Table of contents 1. Introduction 1.1. Purpose and scope 2. Background to the intervention 2.1. Description of the intervention and its objectives 2.2. Baseline and points of comparison 2.2.1. Common EU rules 2.2.2. Interpretation of the common EU rules by the CJEU 3. Implementation / state of Play 3.1. The travel-tourism industry 3.1.1. Importance of the industry in the EU 3.1.2. Impact of the Covid-19 crisis 3.1.3. Digital transformation 3.1.4. Business models 3.2. Implementation of the scheme by Member States 3.2.1. Scope of the special scheme 3.2.2. Wholesale supplies

3.2.3. B2B supplies 3.2.4. Mixed packages 3.2.5. The margin calculation 3.2.6. Third country operators 4. Method 4.1. Short description of methodology 4.2. Data collection activities and legal mapping exercise 4.2.1. The study – legal mapping and business survey 4.2.2. Consultation of Member States – data collection 4.2.3. Feedback to the evaluation roadmap – data collection 4.2.4. The public consultation – data collection 5. Analysis and answers to the evaluation questions 5.1 Effectiveness 5.1.1 Simplification in the application of EU VAT rules 5.1.2 Allocation of VAT revenues 5.1.3 Unintended effects – Third country operators 5.2 Efficiency 5.2.1 VAT compliance costs under the normal VAT rules 5.2.2 Cost-benefit analysis for businesses 5.2.3 Potential distortions of competition

5.2.3.1. Wholesale supplies 5.2.3.2. Definition of travel facilities 5.2.4 Lack of level playing field 5.2.5 Calculation of profit margin 5.3 Relevance 5.4 Coherence 5.4.1 Shift towards taxation at destination 5.4.2 Regulatory framework 5.5 EU added value 6. Conclusion 6.1 Achievements of the special scheme 6.2 Shortcomings of the special scheme 6.3 Issues at stake Annex 1: Procedural information Annex 2: Stakeholder consultation 1. Business survey within the study by KPMG 2. Targeted Consultation of Member States in the context of the Group on the Future of VAT 3. Feedback mechanism – Comments and contributions to the evalaution roadmap 4. Public consultation open to all stakeholders and members of the public 4.1. The overview

4.2. Key findings Annex 3: Methods and analytical models List of tables Table 1: VAT collected on travel services Table 2: Country of origin List of fIGURES Figure 1: Intervention Logic of the Travel Agent scheme Figure 2: Turnover in tourism services in EU27 Figure 3: Single travel services – Application of the scheme by Member States and United Kingdom Figure 4: Meaning of travel facilities – Application of the scheme by Member States and United Kingdom Figure 5: Wholesale supplies - Application of the scheme by Member States and United Kingdom Figure 6: B2B supplies - Application of the scheme by Member States and United Kingdom Figure 7: Mixed packages (VAT on in-house element) – Application of the scheme by Member States and United Kingdom Figure 8: Mixed packages (margin apportionment) – Application of the scheme by Member States and United Kingdom Figure 9: Mixed packages (MICE) – Application of the scheme by Member States and United Kingdom Figure 10: The margin calculation – Application of the scheme by Member States and United Kingdom Figure 11: Supply of accommodation only – example 1 Figure 12: Supply of accommodation only – example 2

Figure 13: Supply of accommodation only – example 3 Figure 14: Car rental Figure 15: Comments re simplification Figure 16: Comments re fitness for digital age Figure 17: Comments re lack of clarity Figure 18: Comments re distortion of competition Figure 19: Comments re business needs Figure 20: Comments re need for amendment Figure 21: Further comments Glossary Bed Bank Online intermediaries specialised in distribution/aggregation of products (e.g. hotel rooms) Bn Billion B2B Business-to-Business B2C Business-to-Customer CJEU Court of Justice of the European Union COM European Commission DG TAXUD Directorate General for Taxation and Customs Union DMC Destination Management Companies EU European Union EUR Euro FIT Fully Independent Traveller GDP Gross Domestic Product ICT Information Communication Technology MICE Meeting, Incentives, Conference and Events OECD Organisation for Economic Co-operation and Development OSS One Stop Shop OTA Online Travel Agency Principal supplier Providers such as hotels, airlines, attractions and car rental companies supplying their own services both directly to travellers and to other operators SME Small and Medium-sized Enterprise TBE Telecommunications, broadcasting and electronically supplied services TMC Travel Management Companies TTL TVC Tourism Tax and Law Travel VAT Conference Travel agents If not otherwise specified, the whole category of travel agents and tour operators to which the special scheme is applicable UNWTO United Nations World Tourism Organization VAT Value Added Tax VAT Directive Directive 2006/112/EC WEF World Economic Forum 1.Introduction The special VAT scheme for travel agents (the “special scheme” or the “travel agent scheme”) was put in place by the Sixth VAT Directive in 1977 as a simplification measure derogating from the normal VAT rules on the place of supply, taxable amount and deduction of input tax. This scheme, currently set out in Articles 306 to 310 of the VAT Directive , has remained unchanged since the adoption of the common VAT system in the EU. Since then, however, divergence in application of the travel agent scheme has arisen between Member States, leading, over the years, to numerous judgments of the Court of Justice of the European Union (CJEU). As a result, in 2002 the Commission adopted a proposal , amended in 2003 (“the 2002/2003 proposal”), to reform the travel agent scheme. No agreement could however be reached in the Council and the 2002/2003 proposal was finally withdrawn in 2014, because it had become obsolete after a series of other rulings of the CJEU. In compliance with its commitment of periodically and regularly review of the provisions of the VAT Directive, in 2017 the Commission contracted a study (“the study”) in order to evaluate the current state of the play of the special scheme, together with possible options for its review. This evaluation fits into the priorities set by the Tax Action Plan, in particular those aiming at simplifying EU tax rules for more competitiveness in the Single Market, especially in light of the current Covid-19 crisis.

In this context, this Staff Working Document presents the outcome of the evaluation process carried out on the travel agent scheme. 1.1.Purpose and scope As set out in the Roadmap published on 4 February 2020, the purpose of this evaluation is twofold. Firstly, it seeks to establish whether the special scheme still meets its original objectives, namely simplifying the application of VAT rules for travel agents and ensuring that VAT revenue goes to the Member States of consumption. Secondly, it sets out to assess whether new concerns and challenges have arisen since its adoption, which cannot be addressed by the scheme in its present form. In particular, the evaluation looks at the implementation of the different provisions of the travel agent scheme, and assesses its application by Member States. In this regard, particular attention is given to the relevant case law of the CJEU. It also assesses possible distorsions of competition that may affect the functioning of the internal market as well as possible side effects that might be due to the application of the scheme. Developments in the travel industry, including its different business models and the digitalisation of the sector, are important aspects that are given consideration. The evaluation also takes into account developments in the regulatory framework, like the introduction of the “One Stop Shop” in 2021 (a solution enabling all businesses that deal with final consumers to avoid multiple registrations and declarations) and the shift to destination-based taxation (in the current VAT Directive and in a definitive VAT system). The performance of the special scheme is assessed against the five evaluation criteria: i) relevance, ii) effectiveness, iii) efficiency, iv) coherence and v) the EU added value as defined in the Better Regulation Guidelines. The time period covered stretches from the creation of the special scheme in 1977 until the availability of the latest reported data (e.g. data from the open public consultation ended in September 2020). In terms of geographical coverage, the evaluation covers all EU Member States and the United Kingdom. With the view to assess whether the special scheme ensures a level playing field, the evaluation also covers economic operators located in third countries. This evaluation will help determine whether any subsequent policy action is needed in order to address any identified shortcomings. It could be then followed by an impact assessment of possible options for reform and eventually result in a legal initiative of the Commission. 2.Background to the intervention 2.1.Description of the intervention and its objectives When the Sixth VAT Directive was adopted in 1977, a special scheme was introduced for travel agencies and tour operators. This special scheme, now set out in Articles 306 to to 310 of the VAT Directive, was brought in due to the special nature of the industry. The services offered by travel agents usually consist of a package of services, in particular transport and accommodation obtained from third parties. These packages are then sold by travel agents, acting in their own name, to their customers. Those are circumstances where it is particularly difficult to apply the normal VAT rules on the place of supply, the taxable amount and deduction of input tax due to the complexity and location of the services provided. The special scheme pursues two main objectives: (a) to simplify the application of the normal VAT rules, especially for the supply of travel packages, so that a travel agent avoids having to register for VAT purposes in each of the Member States where the services acquired by the travel agent are performed. To be kept in mind that the normal activity of travel agents consists of purchasing services for the direct benefit of a traveller from service providers, mainly established in other Member States or outside the EU, and reselling them in their own name to the traveller. Under Article 28 of the VAT Directive, taxable persons (travel agents) acting in their own name but on behalf of another (the traveller) would be considered to have received and supplied those services themselves. Application of the normal VAT rules would therefore result in the travel agent having to register in each of the Member States in which the relevant services are supplied. For example, the provision of hotel accommodation is deemed to take place where the hotel is located and admission to cultural, artistic, entertainment and similar events is deemed to take place where those services are physically carried out. By introducing the “single service” concept, under which all transactions in respect of a journey are regarded as a single supply taxable in the Member State where the travel agent is established, the special scheme does away with the requirement of multiple VAT registrations. (b) to ensure that VAT revenue goes to the Member State in which final consumption of each individual component of the single supply takes place. Under the special scheme, travel agents are not taxed on their turnover, but on their margin. VAT incurred by the travel agent in respect of supplies made for the direct benefit of the traveller is therefore not eligible for deduction or refund in any Member State. The effect of taxation on the margin is that VAT revenue on services enjoyed in the course of the journey, such as hotel accommodation, restaurant services or transport, will go to the Member State in which the traveller receives the service, whereas VAT on the travel agent’s margin returns to the Member State in which the agent is established so that, in principle, a fair distribution of VAT revenues between Member States is guaranteed: in the end, each element of the travel package will bear VAT in the country of consumption. In addition, without an arrangement such as taxation on the margin, travel agents putting together a holiday or travel package within the European Union would have to recover the VAT charged to them, often in other Member States, for supplies such as accommodation, meals, transport, guided tours, cruises or organised leisure activities to be provided in those Member States. Not only would that result in significant administrative complexity but, as a result, such services would be subject to VAT not in the Member State in which they were in fact provided and consumed but in the Member State in which the package was purchased. Significant VAT revenue might thus be diverted from Member States providing tourist destinations to those providing the tourists. Since its introduction in 1977, nevertheless, the travel agent scheme has not been applied uniformly by Member States, possibly leading to double taxation, distortions of competition and unfair distribution of VAT receipts among Member States. For that reason, in 2002 the Commission adopted a proposal with a view to amend the travel agent scheme . That proposal had as its objective:

·to allow travel agents to apply VAT to their profit margin for services sold to other travel agents as well as to private individuals, ·to include travel agents not established in the EU within the scope of the VAT system, when selling package tours to customers established in the EU, ·to entitle travel agents to opt for application of the normal VAT system, ·to authorise travel agents to calculate a single profit margin for package tours provided over a certain period. The European Parliament proposed two amendments to this proposal, one of which was accepted by the Commission, namely the introduction of the “one stop shop” principle. The introduction of an exemption for supplies to third-country established clients was however not accepted, as it would have been contrary to one of the basic principles of the EU VAT system whereby supplies of goods and services are taxed where the consumption takes place regardless the place of establishment of the client. To this end, in 2003 the Commission amended its proposal (“the 2002/2003 proposal”) aiming at extending the simplified mechanism just adopted for services provided electronically by suppliers not established in the European Union to customers established in the EU so that it would also cover supplies made under the travel agent scheme. No agreement could however be reached in the Council and the 2002/2003 proposal was finally withdrawn in 2014, because it had become obsolete after a series of rulings of the CJEU. 2.2.Baseline and points of comparison 2.2.1. Common EU rules The travel agent scheme is set out in Articles 306 to 310 of the VAT Directive and is mandatory for both Member States and businesses. According to Article 306, the special scheme applies to operations carried out by the travel agents (including tour operators) who deal with customers in their own name and use the supplies of goods or services of other taxable persons in the provision of travel facilities. When travel agents act as intermediaries, i.e. act in the name of another person, the special scheme does not apply and the supplies of travel facilities are instead treated according to the normal VAT rules. Under Article 307 of the VAT Directive, transactions performed, in accordance with the conditions laid down in Article 306, by a travel agent in respect of a journey are regarded as a single supply. The place of taxation for the travel agent's supply is where he has established his business or has a fixed establishment from which the service is provided or, failing this, the place where he has his permanent address or usually resides. According to Article 308 of the VAT Directive, the taxable amount is the profit margin realised by the travel agent on the supply of single service, that is to say, the difference between the total amount, exclusive of VAT, to be paid by the traveller and the actual cost to the travel agent of supplies of goods or services provided by other taxable persons (inclusive of VAT), where those transactions are for the direct benefit of the traveller. Hence, the travel agent is not entitled to deduct input VAT: tax charged to a travel agent by other taxable persons on transactions that directly benefit a traveller is not eligible for deduction or refund in any Member State. However, Article 310 of the VAT Directive leaves the right for the travel agent to deduct input tax incurred on transactions other than those directly benefiting a traveller, such as VAT on overhead costs (advertising, office expenses, etc.). Finally, as for transactions entrusted by a travel agent to other taxable persons performed by such persons outside the European Union, the exemption with right of deduction applies based on Article 309 of the VAT Directive, read in conjunction with Articles 153 and 169. When the transactions entrusted by a travel agent to other taxable persons are performed both inside and outside the EU, only the part of the service relating to the transactions outside the European Union is exempted with right of deduction. 2.2.2. Interpretation of the common EU rules by the CJEU Differences in interpretation by Member States of the above rules have led to a multitude of judgments rendered by the CJEU over the years. These have served to clarify the EU common rules and to complement them as a baseline for the special scheme. The crucial interpretative role played by the CJEU over the last years has also been underlined by Advocate General Sharpston in her opinion in case C‑189/11 et al. Commission v Spain: “It is hard to avoid the impression that the Court is being called upon to decide a matter of VAT policy (and of legislative drafting) which has proved beyond the capabilities or the willingness of the Member States and the legislature.”. The CJEU confirmed that the special scheme derogates only in terms of place of supply, taxable amount and deduction of input tax and that in any other case, the normal VAT rules must be applied:

·The supply of travel services is not included in Annex III of the VAT Directive and can therefore not benefit from a reduced rate of VAT (C‑74/91 Commission v Germany and C‑552/17 Alpenchalets). ·The value of the margin must be considered in a manner consistent with normal valuation provisions (C‑149/01 First Choice Holidays). ·VAT payable must be calculated separately for each supply. Using a global or aggregated basis is not permitted (C‑189/11 et al. Commission v Spain and C‑380/16 Commission v Germany). ·When a travel agent, subject to the special scheme, receives a payment on account, VAT is chargeable, in accordance with Article 65, on receipt of that payment on account (C‑422/17 Skarpa Travel). ·The turnover of a travel agent (and not his margin) must be taken into account, when the travel agent wants to benefit from exemption as a small business (C‑388/18 B (Chiffre d’affaires du revendeur de véhicules d’occasion)). The CJEU clarified that, as the special scheme is an exception to the normal VAT rules, it must be applied only to the extent required to achieve its objectives: ·Services supplied by the travel agent himself cannot fall within the special scheme (C‑557/11 Kozak). ·Bought-in services should not be included in the special scheme when merely ancillary to in-house services (C‑308/96 and C‑94/97 Madgett and Baldwin). ·In-house services (when supplied together with bought-in services) must be valued by reference to their market value whenever this market value can be established. A travel agent may only use an actual costs basis to identify the market value where he can prove that that basis accurately reflects the structure of the package supplied or where it is simply not possible to establish the market value (C‑291/03 MyTravel). ·A supply in isolation, which does not relate to a journey, is to be taxed under the normal VAT rules (C‑31/10 Minerva Kulturreisen). The CJEU emphasised that the special scheme must be applied in a consistent manner in order to achieve its objectives: ·The special scheme is not limited to travel agents and tour operators but must apply equally to any person supplying travels under the circumstances envisaged (C‑308/96 and C‑94/97 Madgett and Baldwin, C‑200/04 iSt and C‑220/11 Star Coaches). ·The status of the customer is not relevant in determining whether the special scheme applies. B2B and B2C supplies are therefore treated equally (C‑189/11 et al. Commission v Spain and C‑380/16 Commission v Germany). In particular, in case C‑380/16 Commission v Germany, the CJEU made clear that it is important to ensure that the interpretation that best matches the objectives of the special scheme, which is that B2B supplies are also covered, must be applied in a uniform manner by the Member States. The CJEU also repeated that the two objectives of the special scheme, namely simplification of the VAT rules for travel agents and the balanced distribution of revenue from the collection of VAT between Member States, are better achieved with the customer principle. ·The special scheme applies both to single items and packages (C‑163/91 Van Ginkel and C‑552/17 Alpenchalets). 3.Implementation / state of Play 3.1.The travel-tourism industry 3.1.1. Importance of the industry in the EU The travel and tourism are mainstays of the EU economy. The European tourism ecosystem, covering a range of activities such as travel, transport, accommodation, food, recreation, directly and indirectly contributes close to 10% to EU GDP and has made the EU the world’s leading tourism destination, with 563 million international arrivals and 30% of global receipts in 2018 according to World Tourism Organization (UNWTO). For countries such as Spain and Italy, the contribution of tourism to their GDP is even higher than the global average, 14.3% and 13.0% of their GDP in 2019, respectively. The crucial importance of tourism in the EU is demonstrated by the fact that it is the fourth largest EU export category and brings spill-over benefits to the European economy as a whole: EUR 1 of value added generated by tourism results in additional 56 cent of value added in indirect effect on other industries. The travel ecosystem is made up by different players, comprising operators of varying description (tour operators, travel agents etc.) and numerous principal suppliers providing services both directly to travellers and to other operators (for example hotels, airlines, attractions and car rental companies).

The EU travel market comprises approximately 210 000 tour operators and travel agents. The total annual turnover derived from EU travel services, including the organisation of conventions and trade shows, in 2018 was circa EUR 213 billion. The industry is increasingly driven by technology which has disrupted the traditional business models and the roles of players within the ecosystem. The rise of the digital consumer and a surge in demand for travel are also driving disruption and transformation in this sector. 3.1.2. Impact of the Covid-19 crisis Worldwide travel and tourism have been the worst affected of all major economic sectors by the Covid-19 pandemic and measures introduced to contain its spread. It has resulted in travel restrictions being put in place in virtually all countries around the world, with conferences and events being cancelled, hotels closed and aircraft left on the ground. Depending on the duration of the crisis and the speed with which travel and tourism rebounds, revised scenarios by the Organisation for Economic Co-operation and Development (OECD) indicate that the potential shock could range between a 60-80% decline in the international tourism economy in 2020. The impact is particularly felt in countries, cities and regions where tourism is an important part of the economy. OECD analysis also indicates that a high share of jobs are at risk in European destinations such as the Ionian islands in Greece, Balearic and Canary Islands in Spain, and the Algarve region in Portugal, given the importance of tourism in the local economy. Between February and June 2020, the turnover for services related to tourism (air transport, hotels, restaurants, tour operators etc.) dropped by 75% as during two months of Covid-19 measures (March and April) many hotels and restaurants had been closed and air travel was massively reduced. Among the detailed sectors within the tourism sector, turnover of travel agencies and tour operators fell the most (-83.6%), followed by air transport (-73.8%), accommodation (-66.4%) and restaurants (-38.4%). Source: Eurostat (online data code: sts_sepr_m) A report published by the Joint Research Centre (JRC) of the European Commission, provides an analysis of the potential effect of the Covid-19 outbreak on EU employment, as the result of tourism flow slowdown. Based on the results of surveys conducted between April and May 2020, the report predicts a decline in tourist arrivals in EU of between 38% and 68% in 2020 and a subsequent potential risk of reduction in working hours or permanent jobs losses in 2020 of between 6.6 and 11.7 million jobs. 3.1.3. Digital transformation Travel and tourism were one of the first sectors to digitalize business processes on a global scale, bringing flight and hotel booking online to become a digital pioneer. As information and communications technology (ICT) became a global phenomenon, the travel and tourism industry was consistently early in adopting digital technologies because of its position as heavily service-oriented ecosystem. According to the World Economic Forum (WEF), the digital transformation in travel tourism and aviation is expected over the next years to: -create up to US$ 305 billion of value for the industry; -migrate US$ 100 billion of value from traditional players to new competitors; -generate benefits valued at US$ 700 billion for customers and the wider society through in particular cost and time savings for consumers; -result in a net displacement of current jobs in the industry. Digital technologies are changing the way travel is traditionally researched, bought, sold, experienced and shared. In particular, digital platforms such as online travel agencies, meta-search engines and travel service aggregators are taking shape across the industry and are challenging the travel incumbents. Their presence in the market now dominant has aggressively disrupted the value chain of the traditional travel system from end-to-end. In particular, Peer-to-Peer (P2P) platforms such as Airbnb have radically altered demand-side dynamics, enabling small entrepreneurs and private individuals to compete with bigger players. According to the World Bank Group, the annual growth rate of P2P platforms providing accommodation services is estimated at 31% between 2013 and 2025, six times the growth rate of traditional bed and breakfasts and hostels.

At the same time, online travel agencies such as Expedia and Booking.com have played a big role in shaping the current state of travel offerings and booking. For instance, by offering instant booking feature to guarantee customers’ reservation, online travel agencies have helped alleviate many of the customers’ concerns and helped automate what had previously been an incredibly arduous part of the business model of a brick-and-mortar travel agent. Indeed, on-line booking is one of the major areas of profit migration. WEF indicates that the share of travel booking made through online travel agencies is expected to grow from 40% in 2016 to 60% in 2025 while the shift from traditional to online channels is expected to cause US$ 220 billion in additional revenues in 2025. As more and more devices get connected to the Internet of Things (IoT), access to customers’ data and ability to provide hyper-personalised services are key for a travel operator to staying relevant. In the transformed travel ecosystem, power has then shifted to travellers and platforms that own data. These changes in the industry make collaboration between other players within and outside the travel ecosystem extremely important. Greater integration allows companies to access more data and use it to optimize customer relationships. Collaboration may not be straightforward, with some companies potentially losing customers to others in the value chain. It also raises the possibility that partner organisations may become competitors. This could result from the vertical and horizontal integration that is likely to take place as industry players expand their activities. An example would be an airline acquiring hotels and, in so doing, entering another part of the value chain. Digital transformation in the travel industry raises two main concerns: §Since new business models become viable and companies at the edge or outside the travel ecosystem are drawn in, it is hard to foresee the shape of the industry in a decade. Traditional industry roles blur and become less relevant. The distinction between acting as intermediary, being principal supplier or operating as undisclosed agent also becomes less and less clear. On the other hand, the trend of convergence and networking within the ecosystem will bring new type of services and diversification of activities. §Core operational processes of a travel operator can be entirely automated, digitalised or handled remotely. The growing use of asset-free models such as platforms means that a physical business presence is no longer necessary. This renders the principle of taxation at the place where the travel operator is established inadequate and does not ensure a level playing field as major online players are based outside the EU. 3.1.4. Business models The evaluation takes into account six key business models that are in use in the industry. In general, travel businesses can operate via two or more of them. ·Tour operators; ·Travel Management Companies (TMC); ·Travel agents; ·Destination Management Companies (DMC); ·MICE (Meeting, Incentives, Conference and Events) organisers; ·Online Travel Platforms. Tour operators: these businesses range from large international tour operators to small independent niche operators (mainly business to consumer, B2C). Tour operators organise and provide package holidays, contracting with hoteliers, airlines, ground transport companies and other suppliers such as Destination Management Companies (DMCs – see below), and advertising the holidays that they have assembled online or in printed brochures. Most tour operators focus on leisure tourism. Historically, tour operators relied upon traditional “brick & mortar” sales channels but this is gradually changing as businesses adopt an online presence so that the online business is now a sales channel in its own right. Continued improvements in internet connectivity and increasing access to digital devices have resulted in more customers seeking to book travel online. The trend towards using online operators and agents has allowed customers to access providers operating outside their own territory. TMC: Travel management companies serve primarily corporate customers (business to business, B2B). Travel management companies are able to compare different itineraries and costs in real-time, allowing users to access fares for air tickets, hotel rooms and rental cars simultaneously and to prepare bespoke travel plans for clients. Travel agents: these businesses operate mainly in the leisure market (i.e. business to consumer, B2C) either as “brick & mortar” enterprises or as “online” agents or both. Travel agents may provide customers with travel advice, then sell and administer bookings acting for a number of tour operators and other suppliers such as airlines, hoteliers and car rental companies. Large travel agencies are often part of an international integrated group that also organises packaged tours and owns accommodation and other facilities. Independent travel agents can also join up in consortia or networks. These networks combine the capacity of their members on the purchase side as well as in providing services to the members of the consortium (HR management, taxation consultancy, etc.). DMC: Destination management companies operate mainly in the inbound segment (non-residents travelling to a country). Destination management companies and wholesale tour operators differ from the tour operators as they usually do not deal directly with end-clients, but sell to agents (mostly tour operators). They cater services for both tour operators focusing on leisure tourism and for MICE organisers, and sometimes for travel management companies. These services can include transportation, hotel accommodation, activities, excursions, conference venues, themed events, etc. Destination management companies/wholesale tour operators organise and sell packages but also sell individual components e.g. “room only”. The package business is often referred to as the “groups business” whilst the sale of single components is often called “FIT” (Fully Independent Traveller).

MICE: Meeting, Incentives, Conference and Events organisers are often specialised in the specific segment of Meeting, Incentives, Conference and Events, although travel management companies can have their own in-house MICE department as well. These operators combine features of travel agents, destination management and travel management companies, generally focused around a specific event or collection of events catering to a particular purpose or special interest group. Online Travel Platforms: digital infrastructures that facilitate the interaction between travel service providers (e.g. hotels, airlines, car rental companies) and customers. These platforms are today essential to operate in the travel sector as they collect and share up-to-date information about travellers’ needs and more importantly generate insights to optimize the customer experience. The platforms’ technology indeed allows customers to explore offerings, make personalised travel packages, book and pay for the service. The operators that use this model are, in particular, online travel agencies but also travel aggregators and metasearch engines that can scrape for information across multiple sources and websites to get up-to-date availability and pricing of travel facilities. Fare aggregators then redirect the customer to an online travel agency, airline, hotel website or car rental website for the final purchase. These platform models are not only relevant in the B2C context but also and increasingly for business users and other players in the travel industry. Services carried out by Online Travel Platforms mainly qualify as intermediation but it is also possible that these would fall within the scope of the special scheme. 3.2.Implementation of the scheme by Member States This section explains how the main provisions of the special scheme are applied by Member States and identifies deviations from the baseline: the VAT Directive and CJEU case-law. Deviations arise either by differing interpretation of the common rules which lack sufficient clarity or by the fact that Member States do not all to comply with the common rules as interpreted by the CJEU. 3.2.1. Scope of the special scheme The scope of the special scheme is not clearly defined in the VAT Directive. This leads to differences in treatment between similar supplies in different Member States. -Single travel services Some Member States consider that the special scheme only applies to “packages” and that a “package” must by its very definition consist of more than one item. Therefore, such Member States consider that the sale of, for example, just a hotel room without a flight cannot be considered as falling within the special scheme. Although the CJEU in Van Ginkel and Star Coaches has given some guidance on this point, the application by Member States does not appear to be consistent. Based on the questionnaire and desk research used for the study, thirteen Member States and the United Kingdom apply the special scheme to a single travel service in conformity with the CJEU case law, while nine Member States apply the special scheme only where some additional “booking service” is provided. Nevertheless, in Van Ginkel, the CJEU ruled that the application of the special scheme is not conditional on these additional services being provided. As such, the special scheme continues to apply also to a supply of a single service (e.g. hotel accommodation). In Estonia, although in principle the special scheme applies to a single travel service, in practice normal VAT rules are regularly applied. Meanwhile, Romanian rules provide an explicit “opt-out” of the special scheme at the taxpayer’s discretion, whereby a single supply (excluding passenger transport) can optionally be taxed under the normal VAT rules. In Latvia, the legislation does not specify how many items should be included in a package for it to fall within the special scheme. Meanwhile, in Hungary and Slovenia, there is no clear guidance from the tax authority. In summary, there appears to be confusion across Member States as to the treatment of a single supply of, for example, hotel accommodation and the supply of, for example, hotel accommodation with a booking service. Another area specifically relates to car hire which in some Member States, when supplied on a standalone basis, is deemed to be outside of the special scheme. Conforms with legislation/case law Appears slightly different to legislation/case law Can opt-out of special scheme if there is a single supply No guidance/guidance not clear

Source: Study (section 5.5.11.1, p. 73) -Meaning of travel facilities The lack of a common definition of travel for the purpose of applying the special scheme (i.e. a precise list of what are travel facilities) leads to many inconsistencies and difficulties for taxable persons who operate in multiple Member States. According to the study, eleven Member States apply the special scheme only to a prescribed list of travel facilities. Meanwhile, in the remaining sixteen Member States and the United Kingdom the liability of certain services to the special scheme depends on whether those services are packaged with other elements. For example in many Member States restaurant meals, catering, admission tickets, sports facilities etc. are not subject to the special scheme unless packaged along with a special scheme supply. For twenty five of the Member States and in the United Kingdom, the duration of the travel services is irrelevant. However, in Finland and Italy, day-trips of a duration less than 24 hours (and without overnight accommodation) are taxed outside of the special scheme, subject to normal VAT rules. It should be borne in mind, however, that the major differences in interpretation of scope pertain to “peripheral” elements of special scheme packages (such as airport lounges and restaurant meals), with widespread agreement on the treatment of core travel elements such as accommodation and flights. Source: Study (Annex 1, p. 123) 3.2.2. Wholesale supplies Practice is divided when it comes to the treatment of “wholesale supplies” whereby a travel service is supplied to a business customer for onward supply to a traveller. Three approaches exist at the moment as to the taxation of wholesale supplies: (i) Application of the special scheme; (ii) Exclusion from the special scheme and application of the normal VAT rules; (iii) Optional application of the special scheme left at the discretion of the taxpayer. In respect of wholesale supplies of travel facilities, six Member States and the United Kingdom consider such supplies to be outside the scope of the special scheme and taxed under the normal VAT rules. In the United Kingdom, however, businesses may choose to include them in the scheme. Fifteen Member States consider such wholesale supplies to fall under the special scheme. Meanwhile, treating wholesale supplies as subject to the special scheme in six Member States is currently optional left at the discretion of the taxpayer. Conforms with legislation/case law Not in conformity with legislation/case law Optional to apply special scheme (not in conformity) Source: Study (section 5.5.7.1, p. 61), updated by Commission services

Destination management companies are those most affected by the diversified treatment as they usually act as wholesalers, not dealing directly with end-clients. Destination management companies and other wholesale suppliers of travel facilities provide either services to be used on their own or packages of services to be used in combination with each other. Implications from the application of normal VAT rules For wholesale supplies of single items, normal VAT rules implies the payment of VAT in the Member State in which the service takes place (for most tourism related services). For example, a supply of accommodation should be subject to VAT in the Member State in which the accommodation is situated whilst passenger transport falls within the scope of VAT in the Member State in which the transport takes place. The supply would then be subject to VAT at the rate stipulated by the Member State of supply. As regards packages of services, more complexities may arise from the taxation under the normal VAT rules as different approaches could be applied and different Member States may be involved: -The “multiple supply” approach, i.e. identify all the component parts of the package, attribute a value to each part and tax each part accordingly at the appropriate VAT rate (i.e. following the appropriate place of supply, valuation and liability rules for each supply identified). -The “predominant supply” approach, i.e. identify the main item within the package and apply the treatment applicable to that main item. -The “general rule” approach, i.e. subject to certain tests, a package is a single supply taxed in accordance with Article 44 of the VAT Directive (i.e. VAT payable where the business client is established – using the reverse charge mechanism). As a result, potential distortions in the wholesale package market may arise as some Member States may require the use of the special scheme while others may exclude such supplies from the scheme or even allow taxpayers to choose to opt for normal VAT rules. These distortions are then even worsened by the different interpretations of which normal VAT rules should be applied. These mismatches in VAT treatment are a significant barrier to the efficient application of VAT to the wholesale sector and may lead to non-taxation or double taxation of the margin. Destination management companies specialised in inbound supplies would however not suffer the same complexities as they would not have to comply with the VAT rules and interpretations given by different Member States. 3.2.3. B2B supplies Practice as regards services supplied for a business client’s own use is more consistent than that applied to wholesale supplies. The compulsory use of the special scheme is much more common in this sector. Austria, which considers services supplied to all taxable persons, no matter what the use of the service, to be excluded from the scheme, is expected to amend its legislation from 2022. Germany, which also used to apply the special scheme only to B2C transactions, amended its legislation with effect from 2020, while Slovakia did so from 2018. These changes were triggered by case C‑380/16, Commission v Germany in which the CJEU made clear that it is important to ensure that the interpretation that best matches the objectives of the special scheme, which is for B2B supplies also to be covered, be applied in a uniform manner by the Member States. The CJEU also repeated that the two objectives of the special scheme, namely simplification of the VAT rules for travel agents and the balanced distribution of revenue from the collection of VAT between Member States, are better achieved with the customer principle. An opt-out option may therefore hamper the uniform application of the common rules resulting in the objectives of the special scheme no longer being achieved. Spain and Sweden, on the other hand, still allow a generalised opt-out option for B2B supplies, while other Member States, such as Romania, provide for a more limited opt-out option (to domestic B2B transactions). Conforms with legislation/case law Not in conformity with legislation/case law Optional to apply special scheme (not in conformity)

Source: Study (section 5.5.8.1, p. 71), updated by Commission services 3.2.4. Mixed packages The VAT treatment of the B2B supply of mixed packages made up by in-house and special scheme items raises some issues in terms of the approach taken as regards invoicing and valuation. The MyTravel case-law outlines that in-house services (when supplied together with services bought from other taxable persons) must be valued by reference to their market value whenever this market value can be established. A travel agent may only use an actual costs basis to identify the market value where he can prove that that basis accurately reflects the structure of the package supplied or where it is simply not possible to establish the market value. A typical alternative to the use of market value is to base the apportionment of the total price by reference to the cost of the in-house and bought-in services respectively. According to the study, in twenty-four Member States an invoice must be issued when a B2B supply falls within the special scheme (Austria does not apply the scheme to B2B supplies and Cyprus does not require the invoice to be issued). In twenty of them, the invoice must itemise the in-house and special scheme supplies separately. In Czechia the itemization is optional, while in Italy separate invoices must be issued for each element of the package. The majority of Member States do not allow for output VAT to be shown with reference to the special scheme supplies but just for the in-house supplies. In four Member States it is optional to display the VAT attributable to the special scheme element of the supply, whereas in other four Member States separate amount of output VAT must be shown for each element of the invoice (special scheme supplies included). Austria considers the full value of a supply of a mixed package as falling outside the scope of the special scheme. Output tax for each element must be shown Output tax cannot be shown for special scheme element Optional whether to display output tax for the special scheme element Other / no specific guidance available Full value of supply falls outside of the Special Scheme Source: Study (section 5.5.12.3, p. 76), updated by Commission services Concerning a package supplied to a business customer for consumption/own use comprising a mixture of special scheme supplies and in-house services, in twenty one Member States the package margin should be apportioned between the special scheme and in-house elements so that only a percentage of the margin is accounted for under the special scheme, with the in-house element accounted for under the normal VAT rules. In Hungary, a package containing in-house services and special scheme supplies is considered a single supply, all of which is subject to the special scheme. In Spain and Sweden, the application of the special scheme is optional for B2B transactions, however if a business opts to apply the special scheme, then the margin should be apportioned. Full value of supply falls within the special scheme Margin apportioned between in-house and special scheme element Full value of supply falls outside of the special scheme Optional whether the special scheme applies No guidance available

Source: Study (section 5.5.12.4, p. 76), updated by Commission services As for the valuation of the margin to be apportioned for a B2B supply of a package containing a mixture of in-house services and special scheme supplies, a variety of methods are applied. Croatia, Bulgaria, Ireland, Malta and Slovenia apply either a market value or cost-based method. Denmark, Netherlands, Spain and Sweden apply the market value method, unless no such market value can be found in which case a cost-based method should be used. Cyprus, Poland, Romania and Lithuania apply a cost based method. Therefore, none of these countries would appear to apply the CJEU decision in MyTravel. In Belgium, Czechia, Estonia, Finland, Greece, Hungary, Italy, Latvia, Portugal and Slovakia no clear guidance was available according to the study, although Finland appears to apply in practice a market value method. As for the MICE conferences and their packages, there is inconsistency over the treatment of facilities (venue, accommodation, travel, entertainment) bought in for the onward B2B provision of a conference or similar event. Although such a conference presumably equates to a mixed package comprising “in-house” and special scheme elements, in practice the VAT treatment varies. Six Member States (Croatia, Czechia, Finland, France, Italy, Greece) consider the full value of the conference under the special scheme. In Denmark, Hungary, Poland, Romania, Slovenia and Spain, a conference would not be subject to the special scheme. However, Spain does not disregard the possibility that such a supply would be subject to the special scheme, (for a B2B supply it is possible to opt out such that the general B2B rules would apply) and that MICE organisers would split a single supply so that just the provision of accommodation services is subject to the special scheme. In Sweden, although the full value would fall within the special scheme, in the MICE sector the supplier usually treats the travel facility separately from the remaining conference elements – and there the travel agent may also apply the general rule for B2B transactions. In Cyprus, Malta and Ireland, the value of the conference would be apportioned so that only the travel elements are accounted for within the special scheme with the remainder of the package accounted for under normal VAT rules. For Belgium, Luxembourg, Bulgaria, Latvia, Lithuania, Portugal, Sweden, Slovakia and Estonia, no specific guidance is available in respect of conferences. As noted above, in Austria the special scheme does not currently apply to B2B transactions. However, a B2B supply would fall within the special scheme if it is for the benefit of a “non-entrepreneurial” traveller. Value of conference apportioned Full value of conference falls within the special scheme Full value of conference not subject to the special scheme No guidance available/obtained Special scheme does not apply to B2B supplies Source: Study (section 5.5.15, p. 78), updated by Commission services 3.2.5. The margin calculation The special scheme requires output tax to be declared not on the sale value of the travel facilities, but on the margin. This requires the margin to be calculated, but each Member State has its own rules under which this calculation is undertaken. However, according to the judgment in C‑189/11 Commission v Spain, there is nothing in the rules of the special scheme to allow for a calculation of the VAT payable on any basis other than by reference to each single supply provided by the travel agent. The practice of Spain of allowing travel agents to make an overall determination of the taxable amount in aggregate on all special scheme supplies made over a period could not be permitted. Therefore, the offsetting of losses is not allowed as the margin should be looked at on a transaction-by-transaction basis. The main difficulty in abiding by the case-law of the CJEU is the effect it has on calculating VAT due. This requires identification of the margin every time a service is provided by the travel agent. It could mean calculating VAT payable numerous times for just a single provision of travel facilities. Furthermore, the travel agent’s cost of a single service may change several times after the service has been performed requiring him to adjust the VAT payable on more than one occasion. Currently, in terms of methodology Member States in their margin calculation fall into the following two broad categories:

-An “overall” or “global” margin calculation that allows losses made on one transaction to offset profits made on another transaction carried out during the same period; or -A “transaction-by-transaction” margin calculation that does not allow losses made on one transaction to offset profits made on another transaction carried out during the same period. Conforms with legislation/case law Not in conformity with legislation/case law No guidance/guidance not clear Source: Study (section 5.5.16, p. 79), updated by Commission services According to the study, twelve Member States calculate the special scheme liability in a way that does not allow for the offsetting of losses, whereas thirteen Member States do allow losses to be offset (fourteen if including Austria whose changes in legislation are expected for 2022). This indicates that currently at least fourteen Member States do not comply with the full requirements of CJEU case-law. It is understood that Member States have considered it appropriate to require (or at least to allow) an aggregated basis of calculation recognition that the alternative (i.e. to calculate VAT as set out by the CJEU) would be very difficult. Sweden allows a choice of either the transaction basis or a simplified procedure, which is not compliant with a strict interpretation of the Commission v Spain judgment. Ireland allows taxpayers to use simplified accounting methods based on estimated margins, but they are required to adjust any estimate to actual margin for each transaction. Estonia allows taxpayers to use the average margin of the previous calendar year, upon written application to the Estonian tax authority. However, the default position is that loss offsetting is not allowed and the calculation is done on a transactional basis. According to the study, there is no legislative guidance on the appropriate method to use in Luxembourg. Regardless of whether a transactional or global margin approach is applied, Member States also diverge in the ways the margin is actually computed. According to the study, five Member States (Slovakia, Belgium, Italy, Croatia and Romania) do not allow retrospective adjustments to be made where the final profit margin differs from the “preliminary” or expected margin computed at the time of the transaction. Cyprus and Estonia calculate an estimate of the special scheme liability for each VAT accounting period based on the prior year, with an annual adjustment made once per year to correct these estimates (in Estonia there is an alternative calculation method which does not entail annual adjustment). Ireland allows an estimate on either an annual or periodic VAT return basis with a requirement to make an annual adjustment. The remaining Member States require the special scheme liability being calculated for each VAT period in accordance with periodic VAT return frequency. The majority of Member States require payment of the special scheme liability in accordance with periodic VAT returns, while Lithuania and Estonia require monthly liability settlements. The majority of Member States requires an “actual” calculation of profit and therefore do not allow a fixed profit percentage to be used to calculate the VAT due. However, in Sweden and Austria there is an option to apply a fixed profit percentage, which is instead compulsory in Belgium (different fixed rates are applicable dependent upon the underlying nature of the supply). Under a procedure laid down in the Sixth VAT Directive, Belgium was allowed to apply a simplification measure derogating from the rules laid down in the Sixth Directive by using fixed lump-sum margins that must be applied even where the actual margin realised by the travel agent is lower. 3.2.6. Third country operators The place-of-supply rule within the special scheme is an origin-based rule as a travel agent’s margin is subject to VAT in the Member State in which the travel agent has established his business or has a fixed establishment from which the supply is made. Therefore, under the current rules, a travel service is taxed under the special scheme only when it is supplied by an EU-based operator but it is not subject to tax on the margin when it is supplied by an operator established in a third country. With the expanding use of the Internet, however, travel agents established in countries outside the EU have become increasingly involved in the supply of travel services to EU consumers. This has led to unequal treatment to detriment of EU businesses which caused reactions by some Member States. A national ruling in France determined that a travel agent established in Switzerland must be taxed under the special scheme in France if supplying French travel to French citizens for reasons of equal treatment. The German tax authorities also launched audits of travel agents located outside the EU and supplying EU travel to German customers. In Portugal, non-established travel agents must use a certified computer invoicing software as of 2021. In the meantime, EU-based operators must need to register in Switzerland if their total worldwide turnover exceeds CHF 100 000, even if they only sell one overnight stay in Switzerland. However, since 1 January 2020, only Swiss sales must be declared. It is no longer necessary to declare the worldwide turnover. Additionally, since 1 January 2021 the United Kingdom have taxed the margin of travel agents supplying EU travel to EU citizens at zero rate, as any supply enjoyed outside the United Kingdom, increasing the distortion of competition vis-à-vis those remaining businesses in the EU. The competitive position of EU businesses is also affected by the great variety of approaches currently applied by Member States in respect of the VAT treatment of travel agents, also in relation to the sector they belong to, as described above. When the special scheme is applied, third country operators benefit from a competitive advantage, not being subject to it. When, instead, the special scheme is not applied (e.g. by a Member State allowing the opt-out for B2B transactions), the normal VAT rules on the place of supply apply, putting EU travel agents at a level playing field with third country operators. Nevertheless, the latter seem to be less likely to be aware of these rules and to comply with them (e.g. by registering in the EU). 4.Method

4.1.Short description of methodology The evaluation is supported by an external study, a consultation of Member States in the context of the Group on the Future of VAT, a Roadmap and a public consultation. The evaluation is based on a set of evaluation questions, connected to the five evaluation criteria defined by the Commission Better Regulation Guidelines, namely (i) relevance; (ii) effectiveness; (iii) efficiency; (iv) coherence; and (v) EU added value. 4.2. Data collection activities and legal mapping exercise A number of data collection activities took place to support and underpin the evaluation. The full range of information regarding the different activities can be found in Annex 2. 4.2.1. The study – legal mapping and business survey In 2017, a study analysed the functioning of the special scheme and reviewed all relevant judgments by the CJEU. The study evaluated national VAT laws and in that regard found that on a number of aspects, the vast majority of Member States were not complying with the common EU rules. With regard to the geographical scope of the study, countries addressed in the report comprised the 27 EU Member States and the former EU Member State United Kingdom as well as certain key non-EU jurisdictions, i.e. Turkey, Switzerland, Norway, the US and Canada. The business models of the travel industry covered in the report comprised: ·Tour operators – ranging from large international tour operators to small independent niche operators (mainly B2C). Tour operators can also operate “online” for this market; ·Travel Management Companies (TMC) – which mainly focus on business travel as intermediaries and serve primarily corporate customers (mainly B2B); ·Travel agents – covering mainly the leisure market as intermediaries. Travel agents can operate as “brick & mortar” enterprises or as “online” agents or both (mainly B2C); ·Destination Management Companies (DMC) – which are primarily operating in the inbound segment (mainly B2B); ·MICE (Meetings, Incentives, Conferences and Events) organisers – which are primarily operating in the corporate segment (mainly B2B). The study, in particular, assessed the functioning of the current VAT rules provided for under the travel agent scheme, notably taking into account a digital environment and a VAT regime based on the destination principle, identifying and quantifying potential distortions of competition. It also identified, assessed and compared options for reform both under the current place-of-supply rules and under place-of-supply rules based on the destination principle. The study conducted a survey through a questionnaire that collected 98 responses from businesses located in 18 Member States. The study did not provide sufficient quantitative analysis with regard to compliance costs savings resulting from the application of the special scheme and on impacts of possible reform options. The lack of quantifications is mostly due to limited available data. Tax data is confidential and the tourism statistics published by Eurostat are incomplete when it comes to travel agents. To compensate for the absence of data, the study relied on data provided directly by businesses. The answers to the questionnaire allowed for rough estimates of VAT liabilities of businesses, but they could not deliver any insight as regards the distribution of VAT revenues between Member States (see Annex 3). More details about the business survey conducted as part of the study can be found in Annex 2. 4.2.2. Consultation of Member States – data collection Following the results of the study and the evolving case-law, Germany, in collaboration with the Commission services, organised a FISCALIS 2020 workshop in Berlin in October 2018. This was an opportunity to discuss the study with Member States and to consult them on the functioning of the special scheme and possible reform options. All Member States and three candidate countries took part in the workshop.

On 11 November 2019, the Group on the Future of VAT met in order to collect Member States’ views on the interpretation of the common EU rules given by the CJEU, the conclusions reached at the FISCALIS 2020 workshop, the findings of the study, the evaluation questions and reform options for the special scheme. Member States were also invited to provide their feedbacks in writing within one month following the meeting. In the context of the feedbacks received, Member States underlined the lack of available data as either travel agents could be taxed both under the special scheme and under the normal VAT rules or there are no specific obligations for disclosure imposed on travel agents upon them filling their tax return. For example, some Member States suggested that part of the travel industry, namely big tour operators, had left the EU, while others had received complaints from the industry on the competitive advantage of travel agents located outside the EU and on the absence of a level playing field. However, little evidence was available for Member States to share. More details about the targeted consultation of Member States can be found in Annex 2. 4.2.3. Feedback to the evaluation roadmap – data collection Through publication of a Roadmap (4 February 2020 – 3 March 2020), citizens and stakeholders were informed about the Commission’s plans for an evaluation and invited to provide feedback on the intended initiative. During these four weeks, 8 stakeholders have submitted contributions, mostly business associations. In these submissions, stakeholders provided their views on the Commission's understanding of the problem and possible solutions. More details about the Roadmap can be found in Annex 2. 4.2.4.The public consultation – data collection A public consultation (25 May 2020 – 14 September 2020) was carried out in order to gather the view of citizens and stakeholders on the functioning of the travel agent scheme and the possible need for revisions. A total of 206 valid responses were received from 18 Member States, the United Kingdom, and Liberia. The majority of respondents (201) answered the public consultation in their professional capacity, while 5 private individuals participated in their personal capacity. More details about the public consultation can be found in Annex 2. 5.Analysis and answers to the evaluation questions This section provides the assessment and answers to the five evaluation criteria. 5.1Effectiveness Effectiveness analysis considers how successful EU action has been in achieving or progressing towards its objectives and whether any unexpected or unintended effects have occurred. Section 5.1.1 presents the assessment of effectiveness in terms of the extent to which the special scheme has been successful in achieving its two objectives of: i) simplification in the application of EU VAT rules, and ii) allocation of VAT revenues to the Member State in which final consumption of each individual component of the single supply takes place. 5.1.1Simplification in the application of EU VAT rules Stakeholder consultations (both targeted and public) as well as the study have confirmed that the special scheme has been effective in providing simplification benefits to travel agents in the form of administrative ease and associated compliance cost savings. The scheme is indeed designed to simplify the application of VAT rules for businesses (travel agents) providing cross-border travel packages, as it allows taxation on the profit margin in the Member State where they are established. First of all, by changing the place-of-supply rule, the scheme permits travel agents to operate within the EU without further need for VAT registration or declaration in each of the other Member States where travel services take place. Indeed, VAT registration is only needed in the Member State where the travel agent is located. This avoids the need for travel agents to understand and comply with other Member States’ VAT regimes and to interact with other tax authorities in different languages. Costs for external tax advisory are therefore limited. Another element that brings simplicity is the single service rule: all bought-in services packaged and sold together to the customer are treated as a single service. Thanks to this rule, the travel agent does not have to determine the nature of the package (single or multiple supply) and apply the relevant VAT treatment which per se requires an assessment of the applicable VAT rate(s), the place of taxation and the status of the customer (section 3.2.2). The special scheme proves to be most beneficial when a travel package contains services located in different Member States. It results from the public consultation that the special scheme simplifies the application of VAT rules for travel agents (79% of respondents). The need for unique VAT registration only, the treatment of a package as a single supply, recourse to simplified margin calculation which avoids the need to recover input VAT and the simplified VAT declaration are some of the aspects of the scheme most appreciated by the respondents. Furthermore, the fact that under the scheme there is no need to recover input VAT in each Member State where services are purchased is of particular relevance as this per se entails a heavy administrative burden relief especially for small businesses. In the absence of the special scheme, a large increase in the compliance burden for travel agents is expected (see section 5.2.1). For instance, a travel operator located in one Member State, providing accommodation for guests in hotels across the EU, would be required to register for VAT in each country where it supplies hotel accommodation. As explained above (chapters 2 and 3), the application of normal VAT rules in particular on place of supply, taxable amount and deduction would increase complexity for travel agents operating cross-border. In particular, it would require a full understanding of the rules applied in each Member State where travel services are consumed. In the case of the supply of a mixed package of travel services, the application of normal VAT rules would imply an even higher degree of complexity.

According to the study, compliance costs savings under the special scheme would amount to approximately EUR 8 000 – 15 000 a year per VAT registered entity and per jurisdiction. The objective of simplification is largely achieved as regards the three aspects of the scheme that deviate from the normal rules: place of supply, deduction of input tax and taxable amount. The special scheme presents also some weaknesses that make the scheme unable to fully address the need of reducing the burden of travel operators related to the application of normal VAT rules. In particular, the scheme, as interpreted by the CJEU, does not provide for a simplified method to determine the profit margin. 5.1.2Allocation of VAT revenues The special scheme allows a fair distribution of VAT revenues among Member States through the taxation of travel packages supplied by EU established businesses to EU destinations. Under the scheme, travel agents are not taxed on their turnover, but on their margin and VAT incurred in respect of supplies for the direct benefit of the traveller is not eligible for deduction or refund in any Member State. The effect of these special rules is that VAT revenues on services enjoyed in the course of a journey, such as hotel accommodation, restaurant meals or transport, go to the Member State in which the traveller receives the service, whereas VAT on the travel agent’s margin is collected in the Member State where the agent is established. In other words, all elements of the travel package are taxed in the Member State of destination while only the margin related to the travel agent’s supply is taxed in the Member State of origin. Without an arrangement such as the special scheme, the travel agents would have to collect VAT from their customers for services often consumed in other Member States. Not only would that impose a significant administrative burden on travel agents but, as a result, such services would become subject to VAT not in the Member State in which they were in fact provided and consumed but in the Member State in which the package was purchased. Significant VAT revenue might thus be diverted from Member States providing tourist destinations to those providing the tourists. The annual value of output VAT indicatively collected via the scheme is estimated in the study at circa EUR 1.9 billion while the value of irrecoverable input VAT incurred on costs directly linked to supplies made under the scheme is estimated at circa EUR 5.6 billion (of which EUR 1.15 billion is VAT on costs of B2B supplies). This clearly shows that the majority of VAT collected via the special scheme is allocated in the form of irrecoverable input VAT to the Member States where individual travel services are purchased and consumed. The estimated value of the output VAT due under the special scheme is smaller in totality and is collected in the Member States where the travel agents are established. VAT indicatively collected on travel services in 2016 (€bn) Output VAT under the special scheme (1% of the EU turnover) 1.9 Output VAT under the special scheme pertaining to B2B travel supplies 0.29 Irrecoverable input VAT on costs directly linked to travel services under the scheme 5.6 Irrecoverable input VAT on costs directly linked to B2B travel services under the scheme 1.15 Output VAT accounted for under the normal rules (2% of the EU turnover) 3.7 Source: Study, see Annex 3 (p. 146) The fundamental feature of blocked input VAT recovery (no deductions or refunds allowed) under Article 310 of the VAT Directive is relatively consistently applied across the EU and affects all business models subject to the special scheme in a similar manner. It results indeed from the study survey that travel agents in all Member States making supplies of travel facilities within the scheme are unable to recover the VAT incurred on purchases of bought-in services, without any exception. However differences in the implementation of the scheme between Member States may have an impact on the different supply chains used under the five key business models. The scheme has then been effective also in achieving its second objective of fair distribution of VAT revenue among Member States. In particular, the broad application of the scheme as intepreted by the CJEU, namely the fact that, regardless of the status of the customer, B2B supplies fall within the scheme, has contributed to the achievement of that second objective. 5.1.3Unintended effects – Third country operators As recalled, the travel agent’s margin is subject to VAT in the Member State in which the travel agent is established. This place of taxation rule has, however, the non-intended effect of excluding third country operators which, with the rise of online travel platforms, are nowadays increasingly involved in the supply of travel services to EU customers. Digital transformation in the travel industry has brought significant changes to both the supply and the demand side. Core operational processes can be entirely automated, digitalised or handled remotely so that a local business establishment is no longer necessary to sell into the EU market. Also, online booking platforms have enlarged consumer choice leading to greater competition across EU borders. While Europe is a large global travel and tourism destination, undisputed leaders in the online travel booking market are nevertheless based outside the EU. This puts at risk EU competitiveness and EU VAT revenue. At the time the study was published, it indicated that more than 50% of customers in the EU would have booked their travel online in 2017 and the online travel market would have grown faster than the overall market, enjoying 8% growth throughout 2017. This trend towards using online booking platforms has allowed customers to access providers operating outside their own territory. For example, the study assessed that in 2015 US-based companies dominated the online market with combined revenues of more than US$ 115 billion.

The place-of-supply rule to be found in the special scheme not only is inadequate for coping with the digital and asset-free environment of the travel sector but also leads to unequal treatment which is detrimental to EU travel agents. To avoid being disadvantaged, an EU-based operator could decide to relocate his activity outside the EU or even circumvent the rules. This would make the EU market even more fragile. While the special scheme does not apply to travel agents established in a third country, it is debatable whether these operators should be considered as outside the scope of EU VAT or instead could be seen as subject to the normal VAT rules on place of supply. In any case, such travel agents are not taxed on the same basis as EU-established travel agents as: i) Either the current scheme facilitates non-taxation of travel agents established in a third country. This is the effect if the VAT Directive is interpreted as applying to all travel agents but only imposing a VAT charge on those having their place of business or a fixed establishment within the EU; ii) Or the current scheme does not cover travel agents established in a third country with the effect that they should apply the normal VAT rules on place of supply, valuation, liability and input tax deduction. Accordingly, they should register in Member States in which they supply services and would be subject to the rules of the Member State(s) involved. Difficulties would then arise from the enforcement of these obligations. The lack of a level playing field between established and non-established travel agents is also expected to be exacerbated due to the withdrawal of the United Kingdom from the European Union. As a Member State, the United Kingdom, according to the special scheme, had to tax the margin of travel operators established in its own territory at standard rate of VAT. Now that the United Kingdom has become a non-EU country, the margin of its operators on all travel services enjoyed in the EU will be zero-rated. From an EU perspective, this means that the distortion of competition with non-established operators will be exacerbated with EU travel agents either tempted to establish in the United Kingdom or suffering from the competitive advantage of United Kingdom travel agents. On the other hand, as United Kingdom businesses will no longer be able to use the simplification for EU travel supplies, it is possible that some Member States will require United Kingdom-based travel agents to register for VAT for supplies of travel services made in their country with a risk for an even higher degree of non-harmonisation in the application of the normal VAT rules among Member States. 5.2Efficiency Efficiency analysis considers the costs and benefits of EU interventions indicating areas where there is potential to reduce inefficiencies, in particular unnecessary regulatory costs, and simplify the intervention. This section presents the analysis of the efficiency of the travel agent scheme from the perspective of the businesses and that of internal market. 5.2.1VAT compliance costs under the normal VAT rules To fully understand the benefits of the special scheme, it is essential to consider what the application of normal VAT rules would involve for travel operators. As set out in the 2016 VAT Action Plan, the EU VAT system is highly complex for businesses generally, and particularly for small enterprises which bear on average proportionally higher VAT compliance costs than large enterprises. Compliance costs related to VAT stem indeed from the complexity of VAT rules (e.g. different rates, different place-of-supply rules, many derogations), the extensive number of VAT obligations and their frequency. In addition, cross-border compliance costs are much more significant due to fragmentation of the VAT system, which represents a significant barrier to the single market. For instance, research shows that on average a firm trading in two Member States would have to deal with 11 differences in VAT-related procedures. In the B2C sector, the average annual cost for an SME to account for VAT in a Member State in which it is not established is estimated to be EUR 4 100. This compares to the average annual cost of EUR 8 000 for a larger business per Member State, where a simplification measure such as the Mini One Stop Shop (MOSS) is not available. That cost can cover registration (or the appointment of a fiscal representative), VAT returns, statistical listings, tax advice, dealing with queries from tax administrations etc. Overall, the study suggests that annual costs savings for a travel operator under the special scheme could approximately range between EUR 8 000 and EUR 15 000 per Member State. In the EU, the activity carried out by travel agents by its very nature has a cross-border dimension. There is no doubt that the application of normal VAT rules, namely those on place of supply, taxable amount and deduction, would increase considerably the compliance burden on travel agents of all sizes. Such a burden would fall disproportionally on smaller operators who in particular might be discouraged from selling services in a large number of Member States. However, any intervention in the VAT treatment of the travel services must take into account changes that have occurred so far in the VAT system aimed at simplifying the administration of VAT for taxable persons not established in the Member States where VAT is due. In particular, the modernisation of VAT as regards the B2C sector could help travel agents to comply with the complex VAT rules in a scenario without a special scheme.

The extension of the current MOSS turning it into a One Stop Shop as from 1 July 2021, would make available simplified arrangements to pay and declare VAT in relation to all types of cross-border services supplied to final consumers within the EU. This, however, would not solve the problem of having to abide by the substantive rules in each Member States, would not be applicable to B2B supplies and would not solve the problem of multiple requests for tax refund in different Member States. 5.2.2Cost-benefit analysis for businesses Similar to other special schemes foreseen in the VAT Directive, the inherent consequence of not charging VAT on the consideration of output supplies is that a business is not allowed to deduct input VAT. Such a consequence can be seen as the price to be paid by the business in return of the benefits of simplification and compliance costs savings. As regards in particular the exemption scheme for small enterprises, which is optional for businesses, it has been assessed that the scheme is more beneficial for the taxable person where most of its customers are final consumers or exempted businesses (with no right of deduction) and where the amount of input VAT is relatively lower than VAT that should be charged on sales under the normal VAT rules. It can be observed that, when the choice is available, depending on the type of activity and business model in use, the taxable person may prefer to apply the normal VAT rules in order to enable their business customers to recover input VAT. On the other hand, despite the cost of non-deductible input VAT, a business that makes both B2B and B2C supplies may find it convenient to opt for a special scheme provided that the business is able to offer lower prices (competitive advantage). Since the travel agent scheme is mandatory, the impact on a business’ VAT liability cannot be minimised by simply choosing the VAT regime that is the most favourable for a certain type of activity. While the inclusion of B2B supplies in the scope of the travel agent scheme ensures effectiveness, it has drawbacks as regards the efficiency. Compared to the normal VAT rules which ensure VAT neutrality, the taxation of B2B supplies at the margin comes at a cost: non-deductibility of input VAT. The blocked input tax on direct costs of B2B supplies resulting from the application of the special scheme has been indicatively estimated to amount to circa EUR 1.15 billion annually across the EU while the irrecoverable output tax declared on B2B supplies made under the special scheme has been indicatively estimated to amount to circa EUR 0.29 billion. The cost of non-deductible input VAT varies considerably from sector to sector. In the DMC sector, whilst the immediate client in the wholesale transaction will always be a business, the final customer is often a non-business person and therefore the use of the special scheme may not be an issue as there would be no final right to input tax deduction by the end customer. On the contrary, in the MICE and TMC sectors (where the end customer is normally a taxable person who would expect to deduct VAT incurred on business expenditure) and in the DMC sector whenever the final customer is a business, the application of the special scheme would deny that final business customer the right to input tax deduction. This can place the travel agent at a disadvantage when compared to suppliers of similar services not subject to the special scheme (e.g. principal suppliers and providers of in-house services). To overcome this negative effect, some Member States have excluded B2B transactions from the scope of the special scheme, disregarding the interpretation given by the CJEU. Other Member States have allowed instead business customers to recover VAT in respect of supplies made under that scheme where a VAT amount is shown on the invoice of the travel agent. In these Member States, the practice may differ as regards the invoicing rules. Travel agents using the scheme may display VAT due on the margin on their invoices or could be required to do so. When the special scheme is applied, travel agents operating in B2B sectors are tempted to adapt their business model and to introduce arrangements whereby they can qualify as intermediary and then apply the normal VAT rules. This is already the usual outcome in the TMC and MICE sectors, notwithstanding that acting as an intermediary, while allowing input tax deduction, would also impose constraints on the taxable persons involved, notably the difficulty for the intermediary in setting its own price for the intermediation service supplied and in ensuring that the client receives the correct documentation to support input tax deduction. The problem faced in regard to the B2B transactions was confirmed by the open public consultation, in the context of which respondents attributed the highest importance for B2B supplies to benefit from input tax deduction as provided for under the normal VAT rules (165 respondents equal to 80%) over the benefit of simplification provided by the special scheme (only 37 respondents equal to 18%). Therefore, the competitive disadvantages caused by the lack of input tax deduction are not perceived as compensated by the benefit of simplification provided by the special scheme to business clients, such as the advantage of avoiding input tax refunds, which are subject to different evidential requirements in each Member State. 5.2.3Potential distortions of competition Differences in the application of the travel agent scheme by Member States, as outlined in section 3.2, generate two main potential distortions of competition which affect the proper functioning of the single market. The first involves the treatment of wholesale supplies which is of particular concern for those sectors of the industry whose activities are focused on corporate clients. The second relates to varying definitions of what constitute “travel facilities”. In addition, inconsistencies as regards the rules of the scheme as interpreted by the CJEU may affect the level playing field of travel operators and put businesses within the scheme in a different competitive position compared to those falling outside the scheme. 5.2.3.1. Wholesale supplies In respect of wholesale supplies of travel facilities, namely supplies made to business customers destined for subsequent resale, a number of Member States consider such supplies to fall within the scheme while others exclude such supplies or provide businesses with an option to exclude them from the scheme and apply the normal VAT rules. Wholesale supplies may consist of both single items and packages. When these supplies are taxed under the normal VAT rules, the travel agent who acts in his own name is deemed to have received and supplied the services himself under Article 28 of the VAT Directive. As seen in section 3.2.2, under the normal VAT rules, indeed, a supply of accommodation as a single item would be subject to VAT in the Member State in which the accommodation is situated, whilst passenger transport alone would fall within the scope of VAT in the Member State in which the transport takes place. The supply would then be subject to VAT at the rate (usually a reduced rate) stipulated by the Member State of supply.

The following examples illustrate mismatches in the supply chain of hotel accommodation due to different local treatments of the wholesale supply. In the examples it is assumed that a reduced rate of 10% applies to the hotel accommodation in Member State 1 while the margin is taxed at the standard rate of 20% in all other Member States. Source: Study on the review of the VAT special scheme for travel agents and options for reform. In example 1 above, all Member States treat the wholesale supply as falling in the special scheme and the amount of VAT collected is the highest. Source: Study on the review of the VAT special scheme for travel agents and options for reform. In example 2, Member States 2 and 3 treat the wholesale supplies under the normal VAT rules (or an option is given to the taxable person to apply them) and the amount of VAT collected is the lowest. The example illustrates a situation of non taxation due to different local treatments of the same supply. Both Bed Banks take indeed advantage of the fact that in Member State 1 the wholesale supplies fall within the special scheme and do not account for VAT in that Member State. Source: Study on the review of the VAT special scheme for travel agents and options for reform In example 3, all Member States treat the wholesale supplies as falling under normal VAT rules. The total VAT revenue is lower than in example 1 as both Bed Banks are entitled to input deduction but both of them have to register and account for VAT in Member State 1. As seen in section 3.2.2, the treatment of wholesale packages under the normal VAT rules may also involve different approaches applied by Member States with regard to valuation and place of supply (“multiple supply”, “predominant supply” and “general rule” approach). When the wholesaler is established in a Member State other than that in which the travel facilities are consumed, potential distortions may therefore arise in particular between: -Travel agents established in a Member State which requires the use of the special scheme and those established in a Member State which excludes such supplies from the scheme; -Travel agents established in a Member State which requires the compulsory use of normal VAT rules and those established in a Member State which allows taxpayers a choice between normal VAT rules and use of the special scheme; -Travel agents established in Member States with differing interpretations of what is meant by normal VAT rules in the context of wholesale packages. These mismatches in VAT treatment lead to non-taxation or double taxation of the margin: (i) non-taxation where a wholesale supply of accommodation, located in a Member State which considers wholesale supplies to be subject to the special scheme, is made by a supplier established in a Member State in which wholesale supplies fall outside the special scheme, and (ii) double taxation where a wholesale supply of accommodation, located in a Member State which considers that wholesale supplies fall outside the special scheme, is made by a supplier established in a Member State in which wholesale supplies are subject to the special scheme. Destination management companies are amongst the main providers of wholesale supplies. Different local treatments of such supplies may result in considerable variations in the profits raised by the operators involved and in the revenue collected.

5.2.3.2. Definition of travel facilities The lack of a precise and harmonised definition of the scope of the special scheme, which does not provide for a precise list of travel facilities covered, leads to many inconsistencies and difficulties for taxable persons who operate in multiple Member States. This hampers the efficiency of the special scheme and can lead to non-taxation or double taxation in certain circumstances. For instance, a number of Member States do not consider the single supply of car hire per se a travel facility while other Member States may treat such a supply under the special scheme if the conditions are met. Therefore, it is possible that a supplier of car hire services could establish his business in a Member State which considers car hire to fall outside the special scheme and pay VAT in that Member State only on hires on a short-term basis for which the car is put at the disposal of a customer in that State (Article 56(1) of the VAT Directive). It would follow that the supplier involved should have no liability to pay VAT on hires where the car is put at the disposal of the customer in those Member States which consider the special scheme to apply as those States would expect VAT to be paid under the special scheme in the Member State in which the supplier is established. The same is true of the services of a guide as some Member States consider this to be a travel facility while others do not and this causes uncertainty and can result in non-taxation or double taxation. In the following example, the car rental company is established in Member State 1 and owns the cars to be rented to customers. The car hire broker is established in Member States 2. In both Member States the standard rate is 20%. Scenario 1: Member State 1 considers car hire to be within the special scheme while Member State 2 follows the normal VAT rules. The short-term car rental is subject to VAT in Member State 1 where the car is put at the disposal of the customer. The broker does not pay any VAT on its supply of car hire. In Member State 2 the special scheme does not apply and according to rules in Member State 1 VAT should be paid on the margin in Member State 2. The broker therefore retains its margin of EUR 12 and incurs non-deductible VAT in Member State 1 of EUR 20. Scenario 2: Member State 1 considers car hire to fall under the normal VAT rules while Member State 2 considers the supply within the special scheme. The broker now has to pay VAT in Member State 2 on its margin. However, Member State 1 also expects VAT to be paid. If the broker registers and account for VAT in Member State 1 he would pay output tax of EUR 22 and deduct EUR 20. The two scenarios illustrates how the lack of consistency may create risks of non-taxation and double-taxation. Source: Study on the review of the VAT special scheme for travel agents and options for reform The lack of harmonisation is also found on the rule on the place of supply to be adopted whenever the special scheme is not applied. Absent a clear rule, the scope for distortion is much greater. For guide services, for example, when the special scheme is not applied, some Member States believe that the supply should fall within the general place-of-supply rule whilst others consider it to be taxable where performed when supplied to a non-taxable person. Additionally, difficulties with non-taxation or double taxation arise due to the varying interpretations applied by Member States to packages, i.e. whether they are single or multiple supplies and, where a single supply exists, how it should be taxed. With regard to the provision of single travel facilities, notwithstanding the CJEU judgments (Van Ginkel and Star Coaches ), some Member States consider that the special scheme only applies to “packages” and a “package” must by its very definition consist of more than one item. Therefore, such Member States consider that the sale of, for example, just a hotel room without a flight cannot be considered as falling within the special scheme. Differing treatment of single travel facilities creates potential for meaningful distortions: in respect of B2B supplies, as input tax might be recoverable absent application of the special scheme and with regard to B2C supplies, as the supply of a single travel facility might be subject to a reduced rate while the margin of a travel agent must be taxed at the standard rate of VAT. The taxation of the supply of a single travel facility, like accommodation only, under the normal VAT rules not only ignores the interpretation of the common rules by the CJEU, but also leads to unequal treatment of similar supplies, because if the travel agent supplies accommodation together with in-house or ancillary supplies, that supply must be taxed under the special scheme. With regard to the supply of mixed packages, differences in treating the same provision of services give rise to distortion of competition especially affecting operators in the MICE sector. In this sector, facilities such as venue, accommodation, travel and entertainment are bought in for the onward B2B provision of a conference or similar event. Divergent interpretations given by Member States lead to differing treatments of MICE operators, not only in the application of the scheme itself but also in terms of the application of normal VAT rules where the special scheme does not apply. Uncertainty arises as many events contain services which cannot ordinarily be described as travel facilities (e.g. entertainment, the use of sports facilities, food and drink and the provision of conference facilities such as audio visuals, meeting rooms and external speakers). Many Member States, therefore, either exclude these facilities from the special scheme by splitting the event package between travel and non travel facilities, or exclude the whole package from the scheme considering the travel facilities within a package as being ancillary and not the main purpose of the event . Hence, absent the application of the special scheme (to whole or part of the package), normal VAT rules must be applied. The lack of clarity on whether an event considered as single supply can be split and on which place-of-supply rule must be applied leads to a multitude of approaches being taken. Indeed, the place of supply of the services of organisers of activities such as entertainment, education, fairs and exhibitions is defined just for B2C supplies as the place where the activities (i.e. the fair/exhibition etc.) take place. For B2B supplies, most frequent in MICE circumstances, no specific rule is defined leaving uncertainty among Member States which have to ascertain whether a single or a multiple supply has occurred and, within a single supply, whether a predominant approach can be applied. Depending on the chosen approach, different rules for the place of supply apply leading to different tax treatments and to potential distortion of competition .

5.2.4Lack of level playing field The margin of a travel agent must be taxed at the standard rate of VAT regardless of the rate applied to the individual travel facilities when supplied outside the special scheme. The supply of travel services is, indeed, not included in Annex III of the VAT Directive and can therefore not benefit from a reduced rate of VAT. However, many tourism services such as passenger transport, hotel accommodation, restaurant services and admission to cultural events and facilities are often exempted or subject to reduced rates. Hence, when dealing with final consumers, travel agents suffer a competitive disadvantage compared to providers whose services can be exempted or subject to reduced rates. These providers can either be i) taxable persons falling outside the scope of the special scheme (e.g. principal suppliers of travel services such as hotel accommodation and intermediaries such as online travel agencies); or ii) other travel agents supplying the same services using their own resources (in-house supplies) which are not subject to the special scheme but to normal VAT rules. Lack of level playing field is especially found in the airline sector where travel agents owning their own aircraft and airline companies providing travel packages can treat the supply of flight seats as an in-house supply which is therefore not subject to the special scheme. As a result, avoidance practices have developed. Travel agents have been able to reduce their margin (and therefore their VAT payment) by establishing subsidiaries t