Special scheme for travel agents

Brussels, 17 July 2002


of the

Economic and Social Committee

on the

Proposal for a Council Directive amending Directive 77/388/EEC

as regards the special scheme for travel agents

COM(2002) 64 final - 2002/0041 (CNS)


On 6 March 2002, the Council decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the

Proposal for a Council Directive amending Directive 77/388/EEC as regards the special scheme for travel agents

COM(2002) 64 final - 2002/0041 (CNS).

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 25 June 2002. The rapporteur was Mr Walker.

At its 392nd plenary session, held on 17 and 18 July 2002 (meeting of 17 July 2002), the Economic and Social Committee adopted the following opinion by 117 votes to one with six abstentions.

1.       Introduction

1.1        In 1977, when the Sixth VAT Directive was adopted, a special scheme was included for travel agents and tour operators, the Travel Operators Margin Scheme (TOMS). This special scheme was created because of the specific nature of the business. It was thought that the application of the normal rules on place of taxation, taxable amount and deduction of input tax would, by reason of the complexity of services and the multiplicity of places in which they are provided, entail practical difficulties for those undertakings, of such a nature as to obstruct their operations. In order to adapt the applicable rules to the specific nature of such operations, the Community legislature set up a special VAT scheme in Article 26 of the Sixth Directive.

1.1.1        The first objective of TOMS was to simplify the application of the Community VAT rules for these supplies. When the travel agent purchases services from other suppliers, puts them together in a package and sells them to the traveller, in his own name and for his own account, the provisions of TOMS ensure that the travel agent avoids the requirement for multiple registrations for VAT purposes in the different Member States whence the services are supplied.       Conversely, where the travel agent purchases services from other suppliers as an agent for his customer and not for his own account (i.e. the customer is directly and solely responsible for payment of the charges incurred), the VAT liability devolves upon the customer and TOMS does not apply. Arrangements of this kind are outside the scope of the proposed Directive and of this opinion.       The effect of the scheme is to simplify the compliance requirements for the tour operators. Where TOMS is not applicable, a travel agent located in Member State A who takes a booking on a hotel room in Member State B and then includes that facility in a package which he sells to a customer in Member State A, will be charged VAT by the hotelier at the rate ruling in Member State B. The travel agent must register for VAT in Member State B and pay tax to the authorities of that country on that proportion of his charge that relates to the hotel room; this is because the place of supply for this part of the service is deemed to be Member State B. He will then be entitled to recover the VAT paid to the hotelier by way of deduction from his output tax liability to the authorities in Member State B. Where the customer is a registered trader, he will be entitled to claim a refund of that portion of the VAT incorporated in his invoice that relates to Member State B by way of an 8th Directive claim on Member State B, provided that Member State B permits 8th Directive claims in respect of hotel accommodation. Not all Member States will allow such claims.       It can readily be seen that this arrangement involves considerable complications for both the travel agent and his customer. The complications are compounded where, as is frequently the case, the package comprises several elements originating in different Member States. It is for these reasons that TOMS was introduced. Under the provisions of this scheme, the travel agent pays VAT, at the rate ruling in Member State B, to the hotelier as before. He will not be entitled to claim a refund of that tax and his customer will not be able to reclaim the tax charged by the travel agent, regardless of whether or not the customer is registered for VAT. On the other hand, the travel agent will not be obliged to register for VAT in Member State B. He will pay VAT on his margin to Member State A. His margin is the difference between the price that he charges to his customer and the price, including VAT, which he pays to the hotelier.

1.2        In practice, there is no real uniformity of application of TOMS by the Member States. Article 28(3)(a) and Annex E (15) of the Sixth VAT Directive allow Member States to continue to tax transactions which take place outside the EU, whilst Article 28(3)(g) allows Member States to exempt such transactions without repayment of input VAT. Furthermore, Article 28(3)(b) and Annex F (27) allow Member States to continue to exempt the supply of services within the Community by travel agents or tour operators.

1.2.1        One Member State has notified1 the Commission under the procedure laid down in Article 27(1-4) of the Sixth VAT Directive of a special simplification measure applicable in that Member State, which allows it to apply divergent rules from Articles 26 and 28 of the Sixth Directive. The Commission notified2 all Member States of the proposed measure and, as no official reaction was received within the stipulated period of two months, this simplification measure was accepted on 19 December 1978.

1.2.2        The Commission has received a number of complaints from operators active in the tourism sector that travel agents’ supplies are receiving different treatment, depending on the Member State where they operate.

1.2.3        A major problem concerns the different application of Article 26 by the Member States. The crucial question is whether TOMS can apply if the package of services is supplied to another travel agent and not to the traveller.       The Commission took the view, supported by case law from the European Court of Justice, that TOMS can only be applied where the package is sold to the final consumer. Where the package is sold between tour operators/travel agents who are both registered for VAT, TOMS cannot be applied and each transaction must be taxed separately in accordance with the provisions determining the place of supply.       However, the application of Article 26 by the Member States does not always follow this interpretation. Member States apply Article 26 in very divergent ways, which can lead in some instances to double taxation. It also creates competitive disadvantages for companies established in Member States that apply TOMS only where the package is sold to the final consumer in comparison to competitors established in Member States that have a more flexible approach.       Some Member States defend the interpretation of Article 26 making it applicable where a package is sold between registered travel agents/tour operators, on the grounds that this would ease the compliance burdens for the businesses concerned, as it would no longer be necessary for them to register for VAT in all the Member States where they supply goods or services that are part of the package where it is sold other than directly to the traveller as final consumer.       Several Member States have also raised the issue of business trips. Where the travel agent/tour operator provides a travel package under TOMS to a registered business as final consumer, the invoiced price will be VAT inclusive and the customer will not be able to reclaim the VAT by way of input-tax deduction, even when the travel package is used for business purposes. This produces residual VAT in the intermediate consumption stage, which is contrary to the basic principle of neutrality of the Community VAT system.

1.3        A second objective of TOMS is the distribution of revenues between Member States. TOMS was devised, inter alia, in order to ensure that the VAT revenue is allocated to the Member State where the final consumption takes place. The effect is to allocate the VAT revenue on services enjoyed during the journey to the Member State where the services are enjoyed and the VAT revenue on the travel agent’s margin to the Member State where the travel agent is established.

1.4        In certain situations, the application of TOMS no longer ensures a fair distribution of VAT revenues between Member States. With the expanding use of the Internet, travel agents and tour operators established in countries outside the EU are becoming increasingly involved in the supply of travel packages to EU consumers. This leads to a clear distortion of competition since, under the current rules applicable in this field, a travel package will be taxed under TOMS when it is supplied by an EU-based operator but it will not be subject to tax on the margin when it is supplied by an operator established in a third country, since the base of supply is considered to be that third country. Hence, the EU-based operators are being put at a competitive disadvantage. This factor has forced an increasing number of travel agents/tour operators based in the EU to relocate their businesses outside the EU. Not only does this increase the distortion of competition vis-à-vis those remaining businesses in the EU but it deprives the Member States of the VAT revenue which would have accrued from the relocated businesses had they remained in the European Union.

1.5        In the light of these problems, which arise partly from changes in business patterns and technology and partly from divergent practices by Member States, the Commission has decided to include a modification of Article 26 as an element of its new VAT Strategy.3 The proposal is aimed at the simplification, modernisation and more uniform application of the Community VAT legislation in this field.

2.       The Commission’s proposals

2.1        The object of the proposals is to ensure more uniform application by extending the scope of TOMS to cover the supply of travel packages to all clients and to abolish the various derogations relating to such supplies. The proposal also aims at eliminating the distortion of competition to the detriment of EU-established tour operators, which is increasingly arising as a result of the use of new technology in this sector.

2.2        The details of the Commission’s proposal are set out in Appendix 1.

3.       General comments

3.1        The Committee agrees with the Commission that the differences between the Member States in the interpretation of Article 26 are creating distortions of competition in the Single Market. The Committee has repeatedly drawn attention in the past to the fact that the ways in which Member States apply national interpretations, customs, practices and precedents to Community legislation are fragmenting the Single Market. The legislative proposals themselves are often at fault; they too frequently leave the Member States with an excessive number of options and Member States are prone to use these discretionary powers in a protective manner.

3.2        The Committee has also drawn frequent attention to the way in which the proliferation of derogations, exemptions and special schemes is frustrating the completion of the Single Market and acting as a disincentive to cross-border trade, particularly for small businesses. It is often easier for registered businesses to trade with companies outside the EU than with those in other Member States. A recent study completed in Holland showed that the VAT compliance costs for Dutch companies engaging in intra-Community trade were over 5% of turnover.

3.3        The Committee accepts that the existing situation is putting EU-based operators at a competitive disadvantage with those based outside the EU and endorses the need to restore a “level playing field” in this area.

3.3.1        The Committee is aware that this has caused a number of operators to relocate their businesses outside the EU and shares the Commission’s concern that, if nothing is done to rectify the situation, this movement will continue and intensify. The rapid spread of on-line shopping, which is particularly prevalent in the holiday and travel area, will give added impetus to this movement.

3.3.2        The Committee appreciates that such developments will, if unchecked, result in a loss of VAT revenue to the Member States and sees this as an added incentive to reverse the trend.

3.3.3        However, the Committee seriously doubts whether the Commission’s proposals will have the effect of solving this problem.       Article 26(2) would be amended to modify the place of taxation for supplies made by non-EU operators to EU customers in such a way as to establish that the place of supply is the Member State of the customer. Theoretically, this would require operators based in third countries to levy VAT at the appropriate rate(s) on their margin and thereby put them on a par with EU-based operators.       The problem, as with previous similar proposals to deal with this situation, would be enforcing compliance on traders who are not registered for VAT within the EU and have no establishment there. With Internet-based trading, it will often be difficult to determine that the transaction has even taken place. The Committee concedes that it is probably worthwhile to put this provision on the statute book but considers that it is likely to prove a brutum fulmen.       Travel agents/tour operators based in the EU will have the right to “opt-out” of TOMS at their discretion. It is presumed that they would wish to do so where they were supplying to a VAT-registered customer as, in this instance, the customer would be able to reclaim the VAT charged by the travel agent and the travel agent would be able to reclaim the VAT charged by his suppliers on the services provided. However, this would create considerable additional administrative work; it would entail the tour operator registering in the Member State(s) where the service(s) were provided and involve the customer in making claims for refunds from the governments of Member States in which he was not registered by way of the 8th Directive procedure, a cumbersome and protracted process which many traders prefer to avoid. The travel agents would not, therefore, be placed on an equal footing with traders who were not established in the EU.

3.3.4        The Committee would point out that the Commission’s objectives, including the removal of the incentive for travel agents to operate off-shore, could be more satisfactorily met and all the concomitant complexities removed by the simple expedient of zero-rating these services (some of which are already zero-rated in some Member States). The Committee accepts, however, that the political will to take this step is unlikely to be forthcoming.

3.4        The Committee notes that one effect of this proposal would be to extend the scope of the scheme to cover business-to-business transactions. It feels that this would do nothing to diminish the incentive for travel agents/tour operators to relocate outside the European Union.

3.5        The sums involved are relatively small. Where TOMS is applied, the travel agents/tour operators pay VAT, at the standard rate ruling in the Member State in which they are established, only on their profit margin. Market concentration and vertical integration of the large tour operators have created a fierce cost/price competition, which has squeezed these margins to very low levels.

3.6        The Committee considers that the deletion of the words “to the traveller” from Article 26(2) constitutes a desirable simplification and clarification of the position.

4.       Specific comments

4.1        The Committee agrees with the Commission that, as the European Court of Justice has already clarified the circumstances in which TOMS may apply, there is no point in attempting to define the term “travel agent” for the application of Article 26.

4.2        The Committee approves the concept of permitting travel agents to calculate an overall profit margin for all supplies of travel packages for a determined period, in line with the provisions of Article 26a (B)(10) of the Sixth VAT Directive, relating to the supply of second-hand goods. It accepts this as an intended simplification of the system but regrets that it has been left to the discretion of the Member States whether or not they should permit this method to be applied. The inevitable result is that some Member States will allow it and others will not, thereby creating more differentials between the Member States and defeating the object of the exercise.

4.3        The Committee welcomes the proposal to secure more uniform application within the Community of the VAT rules applicable to these services by abolishing the possibility offered to Member States by Article 28(3)(g) (which allows Member States to continue to exempt services mentioned under the old Article 26(3) of the Sixth VAT Directive without refund of input VAT, rather than exempt them with a right to deduct input VAT), the abolition of the derogations foreseen under Article 28(3)(a) and point 15 of Annexe E (which allows Member States to subject to tax journeys outside the Community), the abolition of the derogations contained in Article 28(3)(b) and point 27 of Annexe F (which permits Member States to exempt journeys within the Community) and the abolition of the derogation granted by a Council Decision according to the procedure foreseen under the provisions of Article 27(1-4) of the Sixth VAT Directive.

4.4        The Committee understands and approves the thinking behind the Commission’s proposal to allow operators to elect to apply the normal VAT arrangements rather than TOMS but it agrees with the Commission’s statement that, “this will entail certain consequences and difficulties for the travel agent concerned” and it fears that the extent of these difficulties may have been under-estimated.

4.4.1        Travel agents dealing with customers who are not registered for VAT will naturally opt for TOMS, while those whose customers are registered businesses will prefer the normal VAT arrangements to apply. As long as a travel agent is dealing mainly or exclusively with one type of customer, this would not cause any undue difficulty but travel agents frequently have substantial numbers of both types of client and this would create serious administrative complications, to the extent that such travel agents might be impelled to split their operations into two different businesses.

4.4.2        Nor is it only the travel agent who is affected. Where he opts for the normal VAT arrangements to apply, this will have consequences for third parties. He will have to ask his supplier for a VAT invoice in order that he may claim the refund of his input tax and provide a VAT invoice to his customer detailing the various elements of different national VAT charges so that the customer may in turn reclaim the VAT (via the burdensome 8th Directive procedure if the suppliers are located in other Member States) and, where the supplier is an intermediary, this requirement will be passed on to that supplier’s source and thence all the way up the supply chain.

4.4.3        Furthermore, a travel agent may make a block booking of rooms in a hotel for a season and will be invoiced by the hotelier for the entire booking as a single transaction; where the bulk of his customers are non-registered persons, this will be charged in some cases at a VAT-inclusive price; if the travel agent subsequently sold a package containing a stay in one of these rooms to a registered business, he would now have to go back to the hotelier and ask for an amended invoice for the original transaction and a VAT invoice for the one room for the relevant period. For these reasons, the Committee is concerned that, in many cases, the “opt-out” provision will prove unworkable in practice.

4.4.4        The VAT authorities will also experience administrative complications. There is the concern that, where the travel agent elects to opt out, there is no way of checking whether he has fulfilled his obligation to register for VAT in other Member States. Moreover, the Member State from which deduction is claimed will have to satisfy itself that the travel agent has opted for the normal VAT arrangements to apply, in which case he is entitled to a refund of his input VAT, and is not supplying under the margin scheme established by Article 26, in which event there is no right to deduct the input VAT.

5.       The Commission’s Impact Assessment

5.1        The Commission contends that Community legislation is necessary in this area in order to further harmonise TOMS and to prevent distortions of competition, especially in relation to the competitive advantage currently being enjoyed by non-EU operators vis-à-vis their European competitors. However, as has already been pointed out, the discretionary powers granted to the Member States will create new differentials between Member States and the competitive advantage of non-EU operators is unlikely to be significantly diminished.

5.1.1        The Commission goes on to state that, “the application of the same rules in all Member States of the EU can only reduce business costs and encourage traders to operate in other Member States.” The Committee agrees with this view as a statement of principle but the discretionary powers given to the Member States will mean that the application will not be the same in all Member States.

5.2        The Commission states that the application of the global margin scheme will make the working of TOMS easier for SMEs. The Committee accepts this but would point out that the complexities introduced by the “opt-out” arrangements are likely to work in the reverse direction.

5.3        The Commission claims that the proposals would remove the distortions of competition arising from non-EU operators not paying VAT on their margin but this is dependent on devising effective means of enforcing the legislation. The Committee considers that this would be very difficult.

5.4        The Commission takes the view that, “VAT has a low impact on employment.” The Committee regards this assertion as being unproven.

5.5        The number of organisations that have been consulted about the proposal by the Commission appears to be rather small.

6.       Conclusions

6.1        The Committee welcomes the Commission’s intention to improve the operation of TOMS and believes that the proposals for a global margin calculation and the removal of a number of existing options and derogations granted to Member States constitute worthwhile improvements. It also welcomes the fact that TOMS can now be applied to transactions between travel agents. These changes are likely to be of particular benefit to SMEs. The Committee regrets, however, that Member States have been given discretion on the application of the global margin calculation.

6.2        The Committee is concerned by the potential complexities of the “opt-out” arrangements. In order to place themselves on an equal footing with operators in third countries when supplying tax-registered customers, EU-based travel agents would have to opt out of TOMS; this would then involve them in all the complexities of the normal VAT arrangements; their clients could only obtain refunds of the VAT paid by recourse to the cumbersome 8th Directive procedure and only then in those cases where the Member State concerned was prepared to admit claims in respect of this type of expenditure.

6.3        The Committee anticipates that difficulties will be encountered in obtaining compliance from operators based outside the EU. Unless a satisfactory way can be found of doing this, the incentive for EU-based operators to move off-shore will not be removed.

6.4        The Committee is not entirely convinced by the Commission’s Impact Assessment. The Committee would also wish to see an ex-post assessment carried out by the Commission after this legislation has been in force for a reasonable period.

Brussels, 17 July 2002.

The President

of the

Economic and Social Committee

The Secretary-General

of the

Economic and Social Committee

Göke Frerichs

Patrick Venturini


*          *

N.B.:  See Appendix 1 overleaf.



Article 1

Directive 77/388/EEC is amended as follows:

(1) Article 26 is replaced by the following:

"Article 26

Special scheme for travel agents

1. Member States shall apply a special value added tax scheme to the operations of travel agents in accordance with the provisions of this Article, where the travel agents deal with customers in their own name and use the supplies of goods and services of other taxable persons in the provision of travel facilities.

That scheme shall not apply to travel agents, who are acting only as intermediaries and accounting for tax in accordance with Article 11 A (3) (c).

For the purposes of this Article, tour operators and any other taxable person who supplies travel services in the same way shall be considered as travel agents.

2. All transactions performed by the travel agent in respect of a journey under the conditions set out in paragraph 1 shall be treated as a single service supplied by the travel agent. That single service shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has provided the services.

When the travel agent is not established in the Community or has a fixed establishment outside the Community from where the service is supplied and he supplies a travel service the effective use and enjoyment of which takes place within the Community, the single service shall be taxable at the place where the customer has established his business or has a fixed establishment to which the service is supplied or in the absence of such a place, the place where he has his permanent address or usually resides.

3. The taxable amount of the single service supplied by the travel agent shall be the profit margin made by the travel agent, less the amount of value added tax included in the profit margin. That profit margin shall be equal to the difference between the selling price charged by the travel agent for a travel package and the actual cost to the travel agent of this travel package. For the purposes of this paragraph, the following definitions shall apply:

a)      selling price means everything which constitutes the consideration, which has been, or is to be, obtained by the travel agent from his customer or a third party, including subsidies directly linked to that transaction, taxes, duties, levies and charges and incidental expenses such as commission and insurance costs charged by the travel agent to the customer but excluding the amounts referred to in Article 11 (A) (3),

b)      actual cost of the travel package means everything which constitutes the consideration, defined in the first indent, including VAT, obtained or to be obtained from the travel agent by his taxable suppliers, for the supplies and services provided to him, where these transactions are for the direct benefit of the customer excluding overhead costs used to compose the travel package.

4. In order to simplify the procedure for charging the tax and subject to the consultation of the VAT Committee, Member States may provide that the taxable amount of supplies of all travel services subject to the special arrangements for taxing the margin shall be determined globally for each tax period during which the travel agent must submit the return referred to in Article 22(4), as replaced by Article 28 (h).

In that event, the taxable amount for the supplies of travel services shall be the total margin made by the travel agent less the amount of value added tax included in that margin.

The total margin shall be equal to the difference between:

a)      the total amount of supplies of travel services subject to the special arrangements for taxing the margin effected by the travel agent during the period; that amount shall be equal to the total selling prices determined in accordance with paragraph 3, and

b)      the total amount of purchases of goods and services as referred to in paragraph 1, effected during that period, by the travel agent; that amount shall be equal to the total actual costs determined in accordance with paragraph 3.

5. If transactions entrusted by the travel agent to other taxable persons are performed by such persons outside the Community, the travel agent’s service shall be treated as an exempted intermediary activity under Article 15 (14).

Where those transactions are performed both inside and outside the Community, only that part of the travel agent’s service relating to transactions outside the Community may be exempted.

6. Tax charged to the travel agent by another taxable person on the transactions described in paragraph 2, which are for the direct benefit of the travel agent's customer, shall not be eligible for deduction or refund in any Member State.

7. The travel agent may apply the normal value added tax arrangements to any supply covered by the special arrangements for taxing the margin.

8. Where the travel agent applies the normal value added tax arrangements to the supply of a travel service, he shall be entitled to deduct from his tax liability the value added tax due or paid for the services supplied to him by his suppliers, where these transactions are for the direct benefit of his customer.

The right to deduct shall arise at the time when the tax due for the supply in respect of which the travel agent opts for application of the normal value added tax arrangements become chargeable.

9. Where the travel agent is led to apply both the normal arrangements for value added tax and the special arrangements for taxing the margin, the travel agent must follow separately in his accounts the transactions falling under each of these arrangements, according to rules laid down by the Member States."

(2) In Article 15(14) the second subparagraph is deleted.

(3) In Article 28(3) point (g) is deleted.

(4) In Annex E point 15 is deleted.

(5) In Annex F point 27 is deleted.

Article 2

Council decision upon request of the Kingdom of Belgium of 13 September 1978, granting to the Kingdom of Belgium a derogation under Article 27(1) of Directive 77/388/EEC is repealed.

Article 3

Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 1 January 2003 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

Article 4

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 5

This Directive is addressed to the Member States.

1 Letter of 13.9.1978.

2 Letter of 19.10.1978.

3 COM(2000) 348 final of 7.6.2000.

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