Digital platforms have proliferated in recent years, creating opportunities for businesses, workers and the self-employed, as well as improved access to services for consumers. But their introduction has also brought challenges in how they are treated for regulatory purposes, including in the area of taxation.
Last December, the European Commission put forward a series of measures to bring the EU’s Value-Added Tax (VAT) rules into the Digital Age. One element of this package, currently being discussed by EU Member States in the Council, aims to clarify once and for all the VAT rules that apply to short-term accommodation rentals and passenger transport services booked via online platforms, and introduce a more level playing field with traditional providers like hotels and taxis.
For our March newsletter interview, we asked Carmen Muñiz Sánchez, the responsible Head of Sector in TAXUD’s VAT Policy Unit, to help us understand why these new rules are needed specifically in the area of short-term accommodation rentals, and how they can contribute to a more dynamic hospitality sector.
What is the current situation? How are hotels and short-term accommodation stays treated differently?
Well, our starting point is that the way of doing business in general has changed over time, due to the development of the internet and globalisation as a whole. And the area of VAT is no exception to this. We have a VAT system which at its root dates back to the 1970s, so it obviously does not capture or classify the latest business models which have developed in recent years - such models were simply non-existent at the time!
But what we are now seeing is that traditional businesses like hotels are suffering from competition with accommodation models facilitated through so-called ‘platforms’ such as Airbnb, Booking.com, and Vrbo. Though not exactly the same, hotels and short-term accommodation platforms are comparable business sectors. The difference is that when a consumer uses such platforms, no VAT is usually being charged on the accommodation fee as it would be if they stayed in a hotel. The consequence is unfair tax treatment and the fact that hotels can then be undercut on price.
This is not the fault of the platform, nor of the underlying supplier or user renting out their apartment. The problem lies with the interpretation of VAT rules: should the facilitation by the platform be considered an intermediatory service? Is the VAT due by the underlying supplier or by the platform itself that is acting as the supplier? It raises complex questions, but the end result is the same – VAT is not being collected consistently.
This must be something that the hospitality industry is keenly aware of…
The explosion in short-term accommodation rentals across the EU has clearly led to difficulties for traditional hotels. For example, in Barcelona a hotel has to compete with thousands of apartments or rooms rented through platforms, which can sometimes have lower prices due in part to the mismatch in VAT treatment.
This was something that we were aware of, and when the Commission was preparing the VAT in the Digital Age package, we asked the hospitality sector for its view. In our public consultation, more than 70% of respondents from the “traditional” industry said they were suffering from a distortion of competition with firms offering the same services via platforms. This confirmed that we needed to take action.
What do the proposed new rules change? How will it benefit the hospitality industry?
To level the playing field, we first need to look at the VAT rules and clarify where VAT should be paid. That’s why the updated VAT rules will provide that the uninterrupted rental of accommodation for a maximum of 45 days has a similar function to a hotel, and that VAT should be due on that stay at the same rate as would be applied for a hotel stay.
But clarifications are not enough. Many small businesses and even individuals rent out apartments and even their own homes using these platforms. Imagine if all these people had to register for VAT and comply with accountancy and VAT rules! It would be very difficult, to put it mildly. That’s why our proposals don’t compare the individuals renting apartments with hotels. We compare the platform itself to a hotel, in the sense that a hotel might have a hundred rooms and then you have platforms which lists hundreds of offers in the same city.
So in our proposal, we suggest that the platform be considered the ‘deemed supplier’ – meaning that it is the platform itself that will collect the VAT on behalf of the individual user and remit that VAT to the Member State authorities.
Won’t platforms and their users have to deal with much more bureaucracy?
At the moment, we have a complete mismatch of VAT rules across the EU, which is already proving a headache for platforms and their users in terms of figuring out when, where and what VAT should be charged. Some consider platforms to be an intermediary service while others say it is an electronic service which requires different VAT treatment. Others define short-term rentals as hotel services but say that to be classified as such, evidence is needed of room cleaning, the provision of towels, a hotel reception etc. So the rules are already leading to confusion and extra paperwork.
In fact, what the Commission wants to do is have more clarification and simpler, harmonised EU-wide rules to the benefit of all parties, not least for the platforms and their users. At the same time, platforms are large scale operations with compliance departments that can easily absorb any extra administrative burden that would otherwise fall on their users.
That’s why the proposed rules clarify that a short-term rental should be considered a maximum 45 day stay, and that it is the platform themselves that must collect and remit the VAT on behalf of their users. With that, all parties can get on with what they do best: facilitating the connection between travelers and owners and welcoming their guests across the EU.
How does the new ‘deemed supplier’ rules fit into the broader picture when it comes to tax collection?
First, I would mention that a similar system for accommodation rentals was introduced in Canada last year where they are doing exactly the same as we have proposed. The Canadians said they have no real complaints, and that the new system has been successful in introducing a more level playing-field.
This move is also in line with the ongoing trend in tax collection when it comes to online sales in the EU in general. We are applying the same procedure as we did for e-commerce, whereby since July 2021 online platforms like Amazon and eBay are considered the ‘deemed supplier’, notably when you buy something from outside the EU. So it’s a system we already know is working well, and both Member States and the online platforms themselves are satisfied.
And in fact, we estimate that the platforms themselves will collectively save €48 million per year over ten years due to the simplifications introduced by the measure and the streamlining and standardisation of reporting obligations they will have in the future.
And of course, Member States will collect additional VAT revenues to the tune of €6.6 billion yearly, over a ten-year period, that can help fund the public services on which we all rely.
Full details on the Commission proposals for the platform economy
Details
- Publication date
- 31 March 2023
- Author
- Directorate-General for Taxation and Customs Union