Travel Agents & VAT frequently asked questions
European Commission - MEMO/02/30 18/02/2002
Brussels, 18th February 2002
Travel Agents & VAT frequently asked questions
(See also IP/02/264)
What are the likely consequences of the proposal on the prices of holidays for individuals resident in the EU?
In principle there should be no or minimal impact on the prices of travel packages for individuals.
For trips outside the EU there should be no consequences on the price level, as there are no changes made to the current rules. When a travel agent established in the Community supplies a travel package the constituent elements of which are enjoyed outside the Community, the travel agent is considered to supply a service outside the Community and is exempt from VAT on this supply. This would not change under the new proposal.
As regards holidays in the EU, those travel agents currently enduring double taxation due to being charged VAT on services received from other travel agents, who were unable to recuperate the VAT that was charged to them by their suppliers, should now be able to charge lower prices. In those three Member States that currently apply an exemption to these supplies of travel services (Denmark, the Netherlands and Ireland), there could be an impact on prices of holidays for individuals, as these suppliers would now be obliged to apply tax to their profit margin realised on the supplies of these travel packages. But it is unfair that at present operators in those countries do not have to apply VAT while their competitors in other countries do. Furthermore, the change for travel agents in these three Member States is only that they would be subject to tax on their profit margin; they would not be taxed on their full taxable amount as they would be if normal VAT rules applied.
Holidays in the EU supplied by third country operators to EU established customers would now be taxed under the margin scheme in the EU, so prices of these holidays might also increase slightly.
What are the consequences of the proposal on prices of packages for businesses and other customers who are themselves subject to VAT?
The cost of these packages to businesses should now be reduced. The Commission proposal offers travel agents the possibility to opt for taxation under the normal VAT rules, specifically to cater for these business packages. The application of normal VAT rules implies that the 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.
Furthermore, when a travel agent avails of this option to be taxed under normal rules, a taxable client purchasing a travel package for business purposes, e.g. for organising a business seminar or business trips, would in turn be allowed to deduct the VAT included in the price of the package which the travel agent sells to him.
What are the consequences for travel operators established in non-EU countries and for customers resident outside the EU?
The only change for suppliers of travel packages established in non-EU countries is where these suppliers supply a travel package for a holiday to take place in the EU to an EU customer. In that case the place of supply of the service would be modified and this service would become taxable in the Member State where the customer was established. The trader established in a non-EU country would be obliged to register in the EU and to charge VAT on his profit margin realised on that supply. Under the current provisions, this supply is outside the scope of EU VAT.
For all other supplies by travel agent established in a non-EU country, nothing would change compared to the current situation. These supplies would remain outside the scope of the EU VAT system.
Where a customer was established outside the EU and the travel package was enjoyed in the EU, the EU established travel agent would have to charge VAT on his profit margin realised on the supply of that package. This is also the case at present, so the only change is for travel agents in Denmark, the Netherlands and Ireland, which currently apply the VAT exemption rather than the margin system to the profits of travel agents. When the travel service was enjoyed outside the EU, the supply of the service would remain exempted.
How could the current non-application of the margin scheme to travel agents selling holiday packages to another travel agent cause double taxation?
When a travel agent located in one Member State sells to another travel agent in that same Member State services such as hotel accommodation which he has purchased in a second Member State, the selling travel agent will be charged VAT in the Member State where the hotel accommodation is located. Under normal VAT rules he should be allowed to reclaim that because he is located in another country. However, it is often the case that the Member State where the hotel is located will deny him that deduction, because it assumes that he is subject to the special margin scheme. At the same time the country where he is located may deny him the benefit of the special margin scheme because he is selling the service to another travel agent rather than to the public. This gives rise to double taxation.
How could Member States enforce a provision that would oblige third-country travel operators to register for VAT, if the sales were made over the Internet?
The solution in the proposal for a Directive on the application of VAT to Electronic Commerce, which Member States agreed on 12th February, would be relevant. The correct application of this travel agents scheme has to be established by the Member States concerned and initially they would probably rely on voluntary compliance by traders established in non-EU countries. It is likely that at least the larger non-EU sellers would choose to be tax compliant.
Have travel agents sought these changes?
Yes. ECTAA (the Group of national travel agents and Tour Operator Associations within the EU) support these changes to simplify and further harmonise the operation of the margin system, which they also support, and eliminate competitive distortions.