European Union member states have moved several steps closer to avoiding a bureaucratic disaster for travel buyers by reaching near-unanimous agreement on how to apply new value-added tax rules to hotel booking fees. Meanwhile, German travel management companies are pressuring their national tax authority, believed to be almost the only one resisting the consensus, by threatening court action.
The controversy was created by the EU VAT Directive, which comes into effect on Jan. 1 and is primarily concerned with defining the place of supply for VAT-chargeable services. The German government believes hotel booking fees should be governed by Article 47 of the directive, relating to immovable supplies. This would force travel management companies and their corporate clients to register with and reclaim VAT through the tax authorities of every member state where they make a hotel booking. One travel taxation expert has described this as a "nightmare scenario."
Instead, the overwhelming majority of member states voted last Friday on an Article 44 interpretation of the directive. This means that registration and reclamation only need take place through the tax authority in the country where the customer is based. Following last Friday's vote, the European Commission responded today by publishing a proposed regulation for implementation of the directive, clarifying that Article 44 is the correct interpretation for such intermediaries as TMCs. However, the proposal is not binding for member states. It only can become binding when the member states' finance ministers adopt the regulation unanimously.
This means Germany, though increasingly isolated, can continue to interpret the directive differently from the rest of Europe. It is believed to be almost the only country that voted at last Friday's EU VAT Committee meeting for the Article 47 interpretation. In response, the country's five leading TMCs decided on Monday that they will inform the German tax authorities they intend to handle their VAT arrangements according to Article 44. They also resolved that if the German government forces them into an Article 47 interpretation, they will take a test case for one of their customers to the country's Fiscal Court.
"The big five TMCs in Germany have decided to take a joint position and will not do what the German tax authorities want us to do," said Volker Jorczyk, a specialist with PricewaterhouseCoopers' taxes and travel practice in Düsseldorf and also the head of the tax committee of German travel agents association DRV. "Most of them are global players and need to set up consistent procedures." The strategy was agreed unanimously by the TMCs' tax chiefs but has yet to be confirmed by their management boards.
Despite German resistance, European travel agents association ECTAA welcomed publication of today's European Commission proposal. "The Regulation proposal would solve the problem in that it allows intermediaries making hotel arrangements for corporate customers to be taxed in accordance with the new Article 44, which avoids burdensome multi-registration requirements," the association said.