The Icelandic government has published proposals to raise the value added tax (VAT) on accommodation, restaurant meals and attractions from seven per cent to 25.5 per cent as of the May 1st 2013.

This proposal more than trebles the tax on all those services that tourists need to purchase.

Two-thirds of Iceland’s population live in Reykjavik, so hotel use is dominated by visitors: 90 per cent of hotel rooms in July 2012 were occupied by foreigners.

This tax is aimed directly at an export market.

The inbound tourism industry has been one of Iceland’s success stories over the last fifteen years.

Foreign arrivals in 1997 were 210,000, in 2011 they were 598,000.

A lot of this growth is recent: 2012 is set to match 2011’s annual increase of more than 16 per cent growth in foreign visitor arrivals.

The number of nights these people stayed increased by 20 per cent.

Tom Jenkins, ETOA chief executive, said “Iceland was in a benign state: they were increasing their visitors and length of stay.

“Much of the drive behind this growth has been Iceland losing its perception as an expensive destination.

“This tax rise, imposing a sudden price increase of 17 per cent, effectively punctures that impression.

“What is strange is that Iceland has been a text-book example of the virtues of cutting indirect taxation in tourism.

“In 2007 it halved tax on tourism services from 14 per cent to seven per cent.

“By 2008 tax receipts from tourism were six per cent higher than they had been in 2006.

“This tax rise is being introduced at the start of the inbound tourism season, just when it will do the most damage.

“It penalises any operator who has signed contracts and published brochures featuring Iceland next year.

“No company can absorb such a surcharge.

“Iceland is a wonderful destination: an extraordinary civilisation set in an astonishing geological region.

“But this tax is a stinging rebuke to anyone who has chosen to invest in promoting Iceland as a destination.”