Terrie's Take 943 (Tourism Edition) - The Coming Tax Grab on Tourism

Mon May 7 08:53:29 JST 2018

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, May 06, 2018, Issue No. 943

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+++ The Coming Tax Grab on Tourism

Two events over the last couple of months show that the government will 
probably become its own biggest threat to the continuation of the 
Inbound travel boom. Firstly there is its abdication of authority over 
the Minpaku (Airbnb) law, handing over the final say on regulations to 
petty-minded local governments who never really liked the flood of 
foreign tourists anyway. If the national government had really wanted 
Minpaku to succeed in Japan, it would have legislated in a way that 
prevented local ordinance overrides. So as a result I predict that from 
next month Airbnb's inventory in Japan will fall from 60,000 or so 
locations to about 1/3 of that amount. This will drive up hotel room 
prices (already 50% higher than 2 years ago), and return Japan to the 
ranking of being one of the most expensive destinations in the world.

Secondly, there is last week's approval in the Diet of the JPY1,000 
Departure Tax on every traveler leaving the country, Japanese or 
foreign. Although the amount seems modest compared to some other 
countries like Australia (AUD60 Passenger Movement Charge - PMC), the 
move to tax travelers is a  direct grab for tourist cash that, much like 
consumption tax, will be hard to resist increasing in the future. Just 
like consumption tax, it will become an addiction and be so pervasive 
that it will be impossible to stop. Worse, the money will likely not be 
used for tourism at all, but rather wind up being funneled to companies 
and organizations that have little to do with tourism today - such as 
IT, manufacturing, and of course construction.

Details of the new tax are still to be decided by the transport 
ministry, but travelers can expect to be paying before the Rugby World 
Cup (next September), and possibly as early as next January (2019).

So, why care about the Departure Tax? Surely if other countries are 
charging it, it must be a legitimate source of income for the 
government, especially if it is going to be used to "boost tourism 
infrastructure and promote travel destinations in rural Japan" and 
global marketing? Well, you have to ask: "Does Japan actually need this 
tax?" It seems to be doing perfectly well so far without it. If you look 
at why the government is introducing the tax, there are a bunch of vague 
reasons, but nothing pressing and nothing that they couldn't fund out of 
the existing tax windfall from tourism spending.

[Continued below...]

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Instead, one of the main reasons Japan introduced the tax is because 
other advanced countries do the same, being the USA (the ESTA fees), the 
UK, and Australia (PMC). In particular, Australia is seen as being a 
good model, because despite the departure tax there being jacked up to 
an almost global high AUD60 (about JPY4,900) per departure, the number 
of inbound travelers has nonetheless increased every year without fail 
(from 6.2MM people in 2014 to 8.9MM in 2017). So, if you can squeeze 
that much juice out, why not take advantage of it?

Here are three reasons why not:

1. Ignorance of macro-economics

According to an entry on Wikipedia, the International Air Transport 
Association (IATA) released an economic briefing in 2013 showing the 
damage Australia's departure tax does to the Australian economy. 
According to IATA, if the then AUD55 charge was removed, the average 
ticket price on airfares to Australia would become 3.5% cheaper, which 
would increase international passenger traffic by 2.5%. This would 
increase net spending by those foreign tourists by AUD1.7bn. (Duh...) 
More importantly, the subsequent net benefit in income tax would exceed 
the revenue lost from the departure tax!

I have no doubt that the same effect would be true for Japan, and in 
fact if this new tax were based on proper economics, then where is the 
credible (non-partisan) study on the issue? There isn't one, because 
this is a fatuous idea by Chief Cabinet Secretary Yoshihide Suga.

2. Japan's market will be more sensitive to a departure tax

Given that such a large number of foreign tourists coming to Japan are 
repeat travelers from East Asia, looking for a cheap and fun 
long-weekend in Japan, I can't help feeling that the impending tax grab 
here is going to start impacting this large price-sensitive market 
segment. Repeat travelers (somewhere around 60% of inbound travelers) 
typically use LCCs or bargain airfares from regular carriers, and help 
balance out the travel numbers in the shoulder and off-seasons, thus 
being important for local economies. Although there are not a lot of 
alternative destinations for these people (Thailand has a JPY2,300 
airport tax, but this is off-set by how cheap the place is) the next 
increase in departure tax will probably start impacting the frequency 
and duration of travel at the lower end of the market. This might be a 
desirable filter for the Japanese hospitality industry, but will 
definitely dent the overall inbound numbers (traffic and spend).

3. Bureaucratic proclivity (towards making the big grab)

Let's face it, bureaucracies exist to feed themselves, and given that 
Japan's bureaucracy has a particularly high level of entitlement (thanks 
to its samurai heritage), it is not hard to imagine that this departure 
tax is just the beginning of the gradual strangling of the golden goose 
that is inbound tourism. Australia is a great example of bureaucratic 
greed. Here is a record of the increases in that country.

* 1995 - AUD27 - originally imposed to "offset the cost of customs, 
immigration and quarantine processing"
* 1998 - AUD30 - increased to "offset the cost of the Sydney 2000 
Olympic Games"
* 2001 - AUD38 - increased to "respond to threat of the introduction of 
foot-and-mouth disease" (I'm not making this up!)
* 2008 - AUD47 - increased to "partially fund national aviation security 
initiatives"
* 2012 - AUD55 - increased because "Well you don't need to know" (i.e., 
no reason provided)
* 2017 - AUD60 - increased because "Hey, we make the rules here" (i.e., 
no reason provided)

What's most concerning to me about this departure tax is that the 
government doesn't really have a clear idea of what it is going to use 
the money for. I've read a variety of lazy, hazy schemes so far, from 
"international ad campaigns" to WiFi on every street in small towns. 
Neither of these things is so important to the international traveler 
that it justifies the tax. Instead, and in reality, the government 
doesn't really have any idea what they are going to do with it, other 
than revel in the fact that the cash dump is going to be more than twice 
the current budget of the Japan Tourism Agency (JTA), and therefore has 
to be a good thing. At least they could be a bit more scientific and do 
a proper publicly-vetted study before jumping on the tax bandwagon.

And while we're on the subject of bureaucratic proclivity to grab the 
cash, we should not forget that taxes come in many guises, and I can 
easily see that the local authorities in Japan are going to jump onboard 
the gravy train soon enough. Indeed, if you consider the lodging taxes 
in Tokyo and Osaka, they already are. In FY2016, Tokyo made a very 
healthy JPY2.5bn from that tax, and Osaka JPY1.1bn. Imagine this being 
repeated around the country - which I predict it soon will be.

Here are some of the taxes that IATA has identified (and which it is 
opposed to), and which are likely to arrive in Japan. I've sorted them 
into categories, representing the same tax but under different names 
around the world.

* Air passenger duty, Air passenger ticket levy, Air craft noise levy
* Passenger service charge, Safety & Security charge, Passenger movement 
charge, Departure tax/Foreign travel tax
* Visa charges/Travel permit
* Bed tax/Bed night tax, Occupancy tax, Hotel tax, Lodging 
tax/Accommodation tax
* Car rental duty, Toll charges, Registration recovery charges
* Premium location surcharge/Airport tax, Environmental management 
charge, Surf tax
* Visitor attractions tax
* Value Added Tax, Goods and services tax, Wholesale sale tax, Sales tax

IATA forgot "Luxury Accommodation" (Tokyo, Osaka, Kyoto) and "Hot 
Springs" taxes - which are already at work here in Japan. So, yeah, I 
think you will see that there is plenty of scope for the bureaucracy to 
scoop up a bunch of cash, which for sure won't be of much benefit for 
travelers, but which will certainly establish handy flows of cash to 
favored companies and entities that provide the services dreamed up to 
spend this money.

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...The information janitors/

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