This is not possible, some would say! How can the state increase the tax burden on a sector that is so important for the national economy and that so contributes to the state treasury? Well, the state, or rather the Government as the embodiment of the state in the hearts and minds of Bulgarians, will do it.

A Value Added Tax (VAT) Bill approved by the Cabinet on March 30 envisages that the VAT rate on everything in this country, including tourist packages for foreigners, will be increased to 20 per cent in 2007.

Currently, Bulgaria charges seven per cent on packages for foreign holidaymakers. These packages include a number of services, starting from hotel accommodations and going through meals, spa treatments and others. Under the new bill, the seven-per cent alleviation will be retained for hotel accommodations.

It is not strange or provocative that the cabinet has decided to increase VAT, but the way it is being served to the sector, to the public and, most importantly, to the foreign tour operators is extremely odd. Moreover, it is a perfect example of how public relations (PR) in crisis situations should not be handled.

No one should have any doubts that this is a crisis situation. The tourism sector is very important for Bulgaria’s economy and it has been flourishing over the past several years. Especially after foreigners found out that they could come and spend some nice time at Bulgaria’s Black Sea beaches or on the mountain slopes of the winter resorts, and in addition to this to be able to buy a second home here for quite a good price.

For the past three years, the tourism industry in Bulgaria has become a leading sector in terms of revenues. Figures showed that 2005 international tourism revenues were about two billion euro, an increase of about nine per cent on the previous year. Another increase of at least six per cent is expected to be registered in 2006.

Furthermore, the provision of tourism services is directly related to the increasing demand for workforce and, indirectly, to the reduction of unemployment in a series of sectors.

And suddenly this winning sector will have to suffer a strike that will scare off some of its customers, maybe chasing them away for good. Instead of explaining how the state can help the sector overcome the difficulty, the state in the face of the Government and the Finance Ministry (the author of the bill) resorts to the lacklustre excuse of the need to harmonise the country’s taxation system to the one of the European Union.

It is true that the EU requires that member countries, what Bulgaria hopes to become in 2007, should levy no less than 15 per cent VAT on anything. However, the union allows alleviations for quite a large list of goods and services. In many countries in the EU, house repairs, clothes, bicycles, window cleaning, hairdressing, care for children and the sick, and others, are taxed with symbolic rates of VAT.

Lower rates are also levied on sectors such as tourism, which are of serious importance for any national economy, as well as on socially significant goods and services. There is a trend for the gradual removal of preferential VAT taxation in the EU, but this process will not speed up till after 2010.

It looks like Bulgaria is preparing to be some kind of champion in the EU on the early adoption of rules that are not yet even certain to happen in many union countries, even after 2010. One could hardly imagine that countries like Spain, or Italy, or Cyprus would resort to such a suicide for their tourism. And even if they eventually increase the VAT on tourist services, we can be certain that other ways will be found to compensate the sector players.

In Bulgaria, there are many ways to compensate, and they have been hinted at by tourist businesses in the past few months. The state could, for instance, support the tourist sector by spending more money on modernising the country’s infrastructure. This will encourage the attraction of richer tourists, who will be ready to pay the higher prices that will come as a result of the VAT hike.

Increasing the funding for national tourist advertising would be a beneficial addition to the efforts for making the sector more competitive.

Instead of promising such things and demonstrating active involvement in the problem, the State Agency on Tourism only makes commitments to presenting a general strategy for tourism development. Tour operators even started joking that they would attach to each of their offers a copy of the strategy. If nothing else, the document will at least be a free-of-charge addition to the tourist packages, which may make their price seem lower.

The champion wrong-doer in the negative media impact of the VAT increase is Finance Minister Plamen Oresharski, who, not listening to anyone, would just point to the fact that Bulgaria has made commitments under EU chapters.

The country has made the commitment to increase VAT under the finance negotiation chapter with the EU, and attempts to re-open the chapter will be useless, Oresharski says. In his publicly expressed view, even if doing it, Bulgaria would hardly achieve better financial terms for the development of its tourist sector.

Naturally, this makes sector representatives suspicious that the EU wants to somehow burden Bulgaria’s successful competing with other old member countries in the field of tourism.

The irony of it all is that the Finance Ministry, immediately after drafting the VAT Bill, said it was open to discussion by all businesses in Bulgaria, and, moreover, that any proposals and criticism would be taken into account. 

This was a very good example of a bad PR, as PR is an art of demonstration - showing rather than stating your message. In other words, accepting criticism and proposals, and not just saying that you are sorry but changes have to be made because of the EU.

When you say that you care and you are sorry, people are cynical. When you demonstrate compassion and caring in a dramatic and distinctive way, people not only believe your message but also pay attention to and remember it.

The PR crisis in the case with the VAT increase puts the state, and its methods of operation, under intense public and media scrutiny that can, if not handled properly, materially impact businesses. And the impact will not be late, as tour operators have already started negotiating their packages for foreigners for 2007. Now, what are they supposed to do in this insecure situation? Especially since the VAT Bill has not yet become an act.

Sector representatives insist that the state should clearly assess the priority branches that it wants to develop and for which it can introduce a differentiated VAT rate. Their hope is to see tourism on the list of priorities.

And, here comes Oresharski again with his fierce opposition to the sector’s desire to have preferential treatment.

It is true that the country’s tax policy is designed to secure sector neutrality and any tax reliefs would lead to breaching that principle and would create conditions for unequal chances among the different economy sectors.

But it is also true that the state has many tools of compensating this indirect taxation hike. First of all, it could have been a cut in the flat VAT rate from 20 to 18 per cent, which was on the promises list of every political force in the 2005 parliamentary elections, including the three parties of the Government coalition.

Value added tax itself accounts for the bulk of budget revenues, which are increasing very steadily, as figures showed in 2005. With the two billion leva surplus in the 2005 budget, the VAT rate could have been cut down. The fact that it was not only shows a lack of vision. And the lack of vision added to the newly planned hike for tourism is certain to turn into a disaster.

Another tool to help businesses overcome the VAT shock could have been a serious drop in corporate tax. It would not deprive the state of much revenue but would give a breath of fresh air not only to tourism, but also to many other priority sectors.

However, such moves have so far remained only on the lists of political promises and have served as a good PR only in pre-election campaigns. Meanwhile, the state administration with its army of PR professionals has failed to observe one of the most important rules in crisis PR: Deal with the crisis head-on. Do not hide.