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Report suggests VAT reduction on pub and restaurant drinks could win back lost customers

The number of customers frequenting Finland's bars and restaurants has plummeted in the last two decades, but a new report posits that a cheaper pint might entice some of them to return.

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Image: Henri Vainio-Hynnilä / Yle

Finland's Natural Resources Institute (Luke) has studied how a drop in the value-added tax (VAT) on alcohol drinks served in bars and restaurants could improve sales in the hospitality sector.

Under the current system, Finland imposes a 24 percent VAT and 7 percent alcohol tax on every pint of beer served in a pub or eating establishment, meaning that a third of the price is returned to the state.

Lowering the VAT on alcohol served in bars and restaurants from 24 percent to 14 percent - the same VAT percentage issued for the food sold in the establishments - would lower the price of alcoholic drinks and encourage more customers to bring their business, the Luke report concludes.

According to the agency's calculations, lowering the VAT on alcohol served in restaurants and pubs would cause the price of drinks to fall by eight percent, if the tax rebate would be transferred in its entirety to customer prices.

50 cent price reduction on a pint

For a standard pint of beer, this would mean a price reduction of around 50 cents. Representatives of the hospitality sector say a VAT reduction on alcohol would assuredly be reflected in cheaper prices.

"The tax rebate would transfer to the price of alcoholic beverages in the same way that the 2010 tax rebate on restaurant food was transferred. In other words, very well," says Timo Lappi, CEO of the Finnish Hospitality Association MaRa.

The Luke report maintains that price reduction would also win more customers back to Finland's pubs and restaurants.

"Our analysis found that [the VAT decrease] would improve demand for restaurant services by three percent, or 127 million euros. The demand for other domestic products and services in the economy would also improve as a result, for a total of 172 million euros in total effect," says Luke research professor Jyrki Niemi.

Lappi predicts that a VAT rebate would dramatically improve the lots of Finland's restaurant and bar owners, especially since the sales of dispensed alcohol has fallen steadily since 1997.

"Alcohol sold in restaurants is too expensive. That's why people prefer to sit at home and drink it. Consumption of dispensed alcohol has fallen by ten percent. The VAT decrease is mandatory if we want to encourage people to get off their sofas and back into the pubs," he says.

Sales of alcohol have actually gone up in the last year, in tandem with Finland's economic upswing. Lappi says the looser alcohol laws that came into effect at the start of 2018 are a good start, but they are not enough.

"One year of improvement can't make up for 20 bad years," Lappi says.

Highest combined tax on beer in the EU

Among the 28 countries in the European Union, Finland has some of the highest alcohol taxes. It comes in at number one for the highest total tax on beer, the most popular drink dispensed in pubs and restaurants; and it comes in second place for tax rates on stronger drinks and wine. In terms of just VAT rates on dispensed alcohol, Finland comes in fourth overall.

The Luke report was commissioned and sponsored by the Finnish Hospitality Association MaRa, which has lobbied to lower VAT on dispensed alcohol for years. The group is hoping to have a proposal to cut the tax rate debated in Parliament next spring.

"Without it, the decline of the industry will continue. It will end up costing the state lost tax revenue and lost employment opportunities," MaRa's CEO Lappi says.

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