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European Travel Agents Fight Back Over VAT

by Ulrika Lomas,, Brussels

15 January 2014

The European Tour Operators Association (ETOA) has called for a urgent review of the EU's special VAT margin scheme for travel agents following a landmark ruling from the European Court of Justice (ECJ) on September 26, 2013.

In its ruling the ECJ called on numerous member states to amend their national legislation to align their provisions on the margin scheme for travel agents with EU law.

Under the scheme – set out in Article 26 of the EU VAT Directive – where a travel agent, acting in his own name, re-sells the supplies and services of another taxable person in the provision of travel facilities, the taxable amount is deemed to be the travel agent's margin – the difference between the VAT-inclusive cost to him of the supplies and services which he includes in the package he sells, and the re-selling price, exclusive of VAT, which he charges for that package.

The scheme aims to level the playing field between those entities registered for VAT purposes and non-VAT registered entities, including businesses that re-sell package holidays that are not "traditional" tour operators. Without an arrangement such as the margin scheme, a travel agent or tour operator putting together a holiday or travel package within the European Union would be liable for output VAT on the whole price of the package in his home country. He would have to recover the VAT charged to him, often in other member states, for supplies such as transport, accommodation, meals, guided tours, cruises or organized leisure activities to be provided in those member states. Not only would that involve significant administrative complexity but, as a result, such services would be subject to VAT, not in the member state in which they were in fact provided and consumed, but in the member state in which the package was purchased. Significant VAT revenue might thus be diverted from member states providing tourist destinations to those providing tourists.

The September 2013 ruling from the ECJ resulted from the Commission's unsuccessful attempts to pressure member states to revise their laws. In 2002, the Commission proposed amendments to Article 26 of the Sixth Directive to replace the word "traveler" with "customer" throughout, to limit the scheme to cases where the customer is the traveler. The Commission's efforts were on account of industry developments, in particular the sale of travel packages to other travel agents or to businesses using travel services as an incentive for their personnel or in the framework of their business, for example attendance at seminars.

In its September 2013 ruling, the ECJ pointed out that, where there are discrepancies between the various language versions of an EU instrument, the provision at issue must be interpreted by reference to the general scheme and purpose of the rules of which it forms part. In that regard, the Court considered that applying the special scheme to any type of customer would be the best way of achieving the aims of the scheme; it would enable travel agents to benefit from simplified rules regardless of the type of customer to whom their services are provided while encouraging a fair distribution of receipts between member states.

ETOA pointed out that, as a result of the ruling, its members must now apply VAT under the special scheme to business-to-business (B2B) transactions as well as business-to-consumer (B2C) transactions. This will require that wholesalers of travel packages reveal their gross margins to their clients, and also account for taxation on a transaction-by-transaction basis. ETOA has argued that these two measures place an "acute competitive and bureaucratic burden" on travel agents.

In a survey of its members, ETOA reported that 96 percent of respondents consider that the judgement will lead to a decline in their competitiveness and also the competitiveness of European tourism destinations. One respondent quipped that "the change not only renders me uncompetitive, it [also] makes me reveal how uncompetitive I am to my customer!" Another stated that: "It would be impossible to calculate our VAT by transaction; this year we will have over 350,000 transactions."

Taking the UK market as an example, the ETOA warned of the ruling's impact on travel agents: "The ruling applies VAT to all tourism exports, including any packages in which a UK holiday is sold through a third party and any sale of a European package to a business based in most of the important origin markets, including, China, India and the US. It makes UK packages less competitive and it makes the UK less competitive as a base for doing tourism business."

Tom Jenkins, Chief Executive of ETOA, argued that: "The ruling is an attack on the process of adding value to tourism services; it inadvertently delivers a devastating blow to growth businesses working in growth markets. This taxation scheme is in dire need of reform."

TAGS: compliance | VAT special schemes | tax | value added tax (VAT) | VAT legislation | law | aviation | legislation | VAT case law | VAT compliance matters

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