain accounted for 5.8% of all visitors, ranking fifth behind France, the USA, China and Mexico, and accounted for 5.9% of spending, ranking second, behind the USA, which accounts for 15.8% of the total 3 . Obviously, together with the economic importance of tourism in Spain, this is also a major source of tax revenue. In terms of indirect taxation, the general rate of VAT in Spain is 21%. However, in order to improve the international competitiveness of the tourism industry, the main activities associated with tourism are taxed at a reduced rate of 10%: the transport of people and their luggage, hospitality services, restaurant services and, in general, the supply of food and beverages for on-the-spot consumption, as well as entry to museums, art galleries, picture galleries, theatres, circuses, bullfights, concerts, other live cultural shows and amateur sports events. In addition, there is a special VAT regime for travel agencies (Jiménez, 2012 and Iglesias, 2013) which affects the VAT tax base. As regards direct taxation, and in contrast to what happens with other sectors or activities such as mining, hydrocarbon exploitation or shipping, corporate tax does not contemplate any specific regime for the taxation of the tourist sector. In short, Spain is a prototypical tourist country that fiscally encourages tourism by applying reduced VAT rates to many tourism sector activities. Indeed to one specific 1 https://www.ine.es/dyngs/INEbase/es/operacion.htm?c=Estadistica_C&cid=1254736169169&menu=ulti Datos&idp=1254735576863 2 https://www.unwto.org/ 3 Own data using primary data obtained from the World Tourism Organization, Compendium of Tourism Statistics - Basic data and indicators 5 tourism subsector, travel agencies, it applies a special regulation. Moreover, it does not apply relevant specific indirect taxes and applies general criteria to tourism companies in direct taxation: in other words, it provides an area of study that offers the right characteristics to achieve the proposed research objectives. The remainder of the work is structured as follows: section 2 provides a review of the literature on tourism taxation. Section 3 sets out the methodology, variables used and data source employed in the empirical analysis. Section 4 shows the results, and finally section 5 presents the main conclusions obtained. 2. Literature review Tax revenue from tourism activities may account for over 10% of the revenue collected by some developed countries and can reach up to 100% in certain small tourist economies (McAleer, Shareef, and Da Veiga, 2005). Such arguments favour indirect taxation on the tourism sector: the low distorting effects of taxes; the high exportability of the tax burden; the possibility of applying the principle of profit, and tourists paying for the public services they consume; coupled with its ability to correct negative externalities (Gago et. al., 2006, 2009). With regard to the first argument, many tourist destinations lack any perfect substitute destinations (due to particular geographical or climatic reasons, distance, quality, etc.) such that there is a certain monopoly power (see Gooroochurn and Sinclair, 2005) which allows the tax wedge to be introduced by moving it to price without it affecting tourist consumption. On the other hand, when the tax burden falls mainly on non-resident tourists (that is, there is high exportability of the tax), the excess burden or inefficiency due to distortion does not affect nationals (Gooroochurn and Sinclair, 2003). This makes tourism taxation a highly appealing instrument for tax 6 reform (Fujii et al, 1985) or for obtaining additional income to finance new public expenditures. Intense tourist activity makes it necessary to provide more services; for example, public safety or health care, garbage collection, etc., the cost of which should not be borne by the ordinary taxes paid by the usual residents. In addition, administrations must provide adequate infrastructure for peak demands in high seasons that are underutilized during the rest of the year (Briassoulis 2002). In this context, citizens’ concern about increased public spending and the feeling that they are subsidizing the tourism industry (Combs and Elledge, 1979), together with the establishment of tourism taxes that are guided by the principle of profit, are seen as legitimate. This is the type of tax referred to in Principle 10 of the Lanzarote Charter of Sustainable Tourism (approved in the World Conference on Sustainable Tourism in 1995): ''measures are urgently needed to enable a more equitable distribution of tourism benefits and burdens''. Other external costs arising from tourism can be very high (Green, Hunter, and Moore, 1990) and can adversely affect tourism itself through congestion and environmental impact (Combs and Elledge, 1979). Mass tourism can decrease the quality of the tourist experience due to street congestion, psychological stress on local users and visitors, deterioration of natural resources and utilities, or loss of aesthetic value (Briassoulis, 2002; Ryan, 2002). If a tax includes environmental and congestion costs in the final price of the tourist package, such as a Pigouvian tax, it will restore economic efficiency. Indirect taxes are therefore a powerful tool to incorporate external costs that are not included in the final price paid by tourists (Clarke and Ng, 1993). For these reasons, studies on the taxation of tourist activities have focused on indirect taxation; more specifically on a wide variety of excise duties applied to: 7 arrivals/departures, air travel, airports/seaports/land borders, hotels/accommodation, restaurants, tolls, car rental, coaches, tourist attractions, and training (see Table 1) (World Tourism Organization, 1998). TABLE 1 HERE Of these taxes, the most widely studied in the literature has been the hotel accommodation tax (Mak and Nishimura, 1979; Combs and Elledge, 1979; Fujii, Khaled and Mak, 1985, 1988; Mak, 1988; Spengler and Uysal, 1989; Bonham, Fujii, Im and Mak, 1992; Hiemstra and Ismail, 1992, 1993; Bonham and Gangnes, 1996 and Im and Sakai, 1996). With regard to excise duties, in addition to the usual port and airport charges for travellers, which are borne by passenger tourists as in all other countries, there is only one regional tax; the so-called ecotax or sustainable tourism tax, established by the government of the Balearic Islands in 2016, which taxes stays in hotels, hostels, cruise ships, private homes intended for tourist leasing and so on. General indirect taxation in the tourism sector has, however, received less attention from the literature (Kristjánsdóttir, 2020, Blake, 2000; Gooroochurn and Milner, 2004; Gooroochurn and Sinclair, 2005; Wanhill, 1995). VAT is the centrepiece of consumption taxation in over 130 countries (Keen, 2007), many of whom engage in pro-tourism tax treatment by applying reduced rates. As an example, VAT rates applied to hotels in the case of the European Union are approximately 50% lower than the general rates in fifteen EU countries, and 40% lower than the general rates in new EU member countries, while VAT rates in restaurants, bars and cafes are around 30% and 20% lower, respectively (European Commission, 2005; World Travel and Tax Policy Center, 2002). 8 The lack of literature is even more noticeable when it comes to direct taxation. There are only two recent works analysing general aspects of this taxation (Álamo, 2018) and which explore the importance of certain economic characteristics in the direct taxation of hotels or travel agencies (Moreno, González and Martín, 2017), both for the case of Spain. This lack of studies means that fundamental questions remain unanswered, such as: ascertaining whether tourism companies pay more or less CT than other companies or whether the lower indirect taxes (VAT) in the tourism sector are recovered through direct taxation (CT). The absence of answers to these questions opens the door to a new field of research - direct taxation in the tourism sector -, and providing answers to these questions constitutes the objective of this work. 3. Methodology The method used to prepare the work was as follows. First, the data sources were selected and observations from the sample were extracted. Data were then refined so as to avoid problems with negative figures and, finally, the values were assigned to the representative sector or subsector dummy variables. After having obtained the database with the complete variables, an estimation model was applied using panel data, performing the regressions sequentially and constructing three scenarios: in the first, the representative dummies of the tourism sector and the services sector were included (without tourism) to test whether the tourism sector experiences a greater or lesser tax burden due to corporate tax than the economy as a whole and the rest of the services sector; in the second, disaggregated service sector subsectors were included, in addition to tourism, to compare taxation at the subsector level; and in the third, tourism subsectors were disaggregated in order to determine whether the tax burden difference in the tourism subsector is the same for all its subsectors equally or whether there are 9 differences between them. Finally, the results obtained were analysed. As regards the data, as a source the SABI (Iberian Balance Analysis System) database was used, developed by INFORMA in collaboration with Bureau Van Dijk, which allows quick and easy management of the general information and annual accounts of over 2.7 million Spanish companies and over 800,000 Portuguese companies. A sample of 27,500 Spanish companies for the period 2014-2018 was extracted in order to exclude the effects of the economic crisis. As is common in most empirical studies into this issue (Fernández, 2004; Molina, 2005; Wilkie and Limberg, 1993), remarks that have a negative corporate tax debt or negative accounting result since were removed; otherwise, the ETR would be positive (by dividing negative corporate tax between the also negative accounting result). This would not be reasonable because it must in fact be considered a negative effect, since those losses will imply a lower tax payment in the following years. The result is a data dashboard of 16,266 companies, of which 11,033 companies are from the services sector and 1,387 from the tourism subsector, in accordance with the selection criteria explained below. In order to define tourism economic activities, the recommendations of the Statistical Office of the European Communities and United Nations (2001) and of the National Institute of Statistics of Spain (2002) were followed. Based on these, the list is given in Table 2, where the group codes corresponding to the National Classification of Economic Activities (CNAE-2009) were included. TABLE 2 HERE As regards the services sector as a whole, the relevant subsectors and economic activities are as follows: 16 REFERENCES Álamo, R. (2018). El sector turístico español: Cuestiones y retos fiscales. Bosch Editor. Alchian, A. & Kessel, R. (1962). Competition, monopoly, and the pursuit of money. Aspects of Labor Economics, 157–183. Atkinson, A. B. (1977). 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Random Effects and OLS Estimate Scenario 1 Scenario 2 Scenario 3 Variable Random effects OLS Random effects OLS Random effects OLS Size 0.0179*** (0.0031) 0.0180*** (0.0050) 0.0192*** (0.0055) 0.0193*** (0.0054) 0.0187*** (0.0031) 0.0189*** (0.0051) Profitability 0.0554*** (0.0185) 0.0600*** (0.0187) 0.0491** (0.0196) 0.0536*** (0.0182) 0.0607*** (0.0185) 0.0654*** (0.0185) capitalintensity -0.0814*** (0.0078) -0.081*** (0.0089) -0.0900*** (0.0109) -0.0904*** (0.0106) -0.0797*** (0.0079) -0.0800*** (0.0090) Tourism sector 0.0163** (0.0083) 0.0162** (0.0063) Non-tourism services sector 0.0206*** (0.0046) 0.0206*** (0.0048) 0.0206*** (0.0046) 0.0206*** (0.0046) Trade and repair vehicles 0.0105* (0.0062) 0.0106* (0.0060) Transport and storage (except passenger transport) -0.0177*** (0.0040) -0.0178*** (0.0034) Information and communication 0.0445 (0.0272) 0.0443* (0.0263) Financial and insurance activities 0.0493*** (0.0062) 0.0491*** (0.0050) Real estate activities 0.0450*** (0.0071) 0.0452*** (0.0065) Professional, scientific and technical activities 0.0342*** (0.0057) 0.0341*** (0.0054) Administrative activities and auxiliary services 0.0246** (0.0108) 0.0245*** (0.0098) Education 0.0225*** (0.0067) 0.0223*** (0.0052) Health and social services 0.0299*** (0.0083) 0.0297*** (0.0078) Artistic, recreational and entertainment activities 0.0075 (0.0057) 0.0072* (0.0040) Other services 0.0200*** (0.0073) 0.0199*** (0.0058) Tourism 0.0167*** (0.0062) 0.0167*** (0.0058) Hostelry 0.0208*** (0.0105) 0.0207*** (0.0076) Transport -0.0262*** (0.0101) -0.0264*** (0.0024) Travel agencies 0.0721* 0.0721* 21 (0.0285) (0.0417) Car rental -0.0349*** (0.0277) -0.0351*** (0.0050) Cultural activities 0.0467 (0.0273) 0.0044 (0.0058) F statistics (Prob>F) 44.87 (0.0000) 121.37 (0.0000) Wald chi2 (Prob>chi2) 176.8 (0.0000) 396.07 (0.0000) 462.47 (0.0000) R2 0.019 0.021 Source: Own elaboration, Standard errors in parentheses. Significance level: ***: 1%; **: 5%; *: 10%. 22 TABLES Table 1. Tourism tax typology Sector Name of tax Payable by: Entry/exit taxes Resident Departure Tax/Foreign Travel Tax Customer Visas/Travel Permits Customer Air travel Air passenger duty Customer Air ticket tax Customer Airline fuel tax Business Airports/seaports/road borders Departure tax Customer Passenger service tax Customer Airport security fee Customer Airport parking tax Customer Transit taxes Customer Trekking/mountaineering fees Customer Hotels/accommodation Bed night tax Customer Bed tax Customer Occupancy tax Customer Differential VAT rate Customer Surtax Customer Sales tax Customer Service tax Customer Turnover tax Business Hotel and restaurant tax Customer Temporary lodging tax Customer Hotel accommodation tax Customer Lodging tax Customer Fringe benefit tax Business Payroll tax Business Customs and Excise Business Restaurants Sales tax/VAT Customer Liquor taxes/duties Business Road taxes Toll charges Customer Fuel taxes/duties Business Car rental Municipal/local taxes Customer Purchase duty Business Petro/diesel duty Customer Coaches Purchase duty Customer Specific additional tax Business Tourist transport tax Customer Tourist attractions Visitor attractions tax Customer VAT and sales taxes Customer Training Industry training tax Business Catering levy Business Source: own elaboration from the World Tourism Organization (1998). 23 Table 2. Subsectors of tourist activity in Spain Subsectors 2009 CNAE GROUP Hostelry* 55: Accommodation services 56: Food and beverage services Transport* 491: Intercity Passenger transport by rail 493: Other ground passenger transport 501: Passenger shipping 503: Transport of passengers by inland waterways 511: Air Passenger transport 522: Activities annexed to transport Travel agencies and other tours operators 791: Activities of travel agencies and tour operators 799: Other booking services and related activities Car rental 771: Motor vehicle rental 773: Rental of other tangible machinery, equipment and goods Cultural activities* 900: Creation, artistic and show activities 910: Activities of libraries, archives, museums and other cultural activities 931: Sport activities 932: Recreational and entertainment activities Source: Own elaboration, from the National Classification of Economic Activities 2009 (CNAE- 2009) (https://www.cnae.com.es/lista-actividades.php) and Article 91 of the Spanish VAT Act (Law 37/1992, of December 28, on Value Added Tax). * They are taxed at the reduced VAT rate of 10% 24 Table 3. Services Sector Subsectors Subsectors 2009 CNAE GROUP 1.- Wholesale and minor trade. Repair. Motor vehicles and motorcycles (45, 46 and 47) 2.- Transportation and storage (except passenger transport) (49, 50, 51, 52 y 53) except 491, 493, 501, 503, 511 and 522 3.- Information and communication (58, 59, 60, 61, 62 y 63) 4.- Financial and insurance activities (64, 65 and 66) 5.- Real estate activities (68) 6.- Professional, scientific and technical activities (69, 70, 71, 72 73, 74 and 75) 7.- Administrative activities and auxiliary services (77, 78, 79, 80 81 y 82) except 771, 773, 791 and 799 8.- Education (85) 9.- Health and social services activities (86, 87 and 88) 10.- Artistic, recreational and entertainment activities (90, 91, 92 and 93) except 900, 910, 931 and 932 11.- Other services (94, 95 and 96) 12.- Tourism sector (55, 56, 491, 493, 501, 503, 511, 522, 771, 773, 791, 799, 900, 910, 931 and 932) Source: Own elaboration, from the National Classification of Economic Activities 2009 (CNAE- 2009) (https://www.cnae.com.es/lista-actividades.php). 25 Table 4.- Descriptive statistics Variable Subsector Mean Standard deviation Min Max EFFECTIVE TAX RATE (ETR) Hostelry 0.15665 0.35099 0.00087 14.99709 Transport 0.13825 0.10508 0.00012 3.2874 Travel agencies and other tours operators 0.22903 0.89861 0.00738 19.38206 Car rental 0.10845 0.07194 0.00013 0.45024 Cultural activities 0.14750 0.10098 0.00046 0.93281 Tourism Sector 0.14959 0.31439 0.00012 19.382 Non-tourism services sector 0.17142 0.57696 0.00002 93.0744 National Economy 0.16448 0.58971 0.00002 99.2167 PROFITABILITY Hostelry 0.15158 0.12676 0.00035 1.11176 Transport 0.15276 0.11509 0.00097 1.45307 Travel agencies and other tours operators 0.11807 0.13155 0.00146 0.75920 Car rental 0.16510 0.12044 0.01032 0.8108 Cultural activities 0.17192 0.18469 0.00302 2.11584 Tourism Sector 0.15220 0.12620 0.00035 2.1158 Non-tourism services sector 0.11900 0.11974 0.00005 3.22288 National Economy 0.11972 0.12281 0.00001 12.37291 SIZE Hostelry 2.68592 0.70164 0.74690 5.32423 Transport 3.02243 0.64208 0.72986 6.32205 Travel agencies and other tours operators 2.67073 0.62238 0.87704 5.08921 Car rental 3.09912 0.61977 1.58727 4.87708 Cultural activities 2.86825 0.77293 0.84600 6.00699 Tourism Sector 2.85610 0.69460 0.7298 6.322 Non-tourism services sector 2.86439 0.68347 0.59964 6.9607 National Economy 2.89092 0.69413 0.59964 6.96078 CAPITAL INTENSITY Hostelry 0.52717 0.28521 - 0.05306 0.99996 Transport 0.40921 0.26892 - 0.00429 0.995271