On 26th September 2013, the Court of Justice of the EU (CJEU) released its judgement in the case C-189/11, European Commission v. Kingdom of Spain, confirming that the application of the special margin scheme for travel agents may be extended to sales to any customer, both retail and wholesale customers. On the same day, the CJEU dismissed similar actions of the European Commission against Poland, Italy, Czech Republic, Greece, France, Finland, Portugal, in which actions the Commission claimed that by applying the special margin scheme to sales other than to travellers, the said Member States were in contravention of the EU VAT Directive.
The Travel Agents Margin Scheme (also known as ‘TOMS’) applies when a travel agent sells a travel package made up of a number of bought-in travel-related services without material alterations to the services. Such packages typically include a combination of services like flights and other transport, accommodation, transfers, land-tours, etc. The TOMS is a kind of simplification mechanism to address the difficulty which travel agents would otherwise face in applying the appropriate VAT treatment to each travel service which is purchased and resold. Through the application of the TOMS the place of supply of the combined package is deemed provided where the travel agent is established and such agent accounts for VAT on the ‘margin’ - being the difference between the VAT-inclusive purchase price of the package components and the selling price charged by the agent, exclusive of VAT.
By way of example, if a Maltese travel agent were to buy in accommodation in France at €100 inclusive of French VAT and resell it to its customer at a VAT-inclusive price of €107, the VAT chargeable by the travel agent in Malta would amount to €1.07 (being the 18% VAT included in the €7 margin) and the travel agent would neither be entitled to claim the French input VAT, nor be required to comply with any VAT registration and compliance obligations in France pursuant to the supply of French accommodation. In this manner, the TOMS avoids multiple registrations for the travel agent to account for VAT in each Member State where the supplies would otherwise be deemed to be supplied and avoids the need to file claims for VAT paid in other Member States.
The ‘margin’ is only taxable in Malta at 18% when the travel services are enjoyed within the EU, otherwise the margin would be fully or partly exempt depending on the extent to which the travel package is enjoyed outside the EU.
In the infringement proceedings against Spain, the European Commission interpreted the provisions in the EU VAT Directive laying down the mechanics of the TOMS (Articles 306 to 310) as applicable only to sales of travel services to travellers. It complained that Spain incorrectly authorized the application of those provisions to sales to non-traveller customers. The European Commission claimed that the EU legislature intended a restrictive interpretation to the relevant provisions.
The arguments of the parties revolved around the interpretation of the terms ‘traveller’ and ‘customer’ as used in the current language versions of the EU VAT Directive and their interpretation in the original language versions of the Directive. The CJEU acknowledged the language differences and the inconsistent use of the terms even within the EU VAT Directive itself. In this context it commented that it is impossible to reach a conclusion concerning the interpretation of the TOMS on the basis of the law provisions. Thus, resort was made to the purpose of the TOMS in order to determine whether the traveller-based or the customer-based approach is most suited to achieve the aims of the TOMS. In its analysis, the CJEU summarised the objective of the TOMS as:
The CJEU concluded that the application of the customer-based approach is most conducive to achieving those two objectives and interpreted the TOMS as applying to all travel package supplies, irrespective of the status of the customer.
Furthermore in its national legislation Spain specifically excluded from the TOMS any sales to the public by retail agents of travel organised by wholesale agents. Spain argued that the exclusion applies only where the retail travel agent acts as intermediary for a wholesale agent. The CJEU concluded amongst others that by excluding from the TOMS sales to the public by retail travel agents of travel services organized by wholesale agents, Spain is not in line with the VAT Directive.
Through other cases the CJEU dismissed also the Commission’s similar actions against Poland, Italy, Czech Republic, Greece, France, Finland and Portugal.
These cases have highlight an area where the practice differs across Member States. Way back in 1993, the London Tribunal in the UK had concluded on the non-applicability of the TOMS to wholesale supplies after comparing the language versions of the then Article 26 of the VAT Directive and commented that the text of the Directive would have to be substantially modified for the TOMS to cover wholesalers of travel packages.
Locally, the position taken by the Maltese VAT Department is that the TOMS cannot be availed of by travel agents selling to other agents or to tour operators i.e. the TOMS is limited to sales by a travel agent to final customers (including both individuals and entities consuming travel services for their own activities). The effects of the aforementioned judgements could mean that the VAT Department would have to reconsider its position and for the industry players to reassess the VAT treatment of their supplies.
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