EU Proposes VAT Changes For Travel Industry

by Ulrika Lomas, Tax-News.com, Brussels

01 May 2002

The EU Commission has proposed changes to the special VAT regime which applies to travel agents. The main VAT legislation (the Sixth VAT Directive) which was adopted in 1977 included special rules for applying VAT to travel agents and tour operators.

The objective of the special rules for travel agents and tour operators is to prevent the complications that the application of the normal VAT rules would cause where such packages comprise services provided outside the Member State concerned. When a travel agent purchases services such as hotel accommodation and transport from third parties in other countries and puts them together in a travel package to sell in his own name and on his own account to a traveller he would, under normal VAT rules, have to pay VAT on every supply of services made to him and register in each Member State from which he purchased services.

But under the special 'margin' scheme all transactions performed by the travel agent in respect of a single travel package are treated as a single supply of services for VAT purposes, taxable in his own Member State. He has no right to deduct VAT on supplies made to him, but on the other hand he is only taxed on the profit margin realised on the supply of the travel package.

The special scheme has the advantage that VAT revenues are allocated to the Member State where the final consumption of each individual service takes place – for example, VAT on the travel element would most likely go to the country where the travel operator is resident and where the profit is generated, while the VAT on the hotel accommodation is allocated to the country where the holiday takes place and so on

The special scheme only applies to packages for travel and lodging in the EU. Travel operators providing travel packages to places outside the EU are exempt from VAT.

Modifications are necessary to the existing scheme to eliminate problems of double taxation which arise because nowadays, with increased specialisation in the travel business, travel operators no longer only deal directly with individual travellers but also sell packages to other operators. Also, different Member States apply the special VAT arrangements for travel agents in very divergent ways which can create competitive disadvantages for some companies.

Businesses often prefer to deal with individual suppliers rather than use travel agents packages because they cannot deduct VAT incurred on travel packages which they purchase under the special travel agents VAT scheme. And travel operators established outside the EU, who can now with the Internet easily sell travel packages to EU residents, are outside the scope of the VAT scheme, which causes competitive problems for EU registered travel operators and must be remedied.

The Commission proposal offers travel agents the possibility to opt for taxation under the normal VAT rules, specifically to cater for business packages. The application of normal VAT rules implies that travel agents would be required to charge VAT on the total amount of the supply of a travel package rather than on just their profit margin, but in those cases they would also be allowed to deduct the VAT that is charged to them. The result is that, although the total amount of VAT charged by the travel agent to his client would be higher than under the margin scheme, the actual cost of the travel package net of VAT should be lower because the travel agent would be able to deduct the VAT paid to his suppliers so he does not have to build the cost of VAT into the price of the package.

Under the proposal non-EU operators selling EU travel packages to EU customers would be required to register for VAT and operate the margin scheme in the same way as their EU competitors need to. It is likely that at least the larger non-EU sellers would choose to be tax compliant. ECTAA, the Group of national travel agents and Tour Operator Associations within the EU, broadly supports the EU proposals. Of course it does.

In so far as the Commission's proposal is driven by complaints from EU travel agents that they are suffering from tax-free Internet competition (quite far, presumably), it is likely to run into the same problems as the Commission's main scheme to garner VAT from non-EU suppliers of digital goods, most notably that member states will squabble over who is to get the tax, but mainly that suppliers can't be forced to comply with the regulations, leaving the tax essentially on a voluntary basis.

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