The industry is ‘dominated by very small companies’ that cannot afford expensive tax consulting or accounting systems needed to cope with the complexities. Image: Shutterstock
Uncertainty around the value-added tax (Vat) treatment on services offered to foreign tour operators or foreign travellers continues to plague the local tourism industry.
Inconsistencies in the approach adopted by the South African Revenue Service (Sars) and an onerous administrative burden on particularly smaller companies are making South Africa uncompetitive compared to the rest of the world.
The South African Tourism Services Association (Satsa) unpacked the practical consequences of the Vat complexities for inbound operators and the implications of a tax court decision in the so-called Ken case during a recent webinar.
The Vat Act provides for a zero rating of services when a local entity renders services or goods to a foreign entity or individual abroad. However, the lack of uniformity in the act’s applications creates uncertainty.
More clarity
The Ken case has raised hopes for more clarity and certainty. Ken, a destination management company in the tourism industry, successfully appealed against additional Vat assessments raised by Sars in the tax court. The company assisted foreign tour operators in structuring tour packages for marketing and sale to the operator’s clients, all foreign tourists.
The tax court found in favour of the company and criticised Sars for its inconsistency with its own interpretation note, which was issued around 2016.
The note sets out the common law relationship between the principal (the supplier of the service) and the agent, and the Vat consequences of the relationship.
However, the tax court decision is only binding on the two parties, namely Sars and Ken, warns Jo Roman, senior associate at ENSafrica. The case is quite fact-specific and cannot be relied on in general terms.
Hence, there is continued uncertainty for the local tourism industry offering agency services to foreign travellers and operators.
The relationship
A lot turns on the relationship between the (foreign) principal and the (local) agent. Cliff Watson, tax director at BDO, says the two terms are being used quite loosely in the industry.
The agent is the authorised representative who affects the legal relationship between the principal and third parties, such as hotels. No contractual rights and obligations are established between the agent and the third parties. The agent merely acts as the conduit to bring about the legal relationships between the principal and the suppliers.
The principal must grant the agent the necessary authority to act on their behalf. If a dispute arises, the agent relies on that authority to show that the authority existed at the time when the legal act was concluded.
Craig van Rooyen, director of Tour d’Afrique, says the industry is dominated by very small companies that really cannot afford expensive tax consulting or accounting systems to assess what is liable to Sars on every booking they make or across the chain when changes are made.
Practical consequences
He gives an example of a small local business that acts as an agent for an Italian tour operator.
The company makes the bookings on behalf of the tour operator and receives an “arranging fee”. While in SA, the foreign travellers decide to stay longer and book additional excursions. Suddenly, these services are now consumed within the country, and the agency mechanism changes from an arranging fee to effectively becoming a principal that should charge the standard Vat rate on the services.
“If you do not have a proper system in place and there is no control over your finances, it becomes difficult and expensive to manage,” Van Rooyen adds.
Cullinan Holdings group financial director David Standage says the current reality for local tourism businesses is one of continued uncertainty. Their group navigates the Vat complexities by broadly following the Australian general sales tax guidelines.
There must be an agreement with the foreign tour operator to confirm the agency relationship. Some foreign operators state in their agreement that the SA agent supplies the service. This may result in a Vat liability for the local business, hence the importance of having their own agreement.
Charles de Wet, tax executive at ENSafrica, also warns against using “boilerplate” clauses in agreements with foreign tour operators. It must be clear that the local management company is not the buyer but sourcing it on behalf of the foreign entity.
“They do not have to be complicated agreements, but they need to be specific about the service you provide and in what capacity you are providing it.”
Continued interaction
David Frost, CEO of Satsa, says the industry continues to engage with the government and Sars to work with the industry as a partner. SA must be competitive as a tourism destination.
He says the interaction between the industry and government should not be acrimonious.
“The aim is to have a clear and defined set of guidelines, such as the Australians have, that small businesses who are genuine tourism entrepreneurs can adhere to and be compliant with,” Frost adds.
International tourist arrivals from January to December 2023 totalled 8.5 million, representing a 48.9% increase when compared with the same period in 2022.