Thank you, Chairman. I refer to the information note which has already been provided, as well as the detailed background note which was supplied to the committee as a basis for this presentation. As explained in the information note, the regulation which is the subject of today's scrutiny is simply concerned with providing a mechanism to assist travel agents from outside the EU where these agents sell travel services to EU customers. However, the underlying issue which gives rise to a need for that regulation in the first instance is the draft directive on the treatment of travel agents and tour operators. I now propose to address that issue. I will take the committee through the topic by explaining the existing margin scheme, the new proposal from the EU Commission and the potential impact of the scheme if adopted in Ireland. I will then bring the committee up to date on developments in Europe.
The existing margin scheme is a way of applying VAT to the profit margin of travel service providers, who usually combine a number of services such as car hire, hotel accommodation and so on in a package which they sell to the consumer in their own name. The existing scheme allows for the correct VAT to be levied on the services in the package at the point where those services are consumed. For example, if one hires a car in Greece and arranges hotel accommodation there, the VAT on those services are paid in Greece. In relation to the profit margin of the travel agent on that particular package, VAT is levied in the country where the travel agent sells that package.
If there was no special scheme in operation to cater for the unique circumstances of travel agents, normal VAT rules would apply. This would mean that, for example, a travel agent in the UK would have to charge VAT on the entire contents of a holiday package sold to a consumer, not just on the profit margin as is currently the case. In those circumstances, the travel agent could reclaim the VAT charged on the elements of the holiday package. In the case of hotel accommodation in Greece, he could try to claim the VAT paid on that accommodation but, to do so, he would have to register for VAT in Greece and seek to recover the VAT from the Greek authorities, which is not an easy process.
Accordingly, the alternative, which is the present special margin scheme, provides that VAT is only payable on the profit margin on the package holiday sold by the travel agent. The VAT payable on the contents of the holiday accrues to the Greek authorities. The VAT payable on the profit margin on the holiday package accrues to the tax authorities where the travel agent is located. Currently, this is only of academic interest to us as Ireland is not part of this particular scheme and travel agents in Ireland do not pay VAT on the margin on the package they sell.
This leads us on to the proposal from the Commission which has a number of broad aims. The first element is to update the scheme which has not been changed since 1977, although there have been substantial developments in the tourism sector in the meantime. Consumers are more sophisticated and the packages on offer are much more varied, giving rise to a need to modernise the existing scheme. A second consideration is that member states are not uniform in their treatment of the scheme. In some European countries, a travel agent may sell a package on to another travel agent. One member state may treat that as if the travel agent was selling on to a consumer while another member state may treat it differently and apply different VAT rules.
The third objective of the proposal is to resolve difficulties with non-EU travel agents selling to consumers within the EU, especially over the Internet. Finally, the Commission wishes to remove the existing exemptions applying to Ireland and Denmark, who do not currently operate the scheme.
I now turn to the impact of the proposal on Ireland if we became part of the scheme, the most immediate impact being that our existing exemption would be removed, bringing us within the existing directive, as modified. Irish based travel service providers would then be required to operate the revised scheme, involving payment of VAT at the standard rate on their profit margin on package holidays. In addition, the scheme would also be extended to include travel agents established outside the EU who provide travel services to customers within the EU.
This is where the regulation to which I referred earlier comes into play. The regulation which was the subject of the initial note to this committee simply proposes to make the administrative arrangements easier for non-EU travel agents on being brought within the scope of the new scheme. In effect, there would be a level playing field, with EU and non-EU travel service providers being treated in the same manner. According to the travel trade, the main potential impact would be a possible increase of up to 3% in prices for the provision of travel services. It is obvious that this depends on the profit margin of the travel agent concerned. If the agent's profit margin is just 10%, for example, one would expect prices to increase by about 2%, bearing in mind the VAT rate of 21%. One hears differing views about the profitability of travel agents, but it is just an example.
This proposal will have two main business consequences for the Irish travel industry, depending on the customers involved. The first consequence will involve non-EU customers, such as an American citizen taking a holiday in Ireland. If such a person purchases a holiday outside the EU, for example in the US, the scheme will not apply to him or her. If he or she purchases a holiday in Ireland from an Irish based travel agent, the scheme will apply to him or her. The second consequence will affect an Irish tourist who purchases a holiday in the EU, for example in Spain or Greece. No VAT is payable on such a holiday at present but, under the new arrangements, such holidays will be subject to VAT on the margin made by the travel agent. Nothing will change in respect of tourists from member states other than Denmark, as travel agents in such states are already subject to VAT on their margins.
I wish to draw attention to the difference between travel agents who sell holidays on commission and those who put packages together. While travel agents who deal only on commission may not be subject to the rules of this scheme, as such, they will nevertheless be liable to VAT at 21% on the commission they earn from the holidays. There will be no difference, in respect of the tax payable, between the treatment of someone who puts a package together and someone who simply sells on a package and earns the commission. VAT will be payable in both cases.
One of the concerns expressed to the Department by the travel trade relates to the potential administrative burden. The larger tour operators will be able to look after themselves, generally speaking, but there is a possibility that smaller travel agents may encounter difficulties as a result of coming within the scope of the VAT system. In this context the Department hopes that if Ireland becomes involved in this scheme, it will be possible to reclaim the VAT paid on supplies made to travel agents. This is one of the potential benefits of being part of the scheme. Travel agents may be able to reclaim VAT paid on office equipment, such as computers, acquired in pursuit of their trade.
The Revenue Commissioners have undertaken to work with the trade to make things as easy as possible in the event of Ireland's participation in the scheme. In this regard, an annual VAT return is possible, something that is provided for in the directive.
I will refer to the current position. The working party dealing with this proposal held a meeting in Brussels on 3 September last. It was clear from the meeting that a number of issues, such as Ireland's negotiating position, remain to be decided. Our initial position was to continue to seek an exemption from the scheme. In the course of the negotiations, the Presidency offered us a derogation until 1 January 2007. We are working with the Danes at the moment to try to present a united front on the best possible negotiating stance.
The second issue that has arisen in the context of this directive is that four member states want not only to be able to use the existing margin scheme, but also to be able to avail of normal VAT rules. One of the reasons we do not have any strong feelings on this matter is that we want to concentrate on our negotiating position and do not want to muddy the waters. This aspect of the scheme would not affect Irish businesses in any event, as they would not be able to claim deductibility. Such a claim would be possible however in some member states if the normal VAT rules were to apply.
A third point worth mentioning is that Germany has been seeking the imposition of VAT on air passenger transport for journeys inside and outside the EU. International air transport is exempted from VAT within the EU at present. Germany's stance on this issue does not have any support and we do not expect it to succeed. Belgium wishes to include in the margin scheme travel services supplied in the EU by travel agents in respect of journeys outside the EU. This is contrary to current VAT practice. Belgium is isolated on this issue and we do not expect that it will be a problem. These issues will come up for decision at an ECOFIN meeting in the near future.
