A recent court case between SARS and a tour operator put the spotlight on zero-rated VAT.
In order to correctly apply South African VAT legislation to the travel and tourism industry, there needs to be clear understanding of the different roles of agent and principal. Both an agent and principal are able to charge zero-rated VAT provided that the foreign tour operator and foreign tourist are not in South Africa at the time of arranging the services rendered.
An agency is a contract whereby one person (the agent) is mandated to acquire goods and services from suppliers, on behalf of another (the principal). A local DMC acquiring accommodation and transport for an overseas wholesaler, and acting under the instruction of the overseas wholesaler would qualify as an agent. Under these circumstances the DMC would not make any changes to the tour package without approval from the wholesaler. The principal is the owner of the goods or services acquired on his/her behalf by the agent and is also able to make changes to the nature or value of the services acquired. If a local DMC is providing goods and services to clients directly at a profit, the DMC would effectively be operating as a principal.
The commission charged by agents forms part of the principal’s expenses. The principal declares gross sales as income for income tax purposes and as taxable supplies for VAT purposes. An agent will only declare the commission earned for income tax and VAT purposes. Only the commission charged by the DMC, when acting as an agent, will be declared for VAT purposes. However, if a DMC operates as a principal, the grand total of all sale transactions, without any deductions, is declared for VAT purposes.
According to the SARS VAT interpretation note no. 42, when a local tour operator acts as an agent, the fees/commission charged by this operator for the service of arranging a tour package will be zero-rated if both the foreign tour operator and foreign tourist are outside South Africa at the time of arranging the package. If either the foreign tour operator or foreign tourist is in South Africa at the time of arranging the tour package, VAT on the fees/commission of the local tour operator will be charged at the standard 14%.
However, when acting in the capacity of a principal, the local tour operator will be responsible for the management of the itinerary when the services are provided while the tourist is in South Africa. The fee for providing the tour will include a profit margin for the tour operator which is subject to the standard 14% VAT, explained Gerhard Badenhorst, Tax Executive at ENS Africa.
Badenhorst said that if a foreign tourist decided to extend their stay while in South Africa, the goods and services provided to them at that time would be subject to the standard VAT rating. He added that if the local tour operator also arranged for the tourist to travel to the other countries, such as Botswana and Namibia, the services provided in those additional countries would be zero-rated.
Badenhorst explained that if a service qualified for the zero rate, local tour operators were still entitled to deduct the VAT on their expenses on charges from local service suppliers which eliminated the VAT from being passed on.
However, he added that there were no clear guidelines from SARS on how the tourism industry should operate here. “This is a grey area and I do think there are some tour operators who may continue to charge zero-rated VAT on everything, some may apply the VAT at zero rate on only the margin, and some may charge the standard VAT on everything,” said Badenhorst. He added that every tour operator would present a different case in trying to establish clarity. “I do think there is a need in the industry that everybody be treated the same or that there are clear guidelines as to what the VAT treatment should be.”
To read the full document on the SARS VAT interpretation note no. 42, click here.
