Perspective Magazine - July 2008: Timeshare & Fractional News & Reviews
August 17, 2008 by Perspective Magazine: Timeshare & Fractional News & Reviews · Leave a Comment
This month sees Perspective Magazine’s reach extend further again - shortly after taking the lead as the most read independent B2B publication for the timeshare and fractional industry, we now add even more conventions to review list and where our magazine is officially distributed - AMDETUR, Mexico, CARE, USA and The Fractional Summit, UK. As part of the latter, this month we feature a number of fractional ownership articles, including the poineers of the fractional industry, DCP International and one of their properties in Bermuda, a review of a recent industry convention in Miami and we have an exclusive interview with the new Managing Director of Group RCI UK and RCI Europe, Jonathan Back on his new role and plans for the future. Plus Front Cover Sponsors, Seasons Holidays announce their fractional ownership product, 8keys.
And now you can read Perspective Magazine using the latest Page Turn Technology for enhanced user experience! Just click on the magazine or links below to see just how different it is.
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EDITION HIGHLIGHTS
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Indirect Tax – A Changing Landscape?
August 17, 2008 by Perspective Magazine: Timeshare & Fractional News & Reviews · Leave a Comment
Paul Stewart is a Director of Indirect Tax Services at KPMG in the UK and has been involved in advising the timeshare sector for over 15 years. He regularly attends the ARDA and OTE conferences.
The majority of countries will have some form of indirect taxation be it a form of VAT or sales tax on transactions. This article focuses on the European Union (“EU”) VAT system but the general principles may apply elsewhere. More than ever businesses are conscious of managing tax risk and maximising the opportunity for savings. So prepare yourself for an insight into the world of indirect tax and timeshare from an EU perspective!
The main form of indirect taxation in the EU is VAT. VAT is a tax based on transactions rather than profits. It is important to understand “who is providing what to whom, when, where and for how much”. This helps establish the rate of VAT and the place and timing of when VAT is due. The fact that developers enter into different types of transactions particularly in relation to property and often on a multi-jurisdictional basis retailing to the end consumer means that the VAT consequences are not always straightforward.
There is evidence that the tax authorities are focusing more closely on the timeshare sector particularly in the UK where currently two specific VAT issues have been referred to the European Court of Justice for a ruling. These referrals relate to the VAT treatment of exchange fees and sales of points. The services are multi-jurisdictional in nature and the common denominator for both is establishing the place of supply ie in which country the services are to be taxed for VAT purposes. In view of the fact that VAT rates vary significantly within the EU and indeed certain non-EU jurisdictions do not have VAT systems it is no wonder that international businesses are keen to understand the most tax efficient structure from both a VAT and corporate tax perspective having regard of course to the key commercial and business drivers.
Background to the VAT system: General principles
Sales of weeks
The primary law on VAT throughout the EU is found in the EC Directives, the 6th Directive in particular now known as the Principal VAT Directive 2006/11/EC. Domestic VAT legislation in EU Member States has been drafted to follow the principles laid down in the Directive. The general VAT regime is however not applicable for example in the Canary Islands which continues to be a popular destination for timeshare owners. Instead, a specific tax (IGIC) is applicable which is similar to European VAT.
VAT is a tax on consumer expenditure and is collected on business transactions. It is charged at each stage in the supply of goods and services where these are subject to positive rate VAT. If the customer is registered for VAT and uses the supplies for his taxable economic activities, then he will be able to reclaim this VAT. In many cases VAT simply “washes through” businesses and is ultimately borne by the final consumer. However, VAT costs can arise for certain businesses in the supply chain. Certain supplies are exempt from VAT, and this means that no VAT is chargeable on such supplies, but unlike zero-rated supplies, VAT incurred on related expenditure is not recoverable.
A transaction will, fall within the scope of VAT in a particular Member State if it is a supply of goods or services, the supply takes place in that Member State, and the supply is made by a taxable person in the course or furtherance of business. Supplies deemed to take place outside of that Member State eg transactions relating to immovable property located in another member state are outside the scope of local VAT, although they may be liable to VAT elsewhere.
VAT treatment of timeshare sales
Under the European Directive an exemption from VAT is provided for the leasing or letting of immovable property excluding the provisions of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function including the provision of accommodation in holiday camps or on sites developed for use as camping sites. The Directive also lists certain supplies of goods and services which may be subject to a reduced rate of VAT by Member States. This includes accommodation provided by hotels and similar establishments including the provision of holiday accommodation and the letting of camping sites and caravan parks.
For example, Spain, Portugal and France apply reduced rates of VAT (7%, 5% and 5.5% respectively) for these types of transactions but the UK and Germany does not and the provision of hotel and holiday accommodation is subject to the standard rates of 17.5% and 19% respectively. In the UK, timeshare sales would therefore on the face of it appear to be subject to VAT at the standard rate. However, the UK treats timeshare sales similar to transactions in immovable property where exemption is permitted for certain types of transactions in property subject to the age of the property, ie is it more or less than three years old. If the unit is more than three years old it will be exempt from VAT whereas if the unit was less than three years old the sale would be subject to VAT at the standard rate. All very straightforward and logical!
This UK VAT treatment applies whether or not the vendor is a UK company. The legislation is drafted in such a way that annual maintenance charges (annual dues) are however subject to VAT even if the sale of the week was exempt from VAT although in Spain the reduced rate can apply to annual dues subject to conditions.
It is understood that countries such as Spain and Portugal have interpreted timeshare grants (or the grant of rotational property rights) as falling within the ambit of the provision of accommodation in the hotel sector as defined in the laws of the Member State and therefore excluded from the exemption for the leasing and letting of immovable property.
As already mentioned reduced rates also apply in a number of EU countries and the position applies in the Canary Islands with a 5% rate. It has also been suggested in some quarters that the UK could be prompted to fall into line with, for example, Spain and Portugal in taxing timeshare sales on the basis of the provision of accommodation rather than the leasing or letting of immovable property. It is however considered highly unlikely that the UK government would agree to the operation of a lower rate as this would almost certainly have to have effect across the hotel sector with no overwhelming justifications. Indeed, the UK has been considering the extension of indirect taxation in the hotel and holiday accommodation sector
to include a form of bed tax which is commonplace elsewhere.
Whilst at first glance it all appears complex, determining the VAT treatment of transactions should be a relatively straightforward exercise when applying the “who, what, when, where” principle. What is perhaps more difficult is shaping a structure where the tax consequences of transactions achieve maximum tax efficiency and reduced tax risk whilst not compromising commercial effectiveness.
Recovery of VAT incurred on expenditure
UK Developers selling fixed and floating UK weeks in resorts more than three years old also face additional costs in that they will not be able to recover VAT incurred on sales and marketing costs and general overheads. This includes VAT charged by UK suppliers and VAT which has to be imputed on certain types of services received from outside the UK. Indeed, for international groups some costs may be capable of being redirected to another country where VAT on expenditure can be recovered. Contrast the UK exemption for sales and non recovery of VAT on expenditure with the Spanish lower 7% rate of VAT applied to sales but with the right to recover VAT on related expenditure which in the majority of cases is charged out at 16%. The charging of a reduced VAT rate on sales may well be more advantageous than the exemption from VAT on sales because of the effect on VAT recovery.
Valuation
There is often uncertainty regarding the value of a transaction for VAT purposes. The amount of VAT chargeable is normally based on the consideration received for a supply which can be either be monetary or non monetary or a combination of both.
A good example would be a developer selling a week in Spain and receiving €5,000 cash and a week in partexchange which has an agreed value of €2,500. The value for VAT purposes would be based on €7,500 even though the cash received by the developer only amounted to €5,000. However, the amount of VAT due can be reduced depending on whether the developer is prepared to or is able to vary his selling arrangements. The VAT authorities are keen to apply non monetary consideration arguments wherever they can.
Points Clubs
There has been and continues to be uncertainty (both on the part of the tax authorities and the sector) on the VAT treatment of the sale of timeshare points. Generally speaking no two points clubs are the same. Points are often sold in a number of jurisdictions with underlying inventory located both within and outside the European Union. Added to this are the differences between member states on the basis for indirect taxation of timeshare sales and the applicable rates.
In the case of Macdonald Resorts Ltd which has been referred to the ECJ for a ruling the UK VAT authorities have contended that UK VAT is due on all points’ sales irrespective of the fact that the majority of sales are concluded outside the UK and much of the inventory underpinning the points is also located outside the UK.
Typically points sold by a developer represent the currency for the grant of a right to use accommodation one step away from the actual supply of accommodation. An alternative interpretation is that VAT would be due in the country where the grant of the right to use is exercised. The sale of points is still a supply for VAT purposes but with the place of supply being calculated on a proportionate basis by reference to the mix of inventory in the points club, rather than all being subject to VAT where the developer belongs.
It may be that the answer to the points issue arrives in new legislation flowing from the current EU consultation exercise on the VAT treatment of vouchers although nothing is likely to happen in the foreseeable future in this respect.
In the meantime the ECJ ruling will be of considerable interest. If the taxpayer is successful then VAT sales will continue to follow the underlying inventory and be taxed broadly on the same basis as fixed or floating weeks. If the UK VAT authorities are successful then the sale of points will be regarded as a bare right and subject to VAT where the developer/seller belongs. It is likely to be 18 months before the decision is released, which will coincide with the introduction of new VAT rules on certain services provided to customers belonging either in other EU countries or outside the EU with effect from 1 January 2010. These rules will enable more international services provided on a business to business basis to be free of local VAT and, one day, may become relevant to vendors of points.
VAT and tax issues are often looked at first on a local basis but the current issue with points helps illustrate the importance of taking an international overview to tax and corporate structuring and then drilling down to local country issues.
Resort Management
Once again the rules vary within the EU on the VAT treatment of resort maintenance services. In the UK, Owner’s Clubs are regarded as carrying on a business activity for VAT purposes. This business activity is the provision of maintenance services (annual dues) to owners of fixed floating weeks. The fact that the Owners Club is non-profit making is not relevant to the VAT analysis. Thus, VAT is due at the standard rate in many EU countries on maintenance fees charged to timeshare owners. Although strictly speaking it is the Owners Club which is contractually providing the maintenance services to the owners the VAT due is often accounted for by the Founder Members’ Management Company on behalf of the Owner’s Club. The opportunity exists to structure the charging arrangements so that VAT is only accounted for on receipt of payment rather than invoice date which aids cash flow and ensures VAT is not paid on bad debts.
The Spanish Directorate of Taxes has on the other hand confirmed that Owners Clubs are not considered as entrepreneurs or professionals for IVA purposes when carrying out their ordinary activities. They are considered to be end consumers and are therefore not obliged to charge IVA to the members when the maintenance fees are billed and therefore do not reclaim the VAT incurred on running costs.
The Canary Islands has a different interpretation. A Canary Island Owners Club is deemed to be an IGIC taxpayer with respect to the services related to the administration and organization of real estate located in the Canary Islands (communal services) with IGIC due at 5% on the maintenance fees. However, if an Owners Club is duly incorporated under Spanish Law may be exempt from IGIC with regard with to the maintenance (communal services) rendered to their owners.
If we continue our journey to visit the place of supply of management fees charged to points’ owners we will find that the VAT position is less clear, since the link to immovable property is likely to be less transparent. The VAT treatment will be dependant on how the charge is structured and in some cases on the place of belonging of the entity making the charge. In fact the interaction between the legal and tax aspects of timeshare transactions cannot be overstated.
Conclusion
There are, of course, other vacation ownership products such as Destination Clubs and fractionals which have their own indirect tax issues and opportunities and provide scope for perhaps a further article at a future date. The corporate tax and transfer pricing implications also have to be considered especially on cross-border structures. In terms of core timeshare, the interaction of the precise nature of what is supplied and the place of belonging of the supplier can very much affect the VAT treatment. An optimum VAT position can be obtained within the rules that exist but it requires a top down approach having due regard to local country rules. The landscape is changing in that the tax authorities are taking a more active interest in the sector as evidenced by the referrals to the ECJ and businesses are increasingly aware of the need to manage risk and to manage the indirect tax opportunities through careful planning.
Paul Stewart is a Director of VAT services at KPMG. The views expressed are those of the writer and not necessarily those of KPMG