The economic effects of the current VAT rules for passenger transport

An international research team, led by CASE and comprised of the Institute for Higher Studies in Vienna and the Transport and Mobility Leuven, recently completed a 2-year project on the economic effects of the current VAT rules for passenger transport in the EU, and delivered the final draft of the Study on the economic effects of the current VAT rules for passenger transport. The report is part of the work of the Consortium coordinated by CPB of the Netherlands that has provided advice on VAT issues for the past four years.
 

Further dissemination of the report and discussion with stakeholders is planned by the European Commission over the next few months, and the outcome of the consultations will determine which proposals may be put to the agenda of the European Council for VAT reform in this crucial sector of the economy and society of the European Union.
 

The main findings of the Report are as follows:

• Since the last large-scale review in 1997, the passenger transport sector has changed in a considerable way, as a result of the greater impacts of airline deregulation, implementation of rail concessioning, and the deregulation of bus transport. The cruise industry has also changed and experienced high growth.
   
• The study provides an update on the structure of the passenger transport industry as it relates to VAT, an assessment of the distortions arising from the current VAT rules and regulations, and an evaluation of some of the changes that might be considered to address those distortions.
   
• The assessments carried out in this report indicate that the distortions are generally small- or medium-sized. For the distortions on output, part of the explanation is in the low elasticities of demand; while for input distortions, it is the ability of operators to reclaim any VAT incurred on inputs, so the only cost is that of financing these costs between when they are paid and when they are rebated. These costs are relatively small because of the reduced times between payment and reimbursement and the current low interest rates on that financing.
   
• The study identifies one set of measures that addresses the output distortions with regard to different VAT rates and the place of supply rules and another to address the input distortions. These changes would require a large amount of consensus among Member States and the European Commission.
   
• Additionally, a valuable insights for tax administrations is provided. It reveals the enormous potential of the application of VAT in the passenger transport sector with regard to generating revenue and the limited impact of applying reduced VAT rates and exemptions on the demand for passenger transport services due to low elasticities of demand and pass-through rates that vary between 7% and 50%.
   
• We can conclude that the above mentioned characteristics of the passenger transport sector suggest a simplified and harmonized application of VAT to all modes and markets. At least the benefits from changing the place of supply rules can be obtained at virtually no cost.
   

The report was written by a team of experts from CASE (Center for Social and Economic Research, Warsaw), IHS (Institute of Higher Studies, Vienna) and Transport Mobility Leuven (TML).  The team was directed by Luca Barbone, and composed of Robin Carruthers (CASE), Maciej Sobolewski (CASE), Hannes Zenz (IHS), Alina Pohl (IHS), Alexander Schnabl (IHS), Sarah Lappöhn (IHS), Tim Breemersch (TML), Rodric Federix (TML), Christophe Heyndrickx (TML) Eef Delhaye (TML).  Research assistance was provided by Katarzyna Wąsik and José Pantoya (CASE).  The Project was coordinated by Iryna Shuvaieva (CASE).

The full text of the report has been released by TAXUD, and can be found here: VOL. 1, VOL. 2, VOL. 3.