Tour operators are puzzled by Germany's move to expand the value added tax because they believe it not only threatens its tourism recovery, but because they believe German authorities didn't think through the decision.
Despite largely making progress in their recovery from the pandemic, tour operators still face challenges in hitting pre-Covid metrics. And executives believe they’ve been dealt another big obstacle.
Germany’s decision to apply a value added tax on January 1 on trips sold by non-European Union companies to the country could impede tour operators’ ongoing rebound, industry executives believe. In addition to making trips to the popular destination more expensive, tour operators are concerned other nations would follow suit, complicating those companies’ efforts to attract customers.
“The travel industry is still in recovery, and while it has improved immensely since the beginning of the pandemic, it is still not where it was pre-pandemic economically or logistically,” said Ulla Hefel Böhler, the chief operating for TTC Tour Brands. She added the timing of Germany’s move was surprising although the country had planned to implement the value-added tax in 2021.
“To create another hurdle for selling travel when we’re still trying to encourage travelers to get back out there doesn’t seem right at this time,” Hefel Böhler said.
Non-European Union travel companies selling trips to Germany currently don’t pay value-added tax, or VAT, under the Tour Operators Margin Scheme.
The new law would impact all aspects of any package sold in Germany, forcing tour operators to pay taxes twice — once in the country where they’re based in selling trips to Germany and again on travel conducted in the country, said Tom Jenkins, CEO of the European Tour Operators Association. He added that while taxes levied on services could range from 9 to 25 percent, most tours will see around a 9 percent sales tax increase related to hotels.
While Böhler is worried about the price of Germany trips going up as well as the impact on bookings made prior to December 31, Jeremy Palmer, the chief operating officer for Wilton, Connecticut-based tour operator Tauck, is concerned that his company won’t have time to factor the costs of the new tax into its 2023 prices. He added that Tauck will be forced to fully absorb the added expensive of the VAT for an entire year.
“What’s more, there will be a significant administrative burden on tour operators,” Palmer said. “And because the specific processes haven’t even been announced yet, we’re not able to do anything now to put systems in place or otherwise prepare.”
So how much will the VAT impact companies like Tauck? Jennifer Tombaugh, the company’s president, acknowledges she’s uncertain about the cost of the new tax, which she considers a rushed decision.
“There’s been virtually no information shared with those that it affects,” Tombaugh said, adding she was uncertain if Germany’s federal or state governments would be the recipient of the tax. “So we could literally find ourselves days, weeks away from the time of implementation without knowing what the cost is, how the process will work, what the exact timing will be, (and) what it will apply to.”
But Tombaugh admitted the impact of the new tax would be significant. While Tauck won’t pass the tax onto consumers in 2023, she said it will do so the following year. The company has contracts with individual partners in Germany and pays them accordingly.
Tombaugh added the cost of visiting Germany for Americans — and citizens of many other countries — will go up significantly. She declined to disclose how many customers Tauck’s Germany offerings attract annually, but did state the country was its most popular European destination on its combined land and river programs.
“That is going to make Germany less competitive in the eyes of Americans,” she said.
So why is Germany implementing the value-added tax?
Jenkins said Brexit drove the decision.
“They were also very worried that if the UK people weren’t paying this tax [UK companies} would be more competitive than German players,” Jenkins said.
Jenkins said the policy wasn’t throughly thought-through.
“What they perhaps had underestimated was the extent it will impact tour operators throughout the world. It’s going to hit everyone from Korea to Canada.”
Will other European nations adopt a similar tax? While Jenkins admits that his organization has no evidence about countries following in Germany’s footsteps other than Croatia, he described Germany’s move as a dangerous precedent.
“The spillover effect that if other countries decide, ‘Hey, let’s do what Germany has done before the (European Commission) rules on this’ creates great confusion in the marketplace,” she said. “And I think it hurts overall economic recovery and damages a leading export, which is tourism, to Germany and possibly Europe.”
UPDATE: The story has been updated to include information from Jennifer Tombaugh stating Tauck has contracts with German partners and that she was unsure which entity would the company have to pay.
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Photo credit: Tour operator executives believe Germany might struggle to attract foreign visitors due to an expanded value added tax. Pictured is a scene in Bavaria, Germany. Lê Tuấn Hùng / Pxhere