Travel & Tourism Sector Update: Icelandic VAT Changes
Effective from 1 January 2016 foreign travel agencies / travel operators providing services or goods which are to be used by travellers in Iceland, will become liable to VAT in Iceland. The VAT liability is based on where the services are used by the traveller. For example, where a traveller has purchased a Northern Lights tour from a foreign tour operator, this will trigger a registration obligation as the services will be used in Iceland where sales exceed the VAT registration threshold of 1 million ISK over a 12 month period.
By way of background, the changes are a result of VAT reform in Iceland which aims to increase VAT efficiency, broaden the application and decrease the total tax burden. As part of the changes to reduce tax, the general rate was reduced from 25.5% to 24%, as of 1 January 2015. However, the gap between the reduced rate and the general rate was narrowed by increasing the reduced rate from 7% to 11%.
Additionally, many exemptions from VAT were abolished and many goods and services which had historically been subject to the reduced rate are now taxed at the general rate in order to make the system simpler. In making the system simpler, various exceptions are no longer available, which in particular includes the services of travel agencies (effective from 1 January 2016).
It should be noted, the VAT threshold of ISK 1 million, is a general threshold in order to establish a de minimis level. This threshold is applied from the time the service is first provided and is in theory retrospective. This means, businesses will not benefit from a ISK 1 million "VAT free period”. In the event it is foreseen that the operation will exceed the threshold, you are liable to register for VAT from the first day.
The 12 month period is not based on the calendar year, but any 12 month period. Therefore, where a tour operator has commenced providing services in Iceland, the 12 month period commences from day one. Where the income exceeds ISK 1 million in any 12 month period (including historic and future supplies), VAT is applicable from the first day or from the day that applicable exemption is abolished.
We are informed that as this is a new tax, this may result in a greater degree of scrutiny by the Icelandic Tax Authorities. We have also included a link which provides other useful information on the changes https://www.rsk.is/english/companies/vat-on-tourism-in-iceland/.