Corporates could lose their ability to reclaim value-added tax on hotel and other bookings in Germany after the country's parliament last week approved important changes to its tax regime. The new rules will apply where a travel service provider, such as a hotel booking platform, travel management company or meetings agency, pays a supplier itself and then recharges the corporate client. Unless mitigating action is taken, the loss of the ability to reclaim VAT would effectively increase hotel room rates for corporate customers by 7 percent and breakfast and other items on a hotel bill by 19 percent.
Domestic air and rail travel also could be affected in certain cases, leading to effective price increases of 19 and 7 percent, respectively. There are also concerns about visa handling fees plus potentially more travel-related services that are not yet confirmed as within the tax changes' scope.
The new rules in Germany relate to a complex European Union regulation called the Tour Operators' Margin Scheme, which simplifies VAT arrangements for travel organizers but also prevents them from reclaiming VAT on purchases they make on behalf of customers.
As the name suggests, TOMS was intended to keep costs down in the package holiday market by allowing tour operators to charge VAT only on their mark-up to consumers, not on the services they sell. However, all travel service providers, including those purveying services to business customers, are in principle subject to TOMS.
Germany and Austria previously mitigated this challenge by exempting business-to-business transactions from TOMS, citing another EU principle that there should be VAT neutrality for business operators, which is why companies usually are allowed to reclaim VAT. But in 2018 the European Court of Justice ruled the two countries' exemptions were illegal. Austria will end its exemption in 2022. In Germany, president Frank-Walter Steinmeier is expected to sign the changes approved by the Bundestag into law before Jan. 1, and possibly as early as next week. However, there are hopes the German federal ministry of finance will issue a recommendation that businesses be allowed three to six months to adjust.
"Each intermediary is looking at different solutions to mitigate the risk," AirPlus International commercial director for Germany Birgit Hölzel told BTN. "I believe a solution can be found to every challenge, but the problem here is timing. Many resellers have not yet fully found their solution." Her colleague, head of partner management for Germany Michael Thomas, added: "Corporate customers are still not well informed about what is happening. We don't know yet whether there will immediately be financial penalties for noncompliance or whether there will be a grace period."
Any corporate customer potentially able to reclaim VAT (the main exception being financial services businesses) will need to check that its travel booking and invoicing arrangements are not threatened by the new rules. "The law applies to the reselling model, where agencies pay a hotel and then resell in their own name to the customer," said AirPlus' Thomas. "Where corporate customers pay directly, that is out of scope. [Meetings, incentive, convention and exhibition] agencies are hit particularly by this because they buy a variety of services and then invoice them to the customers on whose behalf they are buying."
The crucial test, said Max Waldmann, COO of Invisible Pay, HRS Group's recently launched in-house payment solution, is whether the invoice issued by the hotel bears the name and address of the travel service provider making the booking or of the corporate customer that is the ultimate beneficiary of the service.
"If the payment solution is in the name of the agent, you can only collect an invoice in the name of the agent," said Waldmann. "If HRS has paid, the invoice has to be in the name of HRS, so the customer cannot reclaim VAT on it."
Waldmann said that until HRS took mitigating action, 60 percent of its customers stood to be affected by TOMS. Those included many non-German customers, because all clients using HRS's central billing facility were handled via a German legal entity.
However, HRS has been anticipating the problem since the European Commission launched legal proceedings against Germany three years ago. It is one of the reasons the group launched Invisible Pay, which operates under its own banking license, effectively making HRS a payment issuer and acquirer in its own right. Consequently, bookings paid through Invisible Pay are invoiced with the customer's name and address rather than that of HRS, allowing VAT reclamation in the usual way.
Many other travel service providers have started to address the TOMS challenge far more recently and will be unwilling or unable to adopt a solution similar to HRS's. However, the German travel industry is not yet sure which kinds of mitigation will be considered acceptable. The federal ministry of finance is expected to provide a letter of clarification that would define more fully what it considers a "travel service" within the scope of TOMS, but this could take up to a year.
"Companies must ensure that, pending final clarification as to which business areas are actually affected, invoices for travel or accommodation services provided are accompanied by the correct billing address issued at their business address—even if they are billed using a lodge card," said Inge Pirner, vice president of German travel managers' association VDR. "Only then is input tax deduction still possible for these travel services.
"We are still in touch with the responsible head of department at the Federal Ministry of Finance and are collecting cases which, in our view, should not fall under TOMS, but which are unclear. We hope to achieve clarification in the course of 2020."
Waldmann offered two pieces of advice to travel buyers. First, he said: "Sit down with the local tax people in your company." Second: "Sit down with your suppliers to understand what their solutions are."