March 2016: VAT on Unused Passenger Tickets: Hidden Consumer Law Implications?
VAT on Unused Passenger Tickets: Hidden Consumer Law Implications?
The Court of Justice of the EU (CJEU) judged recently that airlines have to pay the VAT (Value Added Tax) on unused, non-refundable airline tickets. This might have implications on the right of passengers to claim also a VAT refund in case of unused (or partly) refundable tickets.
The judgment concerned two joined cases:
- case C-250/14, in which French tax authorities obliged Air France (currently Air France-KLM) to pay additional VAT for the period from 1st April 2000 until 31st March 2003, amounting to EUR 4,066,607, together with default interest amounting to EUR 1,226,584 that related to the amounts Air France had received for non-refundable passenger tickets, which had not been used by their holders;
- case C-289/14, in which French tax authorities demanded VAT for the lump sum paid annually by Brit Air (currently Hop!-Brit Air SAS) to Air France, for unused non-refundable tickets of Air France that Brit Air had sold in the context of a franchise agreement that was agreed between them. This sum was 2 per cent of the annual turnover from the routes operated as a franchise, including VAT.
The French authorities based their decision on the provisions of Directive 77/388/EEC, which was applicable at that time (this Directive has been repealed by Directive 2006/112/EC, yet many of its provisions have been included in the new Directive). The above cases ended before the French Supreme Court for administrative issues (Conseil d’Etat), which referred to the CJEU for a preliminary ruling.
The actions in the main proceedings and the questions referred for a preliminary ruling
Case C 250/14
Air France-KLM, which became the legal successor to Air France in 2004, is a company established in France carrying out air transport. In the context of that business, Air France-KLM performs air passenger transport services within the French territory. Since domestic flights are subject to VAT, tickets for those flights are sold at prices including VAT.
As from 1999, Air France ceased paying to the French treasury VAT on the sale of tickets issued to but not used by passengers of its domestic flights. At issue are, first, non-refundable tickets that are no longer valid as a result of customers being ‘no-shows’ at boarding, and, secondly, invalid exchangeable tickets which were not used during their period of validity.
Following an examination of accounts, the tax authorities concluded that the amounts relating to those ‘tickets issued and not used’ should have been subject to VAT at the reduced rate of 5.5 per cent applicable to supplies of domestic passenger air transport services. As a result, the authorities notified Air France-KLM of additional assessments to VAT relating to the period from 1 April 2000 until 31 March 2003 amounting to EUR 4,066,607, together with default interest amounting to EUR 1,226,584.
By judgment of 9 June 2011, the Administrative Court of Cergy-Pontoise dismissed the application brought by Air France-KLM for discharge from those additional assessments to VAT. By judgment of 13 November 2012, the Administrative Court of Appeal of Versailles upheld that judgment and held that, in accordance with articles 256 and 269 of the CGI, read in conjunction with Article 1234 of the Code Civil, the amounts retained following the definitive non-performance of the transport service must be subject to VAT. Air France-KLM appealed on a point of law against that judgment.
Since it has doubts concerning the liability to VAT of an unused travel ticket, the Conseil d’État (Council of State) decided to halt the proceedings and to refer to the CJEU the following questions for a preliminary ruling:
- Must Articles 2(1) and 10(2) of the 6th Directive and the amended 6th Directive be interpreted as meaning that the issue of the ticket may be treated as the effective performance of the transport service and that the sums retained by an airline company where the holder of an air ticket has not used his ticket, which is no longer valid, are subject to VAT?
- In that case, must the tax received be paid to the Treasury on receipt of payment of the price, even though the travel may not have taken place as a result of the customer’s acts?’
Case C 289/14
According to the order for reference in Case C 289/14, Brit Air (now Hop!-Brit Air SAS) performed air passenger transport services in the context of a franchise agreement concluded with Air France-KLM. The latter was responsible for marketing and ticket management on the routes operated as a franchise by Brit Air.
Air France-KLM received the price of the tickets and paid it on to Brit Air with respect to each passenger transported. In respect of tickets sold but not used as a result of passenger ‘no-shows’ at the time of boarding or the expiry of the validity of the ticket, Air France-KLM paid to Brit Air annual flat-rate compensation calculated as a percentage (2%) of the annual turnover (including VAT) received from the routes operated as a franchise. Brit Air did not subject that sum to VAT.
Following an examination of Brit Air’s accounts, the tax authorities sent in, in respect of the period from 1 April 2001 to 31 August 2005, demands for VAT relating to sums corresponding to unused tickets it had received from Air France.
By judgment of 24 June 2010, the Administrative Court of Montreuil dismissed the application brought by Brit Air for discharge from those additional assessments to VAT. Brit Air appealed against that judgment before the Administrative Court of Appeal of Versailles. Since the judgment delivered by the latter court on 13 November 2012 upheld the judgment under appeal, Brit Air brought an appeal on a point of law before the Conseil d’État.
Since it has doubts concerning the liability to VAT of sums paid by an air transport company to an undertaking carrying on the same type of business in consideration for the sale of unused transport tickets, the Conseil d’État decided to halt the proceedings and to refer to the Court the following questions for a preliminary ruling:
(1) Must Articles 2(1) and 10(2) of the 6th Directive and the amended 6th Directive be interpreted as meaning that a lump sum calculated as a percentage of the annual turnover received from routes operated as a franchise and paid by an airline company which issued on behalf of another company tickets which are no longer valid constitutes non-taxable compensation paid to the latter for the harm suffered as a result of the activation in vain by the latter of its means of transport, or a sum corresponding to the proceeds from tickets issued and expired?
(2) In the event that that sum is deemed to correspond to the price of tickets issued and expired, must those provisions be interpreted as meaning that the issue of the ticket may be treated as the effective performance of the transport service and that the sums retained by an airline company where the holder of an air ticket has not used his ticket, which is no longer valid, are subject to VAT?
(3) In that case, must the tax received be paid onwards to the Treasury by Air France or Brit Air on receipt of payment of the price, even though the travel may not have taken place as a result of the customer’s acts?’
By order of the President of the Court of 10 July 2014, Cases C 250/14 and C 289/14 were joined for the purposes of the written and oral procedure and the judgment.
VAT) of an unused transport ticket and of sums paid by an airline company to an undertaking carrying on the same type of business in consideration for the sale of unused transport tickets.
Legal context
EU law
Under Article 2(1) of the 6th Directive and the amended 6th Directive, the following shall be subject to value added tax: the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.
Article 10 of the Sixth Directive provided:
(a) A ‘chargeable event’ means that the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled.
(b) The tax becomes ‘chargeable’ when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred.
- The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed.
However, where a payment is to be made on account before the goods are delivered or the services are performed, the tax shall become chargeable on receipt of the payment and on the amount received.
By way of derogation from the above provisions, Member States may provide that the tax shall become chargeable, for certain transactions or for certain categories of taxable person, either:
– no later than the issue of the invoice or of the document serving as invoice, or
– no later than receipt of the price, or
– in case an invoice or document serving as invoice is not issued, or is issued late, within a specified period from the date of the chargeable event.
Arguments
The airlines claimed that these sums were actually compensation paid by passengers for their non-show and not remuneration for services of air carriage. Therefore, they were not subject to VAT.
The CJEU clarified that, according to Directive 77/388/EEC, VAT is due for services, if the amount paid by the passenger is directly linked to an identifiable service and if the service is performed. It suffices that the airline has made available the service of the air carriage to the passenger, even if the passenger has not used the service.
Furthermore, the VAT paid by the passenger becomes chargeable on receipt of payment of the ticket price, whether by the airline itself, by a third party acting in its name and on its behalf, or by a third party acting in its own name but on behalf of the airline. Therefore, if a third party sells tickets on behalf of the airline in the context of a franchise agreement and pays the airline a lump sum for the tickets issued and no longer valid, that sum is taxable as consideration for those tickets.
It is noteworthy, that the CJEU rejected the airlines’ argument that the sum received as VAT was part of compensation that the passenger provided to the airline for its losses resulting from the non-show. The Court observed that, since the airlines had retained the full amount of the ticket, they had sustained no damage.
Consequently, airlines have to pay VAT for unused, non-refundable tickets, regardless of how they received the price of the ticket.
A very interesting issue are the consequences of this judgment for refundable tickets. Does the judgment imply that airlines are not obliged to pay VAT for the refundable part of the ticket? Is the airline entitled to withhold the VAT amount paid by the passenger as compensation for its loss? Is the VAT also refundable alongside with the refundable part of the ticket? What would be the exact requirements for such right from the perspective of the applicable EU rules on airline pricing (Regulation (EC) No 1008/2008), unfair commercial practices against consumers (Directive 2005/29/EC) and unfair contractual terms in consumer contracts (Directive 93/13/EEC)? The answers to the above questions are highly equivocal and would perhaps constitute the subject of another question to the CJEU for a preliminary ruling.
For further information and comment, please contact Arthur Flieger (flieger@fliegerlaw.com, +32 3 238 77 66)
© 2016 A. Flieger – This publication is defined to provide accurate and authoritative information in regard to the subject matter covered. It is transmitted with the understanding that the publisher is not engaged in rendering legal, or any other professional services. If legal advice or other expert assistance is required, professional services should be sought. You can always contact A. Flieger at flieger@fliegerlaw.com.
