On June 21, 2024, the Economic and Financial Affairs Council (ECOFIN) Council failed to reach an agreement on the VAT in the Digital Age (ViDA) reforms. Estonia’s objection to the proposed rules for platform operators in the short-term rental and accommodation sectors halted the legislative process, as unanimity is required for enacting VAT laws in the EU. The Hungarian presidency will now attempt to find consensus on the proposals during the second half of 2024.
Uncertainty around VAT in the platform economy
Current regulations do not require platforms to collect VAT on short-term rentals and passenger transport services they facilitate. Instead, the service provider (property owner or driver) is responsible for charging VAT if their revenue exceeds the tax registration or collection threshold in their home country. These thresholds vary significantly between member states, ranging from €0 (Spain) to €91,900 (France). The rationale behind exempting low-revenue businesses is that the collected VAT revenue wouldn’t justify the administrative costs involved.
Critics argue that the current system unfairly advantages individuals renting out apartments compared to traditional hotels. Since individuals often fall below national VAT registration or collection thresholds, they don’t need to charge tax on rentals, unlike hotels. However, these individuals compete with hotels through platforms that provide broad audience reach.
Another reason the current system may be considered unfair is that hotel accommodation and comparable accommodation services are subject to VAT, while property rentals may be exempt. Some countries also exempt accommodation rentals where the owner doesn’t provide services typical of the hotel industry. This means that individuals renting out their apartments will not have to charge VAT, even though VAT would be due on comparable hotel accommodations.
Additionally, the current VAT rules lack clear guidelines on classifying platform fees for VAT purposes. Are platforms providing digital services or intermediary services? This distinction is crucial in business-to-consumer (B2C) scenarios, as it determines which country collects the tax. For instance, if an accommodation platform classifies its services as intermediary, the rental property’s location determines where the tax is due. However, if it opts for “digital services”, the tax is collected in the customer’s country. In business-to-business (B2B) scenarios, the classification (digital or intermediary) doesn’t matter, as both are taxed in the customer’s country.
ViDA’s deemed supplier model
The ViDA proposals aim to introduce a deemed supplier model for platforms in the short-term rental and road passenger transport sectors. In this model, platform operators will collect VAT on the services they facilitate. The VAT law creates a legal fiction of two identical sales occurring consecutively: the seller supplies services to the platform operator, who then supplies them to the customer. This deemed supplier model will only apply to transactions where the service provider is not required to collect VAT. Platform operators will not collect VAT if the service provider provides a valid VAT ID and declares their intention to handle VAT themselves.
The ViDA proposal also clarifies that short-term rentals — defined as uninterrupted rental of accommodation to the same person for a maximum of 30 consecutive nights — have a similar function to the hotel industry and cannot benefit from VAT exemptions.
Lastly, the proposal specifies that platform facilitation services provided to platform sellers who are not VAT-registered will be taxable in the member state where the transaction occurs. This provision applies not only to short-term rentals and passenger transport but also to other facilitation services.
Estonia’s objections
Estonia objected to the ViDA rules for the platform economy, arguing that the proposed approach would create unequal treatment for the same services and undermine the principle of VAT neutrality.
Under ViDA, VAT would be due on apartments rented out by individuals through online platforms, even if those individuals fall below the national thresholds and wouldn’t otherwise be required to register for VAT. However, if the same apartment were rented directly, without the platform’s involvement, no VAT would be due.
VAT neutrality means that businesses charging and remitting VAT should be able to reclaim the VAT they paid on their own purchases. This is because VAT is ultimately intended to tax the final consumption of goods and services, and not burden businesses throughout the supply chain. For example, a hotel purchases a bed to furnish a room and rents the room to a consumer. The consumer pays VAT on the room rental, but the hotel can deduct the tax paid on the bed as input VAT, as the bed is part of the cost of providing the room rental. However, ViDA’s deemed supplier rules would violate the neutrality principle: VAT would be charged on the apartment rental, but the property owner would not be able to deduct the VAT on the bed purchased to furnish the apartment.
Interestingly, New Zealand implemented similar regulations for short-term rentals on April 1, 2024. Unlike the proposed EU rules, New Zealand offers a flat-rate credit approximating the recoverable input tax. Platforms collect 15% GST but return 8.5% of the GST collected to the service provider. Essentially, only 6.5% of the 15% GST charged by the platforms is collected by Inland Revenue if the underlying supplier is not GST registered.
Some unanswered questions
The ViDA proposals clarify that the deemed supplier model won’t apply to services covered by the special VAT scheme for travel agents and tour operators (TOMS). TOMS allows travel agents and similar providers to calculate VAT based on the margin – the difference between the customer’s total price and the cost of travel services acquired. Traditionally, applying TOMS required complex services involving multiple steps to organize a trip. However, recent court rulings suggest that simply reselling a single service like accommodation or transport may qualify for TOMS. In 2023, the European Court of Justice ruled that reselling accommodation services can qualify for TOMS as it is similar to what travel agents do. This case involved a Polish company that didn’t own accommodation but acted as a “hotel consolidator”, buying and reselling rooms from VAT-registered businesses. If short-term rentals or facilitating them fall under TOMS, does this mean the ViDA deemed supplier model wouldn’t apply?
Another interesting question surrounds platform facilitation fees. In the traditional deemed supplier model (also called “undisclosed agent”), an intermediary acting in its own name but on behalf of a VAT-registered business is considered the seller for VAT purposes due to the legal fiction of two identical sales occurring consecutively. This means the intermediary’s facilitation fee is part of the total price charged to the customer. However, the ViDA proposals appear to depart from this traditional model. They suggest the platform’s facilitation service continues to exist alongside the legal fiction of two consecutive supplies. This different treatment creates unnecessary complexity and inconsistency within the VAT system.
Concluding remarks
The ViDA rules for the platform economy aim to level the playing field, preventing unfair competition between “VAT-free” rental services facilitated through platforms and those subject to VAT provided by traditional businesses. However, it can be argued that the distortion of competition isn’t caused by the platform model itself, but by inconsistencies in national VAT rules. For example, short-term rentals facilitated by platforms may escape taxation due to service providers falling below the national registration thresholds and exemptions granted by some member states for short-term rentals.
These issues could be addressed by amending existing national legislation, without resorting to a deemed supplier regime that holds platforms fully responsible for tax collection. Additionally, the recently implemented DAC7 Directive offers tools to identify non-compliance among service providers that use online platforms. As DAC7 is relatively new, its effectiveness in tax collection, compliance, and combating avoidance remains to be fully evaluated.
In its report The Role of Digital Platforms in the Collection of VAT/GST on Online Sales, the OECD has proposed alternative, less disruptive models for platform involvement in VAT collection, such as educating platform sellers on their VAT/GST obligations, facilitating information sharing with tax authorities through data reporting, and establishing formal cooperation agreements with tax authorities. The deemed supplier model is suggested only as a last resort. By opting for the most intrusive option, the EU raises the question: could other methods achieve the desired outcome with less disruption for platform operators?
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
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