Tax Administration of Cross-Border Tourism and Hospitality

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New Challenges for the Tax Administration of Tourism and Hospitality Industry

Cross-border challenges have emerged for tax administrations in the tourism and hospitality industry due to the rise of international aggregators. The Internet, international payments, and innovations in the tourism and hospitality industry have created new types of accommodation rental services. Aggregators like Airbnb.com, Expedia.com, and Booking.com have attracted not only major taxpayers such as hotel chains but also hundreds of thousands of small ones. Property owners of houses, apartments, and condominiums rent them out through these platforms in most countries worldwide. Billion-dollar investments have enabled international aggregators to grow, replace, or prevent the emergence of local competitors and dominate the market. Such a business situation creates new challenges for tax administrations:

• International aggregators often operate as non-resident taxpayers. Small local offices are established to support users but do not process payments, meaning the money flows out to other countries.
• Frequently, the properties offered through international aggregators are owned by foreigners who are also non-tax residents in the country, making their administration difficult.

In such a situation, local tax authorities have little influence over international aggregator companies and rental service providers.

Traditional Taxation Methods

Tax administrations are considering how to address these issues and increase tax collection by developing the country’s tourism potential. From a tax administration perspective, the following are traditionally subject to taxation:

• Services provided by individuals, sole proprietors, or legal entities who own or manage rental properties.
• Services provided by international aggregators in the country where the property is being rented out.

Local tax residents would otherwise be at a disadvantage compared to those operating through international aggregators who do not pay local taxes. A protectionist solution that quickly comes to mind is to block internet access to international aggregators. This approach has been implemented, for example, in Turkey, but buyers either reside outside of Turkey or know how to use VPNs. This measure proves ineffective as tax administrations do not receive taxes from international aggregators, nor see an increase in the occupancy and revenues of local companies, or a growth in tax revenues.

Another solution is to introduce a special tax regime for property owners with a simplified income reporting process and an attractive tax rate. Tax authorities are often skeptical of such a strategy, but several countries have achieved success in formalizing the rental market using this approach. This would enable tax collection from tax residents of the country. Additional steps are required to identify and tax non-resident taxpayers. However, international aggregators remain beyond the reach of tax authorities.

System Solution by Fiscalization of International Aggregators

To implement a systemic solution for the aforementioned challenges, it is important to consider several factors:

• International aggregators are willing to comply with the legislation of the countries in which they operate and be law-abiding.
• Only international aggregators have access to the income information of property owners and their income from these properties. Aggregators are aware of the location of the property and can easily calculate and include taxes in the service cost.

Therefore, it is logical to develop regulations that require international aggregators to pay taxes on behalf of both themselves and the property owners who generate rental income through their platforms. The aggregator’s commission would be adjusted to include penalties and bonuses. It would be reasonable to establish a unified tax rate that considers the taxes of both the property owner and the aggregator. Additionally, implementing a simplified registration process for non-residents and a straightforward income declaration would be sensible.

The drawback of such a system is the lack of control over the overall income amount of international aggregators because there is no detailed breakdown of the recipients’ transactions. Implementing fiscalization technology would help obtain information about each order. The aggregator would transmit payment information to the tax administration and receive a fiscal receipt with a unique code that verifies the income information.

Orders should include information about the recipient of income, including their taxpayer identification number (INN) and the address of the property. In this case, there is no need for a tax declaration from the international aggregator as the taxes can be calculated independently, simplifying tax administration. A registry of property owners can be automatically compiled from the orders, allowing for the identification of those who are illegally renting out their properties.

To motivate buyers to request fiscal receipts and verify the legality of the aggregator’s operations, they can be required to present fiscal receipts at the border upon entry or departure from the country.

Implementing tax administration measures incorporating these steps will enhance the legality of rental property services and improve tax collection.