Opinion of the Economic and Social Committee on the "Proposal for a Council Directive amending Directive 77/388/EEC as regards the special scheme for travel agents" (COM(2002) 64 final — 2002/0041 (CNS))
Date: 2002-07-17
Institutions: European Economic and Social Committee
Subjects: VAT, provision of services, restriction on competition, tax system, transfer of businesses, travel agency

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of economics and taxation, devoting particular attention to
the candidate countries and — as the Committee had cause to
recommend in 1997 (1) — broadening Fiscalis 2007 to take in
the important area of direct taxation.

4.2.
The success of this objective will depend on how
effective customs controls are able to be, as mentioned in
point 3.6.1 of this opinion.

( 1) OJ C 19, 21.1.1998, p. 48.

Brussels, 17 July 2002.

4.3.
The Council and the Commission should introduce the
long-promised definitive VAT rules, based on the country of
origin, as the Committee has been proposing.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive
amending Directive 77/388/EEC as regards the special scheme for travel agents’

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

(2002/C 241/16)

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

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

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

1.

Introduction

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

puts them together in a package and sells them to the traveller,
in his own name and for his own account, the provisions of
TOMS ensure that the travel agent avoids the requirement for
multiple registrations for VAT purposes in the different
Member States whence the services are supplied.

1.1.1.1.
Conversely, where the travel agent purchases ser-
vices from other suppliers as an agent for his customer and
not for his own account (i.e. the customer is directly and solely
responsible for payment of the charges incurred), the VAT
liability devolves upon the customer and TOMS does not
apply. Arrangements of this kind are outside the scope of the
proposed Directive and of this opinion.

The first objective of TOMS was to simplify the
1.1.1.
application of the Community VAT rules for these supplies.
When the travel agent purchases services from other suppliers,

The effect of the scheme is to simplify the com-
1.1.1.2.
pliance requirements for the tour operators. Where TOMS is
not applicable, a travel agent located in Member State A who

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takes a booking on a hotel room in Member State B and then
includes that facility in a package which he sells to a customer
in Member State A, will be charged VAT by the hotelier at the
rate ruling in Member State B. The travel agent must register
for VAT in Member State B and pay tax to the authorities of
that country on that proportion of his charge that relates to
the hotel room; this is because the place of supply for this part
of the service is deemed to be Member State B. He will then be
entitled to recover the VAT paid to the hotelier by way of
deduction from his output tax liability to the authorities in
Member State B. Where the customer is a registered trader, he
will be entitled to claim a refund of that portion of the VAT
incorporated in his invoice that relates to Member State B by
way of an 8th Directive claim on Member State B, provided
that Member State B permits 8th Directive claims in respect of
hotel accommodation. Not all Member States will allow such
claims.

1.1.1.3.
It can readily be seen that this arrangement involves
considerable complications for both the travel agent and his
customer. The complications are compounded where, as is
frequently the case, the package comprises several elements
originating in different Member States. It is for these reasons
that TOMS was introduced. Under the provisions of this
scheme, the travel agent pays VAT, at the rate ruling in
Member State B, to the hotelier as before. He will not be
entitled to claim a refund of that tax and his customer will not
be able to reclaim the tax charged by the travel agent, regardless
of whether or not the customer is registered for VAT. On the
other hand, the travel agent will not be obliged to register for
VAT in Member State B. He will pay VAT on his margin to
Member State A. His margin is the difference between the price
that he charges to his customer and the price, including VAT,
which he pays to the hotelier.

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

VAT Directive of a special simplification measure (1) applicable
in that Member State, which allows it to apply divergent
rules from Articles 26 and 28 of the Sixth Directive. The
Commission notified (2) all Member States of the proposed
measure and, as no official reaction was received within the
stipulated period of two months, this simplification measure
was accepted on 19 December 1978.

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

1.2.3.
A major problem concerns the different application
of Article 26 by the Member States. The crucial question is
whether TOMS can apply if the package of services is supplied
to another travel agent and not to the traveller.

1.2.3.1.
The Commission took the view, supported by case
law from the European Court of Justice, that TOMS can only
be applied where the package is sold to the final consumer.
Where the package is sold between tour operators/travel
agents who are both registered for VAT, TOMS cannot be
applied and each transaction must be taxed separately in
accordance with the provisions determining the place of
supply.

1.2.3.2.
However, the application of Article 26 by the
Member States does not always follow this interpretation.
Member States apply Article 26 in very divergent ways, which
can lead in some instances to double taxation. It also creates
competitive disadvantages for companies established in Mem-
ber States that apply TOMS only where the package is sold to
the final consumer in comparison to competitors established
in Member States that have a more flexible approach.

1.2.3.3.
Some Member States defend the interpretation of
Article 26 making it applicable where a package is sold
between registered travel agents/tour operators, on the grounds
that this would ease the compliance burdens for the businesses
concerned, as it would no longer be necessary for them to
register for VAT in all the Member States where they supply
goods or services that are part of the package where it is sold
other than directly to the traveller as final consumer.

1.2.1.
One Member State has notified the Commission
under the procedure laid down in Article 27(1-4) of the Sixth

(1) Letter of 13.9.1978.
(2) Letter of 19.10.1978.

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1.2.3.4.
Several Member States have also raised the issue of
business trips. Where the travel agent/tour operator provides
a travel package under TOMS to a registered business as final
consumer, the invoiced price will be VAT inclusive and the
customer will not be able to reclaim the VAT by way of input-
tax deduction, even when the travel package is used for
business purposes. This produces residual VAT in the inter-
mediate consumption stage, which is contrary to the basic
principle of neutrality of the Community VAT system.

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

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

1.5.
In the light of these problems, which arise partly from
changes in business patterns and technology and partly from
divergent practices by Member States, the Commission has
decided to include a modification of Article 26 as an element
of its new VAT Strategy (1). The proposal is aimed at the
simplification, modernisation and more uniform application
of the Community VAT legislation in this field.

2. The Commission’s proposals

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

The details of the Commission’s proposal are set out in

2.2.
Appendix 1.

3. General comments

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

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

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

( 1) COM(2000) 348 final of 7.6.2000.

The Committee is aware that this has caused a
3.3.1.
number of operators to relocate their businesses outside the
EU and shares the Commission’s concern that, if nothing is

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done to rectify the situation, this movement will continue and
intensify. The rapid spread of on-line shopping, which is
particularly prevalent in the holiday and travel area, will give
added impetus to this movement.

by way of the 8th Directive procedure, a cumbersome and
protracted process which many traders prefer to avoid. The
travel agents would not, therefore, be placed on an equal
footing with traders who were not established in the EU.

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

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

3.3.3.
However, the Committee seriously doubts whether
the Commission’s proposals will have the effect of solving this
problem.

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

3.3.3.1.
Article 26(2) would be amended to modify the
place of taxation for supplies made by non-EU operators to
EU customers in such a way as to establish that the place of
supply is the Member State of the customer. Theoretically, this
would require operators based in third countries to levy VAT
at the appropriate rate(s) on their margin and thereby put
them on a par with EU-based operators.

3.3.3.2.
The problem, as with previous similar proposals to
deal with this situation, would be enforcing compliance on
traders who are not registered for VAT within the EU and have
no establishment there. With Internet-based trading, it will
often be difficult to determine that the transaction has even
taken place. The Committee concedes that it
is probably
worthwhile to put this provision on the statute book but
considers that it is likely to prove a brutum fulmen.

Travel agents/tour operators based in the EU will
3.3.3.3.
have the right to ‘opt-out’ of TOMS at their discretion. It is
presumed that they would wish to do so where they were
supplying to a VAT-registered customer as, in this instance,
the customer would be able to reclaim the VAT charged by the
travel agent and the travel agent would be able to reclaim the
VAT charged by his suppliers on the services provided.
However, this would create considerable additional adminis-
trative work; it would entail the tour operator registering in
the Member State(s) where the service(s) were provided and
involve the customer in making claims for refunds from the
governments of Member States in which he was not registered

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

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

4. Specific comments

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

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

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applied. The inevitable result is that some Member States will
allow it and others will not, thereby creating more differentials
between the Member States and defeating the object of the
exercise.

customer detailing the various elements of different national
VAT charges so that the customer may in turn reclaim the
VAT (via the burdensome 8th Directive procedure if the
suppliers are located in other Member States) and, where the
supplier is an intermediary, this requirement will be passed on
to that supplier’s source and thence all the way up the supply
chain.

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

the abolition of

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

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

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

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

5. The Commission’s Impact Assessment

4.4.2.
Nor is it only the travel agent who is affected. Where
he opts for the normal VAT arrangements to apply, this will
have consequences for third parties. He will have to ask his
supplier for a VAT invoice in order that he may claim the
refund of his input tax and provide a VAT invoice to his

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

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

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

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

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

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

6. Conclusions

6.1.
The Committee welcomes the Commission’s intention
to improve the operation of TOMS and believes that the

Brussels, 17 July 2002.

proposals for a global margin calculation and the removal of a
number of existing options and derogations granted to Mem-
ber States constitute worthwhile improvements. It also wel-
comes the fact that TOMS can now be applied to transactions
between travel agents. These changes are likely to be of
particular benefit to SMEs. The Committee regrets, however,
that Member States have been given discretion on the appli-
cation of the global margin calculation.

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

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

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

The President

of the Economic and Social Committee

Göke FRERICHS