Taxing Tourism in Developing Countries : Principles for Improving the Investment Climate Through Simple, Fair, and Transparent Taxation

Abstract

A good investment climate for tourism,
 underpinned by a sound tax regime, can play a central role
 in a government's growth and development strategy. Yet
 in many countries, tax systems for the tourism sector are
 characterized by exemption schemes and instruments that
 generate little revenue and burden business. This note
 focuses on the three main issues facing policymakers dealing
 with tourism taxation in developing countries: fiscal
 incentives, sector-specific levies, and value-added tax
 (VAT). It discusses different policy options to encourage
 tourism investments while ensuring sustainable revenue
 collection. A good business environment for tourism is
 essential to support the industry's central role in
 many countries' development strategies. Investments in
 the sector, which has significant growth potential among
 developing countries, can have important positive spillovers
 on poverty reduction. Tourism is a complex industry of
 numerous subsectors. It is challenging to define exactly
 what constitutes a tourism product and how to tax it;
 tourism is not a single commodity, but rather a collection
 of many different goods and services provided by a wide
 range of suppliers. The tourism value chain encompasses a
 variety of different actors, including hotels, air carriers
 and transport companies, tour operators, travel agents,
 rental agencies, and countless suppliers from other sectors.