Cos. Could Pay For Standoff On European Value-Added Tax Rule Change

European travel buyers and their travel management companies are facing what one tax expert has labeled "an administrative nightmare" starting Jan. 1, owing to disagreement between European Union member states on how to apply value-added tax to TMC fees for booking hotels. The standoff could result in VAT from two countries being applied to some booking fees, but no VAT at all applied to others. It also could mean TMCs will have to register to charge VAT in any European Union country where their customers spend a night in a hotel, and customers will have to reclaim the VAT on the booking fee from that country's authorities.

The chaos has arisen after failure by the E.U.'s VAT Committee to reach agreement at a meeting in Brussels last week. The committee was discussing how to treat VAT on hotel booking fees under an E.U. cross-border VAT directive that goes into effect on Jan. 1.

The directive is intended to modernize and simplify the rules relating to cross-border supplies of services and to the recovery of VAT on purchases made in other E.U. countries. In the case of most business services, Article 44 of the directive states that the place of supply will move from the location of the provider to that of the customer. This would enable customers to reclaim VAT in their own countries where they are already registered instead of having to go through cumbersome refund procedures in the country of the supplier.

However, TMC bookings of hotels also could be interpreted as applying to Article 47 of the directive, which relates to immovable property. Under this article, VAT would be charged in the country where the hotel is based. To take one simplified example, if a British TMC books a hotel in Germany, its booking fee would be liable to German VAT. The TMC would then have to register in Germany and pass the German VAT on to its customers, who would then have to apply to Germany for a VAT refund. Certain businesses, especially in the financial services and insurance industries, and public sector organizations are not eligible.

At last week's E.U. VAT Committee meeting, the European Commission sided with countries, including the United Kingdom, that wish to apply Article 44 to TMC hotel bookings, but this was resisted by the member states, including Germany, that wish to apply Article 47.

"The committee was supposed to propose a resolution but all fiscal questions have to be adopted unanimously," said Christina Russe, industry affairs manager for the Guild of European Business Travel Agents.

Another attempt to achieve consensus will be made in mid-December, but Russe holds little hope of a satisfactory outcome. "We don't know how long it will be take but it will certainly not be in place before the directive comes into effect on 1 January," she said.

The lack of agreement creates the possibility that, for example, a British-registered company technically will be liable to pay VAT to both U.K. and German authorities when booking a hotel room in Germany. Conversely, a Germany company booking a hotel in the United Kingdom may not be called upon to pay VAT in either country.

"It's an administrative nightmare," 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. "There is no need to apply Article 47 on any hotel booking services and we do not know why the German tax authorities have decided to follow this. Article 44 is the only solution that makes sense. No one would be able to issue accurate invoices in double-taxation scenarios."

Jorczyk added that DRV would hold more talks with Germany's finance ministry to persuade it to change its mind.

Paul Quigley, director of international VAT consulting for the Dublin-based VAT outsourcing specialist Meridian, agreed that the potential for both double taxation and non-taxation will increase. "The very thing this directive is meant to prevent is now more likely to happen," he said.

Quigley warned that the situation is even more complicated for companies not registered in the same country as their TMC. In January, suppliers will be obliged to provide more details to European VAT authorities about services they have provided to clients in other E.U. states. Suppliers do not have to levy VAT to foreign clients on the understanding that the client will self-assess and zero-claim the VAT through what is known as reverse charging. The new rules will make it easier to check they have done this.

Quigley urged all corporate buyers to seek advice on the position of their local tax authority regarding Articles 44 and 47, and to query with their TMC any invoices for which VAT is charged. He also recommended that all companies check that they are self-assessing comprehensively.