By Igor Ilic - Reuters

ZAGREB - The Croatian government said on Friday it planned to reduce value added tax (VAT) on tourism services to 10 percent from 22 percent to make its key industry more competitive with peers in the Mediterranean.

“By introducing a 10 percent tax, we will make the rate equal for both domestic and foreign guests,” Finance Minister Ivan Suker told a cabinet session.

The measure, if passed in the parliament, should become effective from Jan. 1, 2006.

At the moment, Croatian tourists pay a VAT rate of 22 percent on services in the tourist industry. Foreign guests, if arriving as part of organized tours, are exempt from paying taxes on accommodation.

The overall VAT rate in the European Union candidate country is 22 percent, with very few exceptions.

Local entrepreneurs in tourism, which accounts for almost 25 percent of Croatia’s gross domestic product, have long requested a flat and privileged VAT rate to make their services more competitive with other countries in the Mediterranean.

The government estimates the budget could lose some 100 million kuna ($16.27 million) next year due to the new VAT rate.