Only 10% of Ukraine’s hotels meet EU standards
The debate on the need for tax exemptions to boost the country’s declining hotel business has entered its final stage. The State Tourism Administration has insisted on supporting the hotel business, because its current state does not meet the requirements of the day. By contrast, the Ministry of the Economy opposes new tax exemptions fearing they would become a burden to state coffers. A relevant bill envisions a zero VAT rate for import of hotel equipment, none of which is manufactured in Ukraine. Above all these are spacious elevators, furnishings for modern pools, and other things that are currently a forbidden luxury for most Ukrainian hotels. The full list of VAT-free imports is subject to approval by the cabinet. In addition, there are plans to allow construction companies to charge to expenses the costs of hotel renovation services in their accounting reports. This means that they will be able to reduce their taxable income by the amount spent on hotel renovations.
Most opposition to the bill has come from the Ministry of the Economy. Numerous lobbyists are now trying to jawbone the ministry into giving the bill the green light. Economy Minister Derkach is convinced that at the current stage of economic development granting tax exemptions by sector seems ill timed. This runs counter to WTO norms. Only last December the government managed to convince the parliament of the need to cancel some of such tax exemptions. Hence, the Ministry of the Economy thinks the bill is at odds with the policy of cutting privileges, especially VAT exemptions, declared by Pres. Kuchma.
Yet after preliminary consultations with parliamentary factions the lobbyists of the bill are certain that it will pass. Yalta Mayor Serhiy Braiko believes that the revival of the town’s hotel business will be quite active even without tax exemptions for investors, although the bill under scrutiny by the government could significantly accelerate this process. To quote him, several Russian and Ukrainian investment groups are currently negotiating the recreational development of the Crimean coastline. The tax exemptions expected as of January 1, 2005 would no doubt affect their plans. According to Mayor Braiko, Yalta currently needs some $2.5 billion to remodel its hotel complexes. Meanwhile, with investors biding their time, construction companies are reluctant to build hotels, since housing construction is far more profitable today. Braiko thinks tax exemptions could solve this problem.
Ukraine has 1,254 officially registered hotels, which can accommodate up to 104,000 guests at a time. Recent years have seen a steady decline in the number of hotels, which is due to both the relatively low demand for tourist services in Ukraine and active remodeling of hotels into business premises. Ukraine has lost 142 hotels since 1995, with the number of hotel beds down by almost 30,000 over the same period. Over a third of Ukraine’s hotels are still municipal or state property. Their condition is lamentable. For obvious reasons neither the government nor municipal authorities wish to invest in such hotels. As a result, the quality of hotel rooms appalls even the least fastidious guests, let alone those who panic at the sight of cockroaches. On the whole, by the estimates of the Tourism Administration, only 10% of Ukraine’s hotels meet minimum EU requirements.
Meanwhile, upscale hotels are developing most actively. October 2003 saw the inauguration of the first Ukrainian hotel chain, Premier Hotels, which has incorporated renovated four and five star hotels Premier-Palace (Kyiv), Oreanda (Yalta), Dnister (Lviv), and a string of small hotels in Western Ukraine. Two hotels of the same class, Victoria and Donbas-Palace, have opened in Donetsk. Construction of Radisson- SAS Hotel is nearing completion in Kyiv. Most of the upscale hotels are almost fully booked throughout the year, which hints at the probable recipients of the potential investments that await tax exemptions.
Yet it is difficult to forecast whether the tax exemptions will pass the parliament. The prospects of the bill passing Verkhovna Rada look good. Almost all industrial and financial groups that have their factions in the parliament have recently entered the hotel services market. The same applies to the most influential of the groups, the so-called Donetsk group, whose capital is put to good use in the industrial construction sector. To all appearances, the vote on the bill should pass without difficulty. Yet before that the bill must be approved by all the relevant ministries and departments. Meanwhile, the Economy Ministry is yet to determine its stand on this issue.
