United States

European Union: Airline “No-Shows” May Be Subject to VAT

Jan 18, 2016
From KPMG TaxWatch

Transcription Only

Loading the player...

The Court of Justice of the European Union (ECJ) recently held in the joined Air France-KLM and Hop!-Brit Air SAS cases (Air France-KLM) that airline “no-shows” should be subject to VAT. In both cases, the taxpayers are airline companies that offer both domestic (taxable) and international (zero-rated) flights to passengers. The airlines did not charge VAT on unused non-refundable tickets sold directly to customers. The French tax authority disagreed and issued an assessment to the airline. The ECJ noted that established case law provides that VAT is payable where a sum paid by a customer is directly linked with a service and that service is performed. The ECJ concluded that, in the case at hand, this does not require the passenger actually board the aircraft; the passenger purchases a right to benefit from the performance of the transport service and has this right regardless of whether they actually board the flight. The ECJ had held previously in Société Thermale that a hotel cancellation fee is not subject to VAT, but instead is non-taxable compensation. In Société Thermale, the ECJ found no link between the reservation deposit and an identifiable service, concluding that the making of a reservation arises from the contract for accommodation itself and not from the payment of a deposit. Therefore, there is no direct connection between the service rendered and the reservation deposit. The ECJ added that the fact that the amount of the deposit is applied towards the price of the reserved room if the client occupies the room confirms that the deposit cannot constitute the consideration for the supply of an independent and identifiable separate service. Therefore, if there is no supply of accommodation, the retained deposit is not payment for anything. The Air France-KLM case may affect businesses in various sectors, such as hotels, restaurants, tour operators, theaters, cinemas, museums, event agencies, or the telecommunications sector that have applied Société Thermal broadly. For more information, please contact Frank B. Sangster at (267) 256-1680 or Sandy Nicholson at (408) 367-2801.

For more information about TWIST or to view archived episodes, please visit our TWIST homepage.

 Subscribe to TWIST via iTunes, or  Subscribe via RSS.

To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.

The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.