Table of Contents

Executive Summary

Payment

1. Introduction

In travel, payment is more than a transaction but constitutes a transfer of risk, responsibility, and reputation. Whether a customer pays a hotel directly, rou

2. The Global Tax Landscape for Travel Businesses

Global travel businesses face an increasingly fragmented and high-risk tax environment. As jurisdictions tighten enforcement and adopt more assertive interpretations of cross-border rules, traditional assumptions about tax neutrality in tourism no longer hold. The travel industry which was long characterised by asset-light models, multi-jurisdictional contracting, and complex B2B2C flows, now finds itself exposed to scrutiny on multiple fronts: VAT, permanent establishment, transfer pricing, and digital taxation. This complexity is amplified by the sector’s structural reliance on disaggregated supply chains, intermediation layers, and the bundling of taxable and exempt services.

A. Travel’s structural vulnerabilities

Few industries operate with such a high degree of geographic dispersion between booking, contracting, payment, and service delivery. A hotel may be located in Italy, sold by a U.S.-based OTA, contracted via a bedbank in Spain, and paid using a virtual credit card issued from Ireland. This fragmentation creates difficulties not only in compliance, but also in establishing tax liability, VAT reclaim eligibility, and permanent establishment thresholds.

Compounding this is the lack of physical footprint typical of modern travel companies. Many OTAs, DMCs, and wholesalers operate without owning inventory or physical assets in the destination country. While operationally efficient, this model often invites questions around substance, residency, and where value is truly created, especially from tax authorities in jurisdictions seeking to preserve local tax bases.

Further, digital intermediaries represent a growing vector for indirect taxation. Even without physical assets or legal entities in a jurisdiction, platforms that facilitate bookings, payments, or dynamic packaging are increasingly subject to claims of Permanent Establishment or Digital Services Tax. Tax authorities are scrutinising whether the provision of intermediary services, especially where local consumers pay domestic providers via the platform, imposes a local tax obligation, irrespective of the head office location.

B. Industry Segments and Tax Touchpoints

Understanding where tax exposure arises depends on the segment and business model. Each has distinct risks:

• Online Travel Agencies (OTAs)

Often headquartered in low-tax jurisdictions but selling globally, OTAs face pressure around digital service tax (DST), permanent establishment via sales agents or contracting teams, and VAT on service fees.

• Destination Management Companies (DMCs)

Frequently based in one jurisdiction but serving clients in another, DMCs often bundle exempt and taxable services (e.g. excursions + accommodation) without full clarity on VAT rules. Reverse charge is often incorrectly assumed to apply to B2C clients.

• Bedbanks and Wholesalers

Their intermediary role is often misunderstood, and VAT liability may arise if they act as principal in the supply chain, especially if they handle payments or issue invoices to B2C customers.

• Hotel Groups

Tax issues arise in transfer pricing (e.g. for intra-group franchise or brand fees), VAT treatment of cross-border bookings, and permanent establishment via marketing or contracting teams in third countries.

• Retail Travel Agencies

Although traditionally low risk, those that cross borders, especially through affiliate models or hosting international clients, face exposure to VAT misclassification and U.S. sales tax nexus.

• Travel Tech Platforms

Companies that provide SaaS or API-based booking engines are increasingly subject to DST regimes or treated as digital intermediaries, even where they never touch the guest or the transaction flow.

Each of these models interacts with tax regimes differently. What is consistent, however, is the increasing willingness of tax authorities to challenge structures that rely on legacy assumptions about where tax should be paid, especially where services are consumed locally or value is created through contract negotiation or fulfilment in high-tax jurisdictions.

C. Case Study: Booking.com’s Global Tax Structure and Public Scrutiny

Perhaps no travel company illustrates the tension between asset-light global scaling and national tax sovereignty better than Booking.com.

Headquartered in the Netherlands, Booking.com long benefited from a tax-friendly environment, booking much of its revenue in the Netherlands even while operating globally. However, several countries have challenged this structure in recent years. The French tax authority, for instance, launched an investigation in 2019 over whether Booking.com should be taxed on revenues generated from French hotels, thus arguing that its commercial activity and marketing presence in France constituted a permanent establishment. Booking.com was ultimately ordered to pay €153 million in back taxes and penalties after the French court ruled that the company’s French operations amounted to a taxable presence in the country, despite the absence of a French legal entity.

Similarly, the UK's HMRC questioned the VAT treatment of commissions earned by Booking.com and other OTAs from UK-based hotels. The challenge focused on whether the VAT reverse charge mechanism applied or whether the supply of intermediation services was effectively taking place in the UK, in which case UK VAT would be due.

These cases mark a shift in global tax enforcement: jurisdictions are increasingly unwilling to accept that platforms serving domestic consumers, and profiting from local accommodation providers, can route all tax obligations to low-tax headquarters abroad. In many ways, the Booking.com disputes preview the logic now underpinning the OECD’s Pillar One reforms, which seek to reallocate taxing rights toward market jurisdictions.

3. Indirect Tax Risk in Global Travel

Indirect tax regimes such as VAT and GST are among the most misunderstood areas of international travel finance. Their impact extends well beyond domestic sellers. Travel businesses operating globally, particularly in asset-light or intermediary models, face exposure both as non-resident suppliers and as recipients of services in complex, bundled transactions. Unlike direct taxation, which typically follows profit allocation, indirect tax liabilities are often triggered by service delivery location, contractual flow, or customer type (B2B vs B2C), even where no legal presence exists in the jurisdiction. As tax authorities grow more assertive in their treatment of foreign intermediaries, the travel sector must reassess assumptions that VAT is someone else’s problem.

A. U.S.-Based Travel Sellers: Exposure to Foreign VAT

Many U.S. travel sellers, including OTAs, luxury advisors, and group operators, operate under the false assumption that foreign VAT rules do not apply unless the business is registered abroad. In practice, this position is no longer tenable. Non-resident VAT liability arises in multiple jurisdictions where services are sold to individuals or where the supplier is deemed to be acting as a principal in the supply chain.

Selling Packages to EU or UK Clients

A U.S.-based luxury travel advisor that assembles and sells multi-day trips in Europe to EU-based clients is often required to register for VAT in the destination country. This applies even if the advisor operates without an EU office. In many cases, tax authorities assert that the service is performed (and consumed) locally and is therefore within the VAT scope.

For example, France has issued guidance confirming that non-EU suppliers of travel services to French individuals are required to register and charge French VAT where the services include physical elements (accommodation, transport, excursions) taking place in France. Similar requirements apply in Italy, Spain, and Austria. Ignorance of this obligation can result in penalties, blocked clients at hotel check-in (due to missing VAT-compliant invoices), or the inability to reclaim supplier VAT, thus materially eroding margin.

Reverse Charge Assumptions and B2B Misclassification

U.S. agencies often rely on the assumption that foreign suppliers will “reverse charge” VAT on B2B purchases. However, this mechanism only applies if the U.S. buyer is correctly identified as a business and the service is eligible for reverse charge. Problems arise when:

• The U.S. agency fails to provide valid proof of business status (e.g. no VAT ID or equivalent).

• The supplier classifies the sale as B2C by default.

• The nature of the service, e.g. hotel accommodation, excursions, is exempt from reverse charge treatment under local law.

These misclassifications often result in irrecoverable VAT being charged to the U.S. agency, with no route for reclaim. In high-VAT countries such as Denmark (25%) or Hungary (27%), this becomes a significant cost center.

U.S. Operators and VAT on Commissions

U.S. advisors earning commission from non-U.S. hotels, cruise lines, or DMCs may find that withholding VAT or local indirect tax is applied to their commission if the payer is based in a VAT jurisdiction. In some cases, the foreign payer will deduct VAT at source and issue a reduced payment, or demand a VAT-compliant invoice from the U.S. party. Without a registered presence, U.S. sellers are unable to issue compliant invoices or reclaim withheld tax, leading to revenue loss.

B. International VAT Frameworks and Sector-Specific Rules

VAT exposure in travel is not solely a U.S. concern. For EU-based travel sellers, DMCs, and B2B wholesalers, compliance risk is embedded in the structure of how services are bundled, invoiced, and delivered. While EU VAT law provides for exemptions and simplifications, these often break down under scrutiny, particularly in cross-border scenarios involving multiple suppliers and clients in different countries.

The Tour Operators Margin Scheme (TOMS)

TOMS is an EU-specific regime that applies to travel businesses acting as principals who buy in and resell travel services without itemizing each component to the customer. Under TOMS:

• VAT is calculated on the margin (sales price minus direct costs), not total revenue.

• The rate and country of taxation is that of the operator’s establishment and not where the services take place.

• VAT on input costs cannot be recovered for services falling under the scheme.

This creates a dual burden. Firstly, margin-based VAT liability often surprises new entrants who are expecting to charge nothing at all (especially DMCs and bedbanks). Secondly, many misapply TOMS or incorrectly assume it does not apply, thus exposing them to reclassifications and retrospective assessments. Intra-EU operators who sell to other businesses often incorrectly apply reverse charge, when in fact TOMS still applies if acting as principal.

ECJ jurisprudence reinforces the need for caution. In Madgett and Baldwin (C‑308/96 & C‑94/97), the Court insisted that any in‑house services bundled with bought‑in services must be attributed a market‑value price for margin calculation under TOMS, effectively preventing internal margins from being artificially reduced via low internal cost accounting.

More recently, the ECJ in C‑108/22 ruled that even consolidators reselling accommodation, without ancillary services, remain eligible for the VAT scheme for travel agents. The judgment underscores the regime’s pragmatic intent: avoiding VAT multiplicity and preserving simplicity across Member States

The EU Package Travel Directive and VAT Bundling Risk

The EU Package Travel Directive (2015/2302) imposes a regulatory obligation on operators selling pre-arranged combinations of travel services to treat them as a single package. While primarily a consumer protection regulation, it also creates VAT consequences. Specifically:

• Services bundled into a package may become subject to VAT as a whole, even if individual components are exempt.

• The operator may be required to act as a principal, triggering VAT registration and liability.

• Common errors include treating the bundle as B2B when it is functionally B2C, or using agency language in contracts while acting as principal in substance.

National tax authorities often review contracts and booking flows to look through form to substance. If the operator controls pricing, holds risk, or sets terms, they may be deemed the supplier, regardless of contract wording. This has been reinforced in multiple national court rulings.

Non-Resident VAT Registration and Reclaim Challenges

Many jurisdictions, including the UK, France, Australia, and the UAE, require non-resident suppliers of certain travel services to register for VAT or its equivalent. Triggers vary by jurisdiction but often include:

• Sales to local individuals (B2C)

• Bundled physical services delivered locally (accommodation, excursions)

• Acting as principal with control over service delivery

Failure to register not only incurs penalties but also blocks VAT reclaim opportunities. For example:

• A UK-based DMC operating tours in Italy without an Italian VAT registration cannot reclaim input VAT on hotel costs, transport, or guides.

• An EU-based OTA issuing payments via virtual credit cards may lose reclaim rights if the hotel invoices are not compliant, or if the card issuer is based offshore.

Reclaim is further complicated by VAT invoice formatting rules, foreign language requirements, and the absence of local fiscal representatives.

C. Strategic Implications

Indirect tax is central to pricing, profitability, and legal compliance. U.S. sellers must recognise that VAT liabilities can arise without physical presence, and EU-based operators must move beyond assumptions that TOMS or reverse charge automatically protect them. The growth of multi-jurisdictional bookings, dynamic packaging, and virtual payment flows requires intentional tax design and not reactive compliance. As indirect tax regimes tighten enforcement, travel businesses must treat VAT not as a backend accounting detail but as a strategic commercial risk.

3. Indirect Tax Risk in Global Travel

Appendix

15. Appendix C – References