The travel industry is experiencing a dramatic shift in its operating models as more and more customers purchase holidays and tours over the internet. While this development can pose a real challenge, it opens up opportunities as well – for example in regard to VAT.
Travel industry is changing
While traditional tour operators with their physical outfits see their relevance diminishing, online travel retailers experience a massive increase in customer acceptance and demand. Not only individual travel services, e.g. a flight or a hotel stay, are being booked online; more and more, package tours also find their way to the customers over the internet. From a business perspective, this obviously means that the place of establishment has become more flexible for online travel operators. It is precisely this that could be important and worthy of a review from an indirect tax perspective.
Switzerland is not only attractive for tourists
Switzerland has always been a beacon for international tourists – beginning with the English who played an important role for developing Switzerland’s touristic infrastructure until today, when the largest markets come from overseas. However, these days, Switzerland is also attractive to tour operators that carry out their business in Switzerland: bookings done through a Swiss entity entail a healthy VAT savings. The fact that the Swiss VAT legislation does not allow Swiss tour operators to levy Swiss VAT on tours taking place wholly or predominantly outside of Switzerland can prove to be quite advantageous.
Consider the example of a UK tour operator selling an EU trip to a private customer. According to applicable law, the tour operator is liable for UK VAT (currently 20%) on the gross profit achieved. Now, Switzerland offers an interesting regulation applicable to tour operators based in Switzerland selling holiday packages to EU destinations. Swiss legislation requires Swiss VAT to only be charged if the service is being consumed in Switzerland. This is a real benefit: if a Swiss tour operator sells a travel package taking place outside of Switzerland, no VAT will apply as no part of the trip is actually taking place in Switzerland. Without any further direct tax optimization, this alone can increase gross profit margin of a tour operator by up to 20% as compared to the margin achieved by a competitor based in the UK.
This does not apply to individual travel services, e.g. a flight or a hotel stay, as in this case the travel seller will have to charge local VAT at the place where that individual travel service is consumed. Also, of course a Swiss entity requires a certain amount of substance and needs to make sense from a business point of view. But given that, this solution might prove to be the cutting edge over your competitors.