Tricky VAT rules on cross-border transportation are back in the spotlight with the rise of the digital economy

September 6, 2022

Most people know that VAT is a consumption tax.  But where is a service consumed?  For many services, it's easy to figure it out.  If you live in France and ask a local electrician to fix a broken outlet, it is intuitive that French VAT would apply.  You might have some doubts if the electrician instead charged Turkish VAT, and rightly so.

For some services, it’s tougher.  For example, electronic services often have different place of taxation rules than other services.  However it is not always clear when a service should be considered an electronic service.  A service can have a significant digital component but a degree of human intervention sufficient to place it in a grey area. 

Some very particular services fall into an additional category.  These are services where the rules are fairly clear cut, but very difficult to comply with.  There are some instances - and this might not come as a surprise - where the practical implications of some tax rules may not have been fully appreciated when created.

This is the case with the rules surrounding the supply of cross-border passenger transportation.  Traditionally these only applied to a small subset of businesses such as train operators, airlines, large bus companies, and maritime transport providers.  Many of these operators benefited from VAT exemptions (cross-border air travel is now exempted by every EU member state), or were able to structure their operations to avoid having to deal with these VAT rules.

However, the rise of the digital economy has changed this dynamic.  Booking platforms and ride-sharing apps have swept over Europe, and increasingly allow customers to purchase cross-border trips.  With these changes, these rarely applied VAT rules are becoming less rare.

So what are the rules?

In theory, it's simple.  Imagine you’re a bus company selling a trip from Paris to Amsterdam for 100 euros.  The trip goes through 3 countries - 50% of the distance travelled is in France, 20% in Belgium, and 30% in the Netherlands.  The rules dictate that 50 euros are subject to French VAT, 20 euros to Belgian VAT, and 30 to Dutch VAT.  

The EU VAT directive also states that, as a general rule, the place of taxation of intermediation services supplied to a non-VAT registered customer is where the underlying transaction is supplied.  In other words, if you operate a platform where private individuals can buy (or sell) cross-border travel, and you charge those private individuals an intermediation fee for using the platform the VAT treatment of that fee must be broken down using the same proportionate distance calculation described above.  The name of the fee is not determinative - it could be considered an intermediation fee regardless of whether it's called a platform fee, service fee, convenience fee, etc.

One technical point of consideration is that cross-border passenger transportation benefits from VAT exemptions in many member states.  However, the rules can vary widely between member states.  In addition, these exemptions often do not apply to intermediation services related to passenger transportation - the EU directive states that the place of taxation must follow the underlying supply, but does not require that the tax treatment follows the underlying supply.

Does this apply to you?

Do you sell cross-border transportation directly to customers in the EU and UK (either as a transportation provider or as a buyer/reseller of transportation services)?  If so, these rules may apply to you.

Do you facilitate the sale of cross-border transportation supplied by third parties to private consumers in the EU and UK, for example by providing a platform to purchase tickets?  Do you charge a fee to private consumers for this service?  If yes to both, these rules may apply to you.

What’s so tough about complying? 

Performing a distance calculation on one or two popular routes is fairly easy.  However, we know that train stations, bus stops, and ride sharing exist outside London, Paris, and Rome.  

  1. If you are selling or facilitating passenger transportation on a global or even regional scale, the amount of potential combinations of departure and destination points grows exponentially.  
  1. What happens if you add new coverage?  You may be seeking to add new countries, additional locations within countries already covered, or new forms of transportation.  If a new functionality needs to be built every time your business seeks to expand, in practice you may either need to delay the growth of your business by waiting until the new functionality is built, or accept being non-compliant until your systems can handle the new activities. 
  1. There is also the issue of the rules surrounding VAT exemptions in EU member states for cross border travel.  Some states exempt some forms of travel but not others.  In addition these exemptions may not apply to intermediary services.  These rules are subject to change as well.  Tracking these changes and updating your system accordingly can take up significant resources.
  1. Lastly, you’ll likely need to do all of the above nearly instantaneously for thousands of customers that use your service or platform.  That makes any manual intervention in the distance calculation essentially impossible and makes building your own internal solution more difficult.

How can Fonoa help?

Fonoa has created an automated distance calculation solution that any business can quickly and easily plug into.  

What does this mean in practice?  

  1. We set up a simple API between our system and yours to automatically retrieve information on the departure point, destination point, and any stops in between, as well as the fee you are charging for your service - this often takes as little as a few days to implement.
  2. For each transaction, we instantly calculate the distance travelled within each country and split up the taxable fee proportionately based on this calculation. 
  3. We then instantly calculate VAT based on the rates and exemptions applicable in each country (which you can of course customize).  These can be quickly modified to take into account any changes.
  4. Faster than you can say ‚ÄúFonoa‚ÄĚ, we provide you with the VAT and net amounts applicable to each country.¬† This can be done during checkout or afterward - your choice.

Adding new routes?  Our system has the flexibility to handle all departure and destination points in the EU and UK.  No additional work is needed either on your end or ours.  

Get in touch to automate all things indirect tax.

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Josh Erenfrid
Tax Technology Manager

Josh is a lawyer and indirect tax specialist with extensive experience managing global VAT projects. He spent over 5 years in the EY VAT practice both in the New York and Paris offices, assisting with VAT automation and technical VAT consulting projects. Before joining Fonoa, Josh was an indirect tax manager at a music technology company, where he managed both VAT and US sales tax matters.