Page 406 - Juta's Indirect Tax

IN 42 VaLue-added tax act: InterPretatIOn nOtes IN 42
4. Application of the law
The South African VAT system is a destination based tax that imposes tax on goods or services consumed in the Republic, regardless of where the goods are produced or services are supplied. Exports which are not consumed in the country are therefore free of tax, and imports which are consumed in the country are taxed when imported.
Accordingly, supplies of goods or services consumed in the Republic, regardless of to whom the goods or services are supplied, are taxable at the standard rate for VAT purposes. Where consumption of the goods or services supplied will occur outside the Republic, provision is made for such supplies to be zero-rated.
In applying these principles to the tourism industry, the VAT implications relating to the supply of the various common elements of a tour package are set out in this Note.
4.1 The rationale for the taxation
The VAT implications of supplies by local entrepreneurs to foreign tour operators are explained in Ruling 52 dated 27 September 1991. This ruling was issued prior to the implementation of VAT in order to provide clarity on the application of VAT regarding the supply of tour packages, and was aligned with the policy recommendations made in the VATCOM Report. The zero-rating provisions cannot apply where services are rendered to a non-resident or to ‘any other person’, if the non-resident or ‘other person’ is in the Republic at the time the services are rendered. This is to ensure that services are standard-rated, where the person consuming the service is physically in South Africa when the service is rendered (irrespective of the location of the contracting parties). In this regard, the constituent parts of a tour package supplied by the local entrepreneur are considered to be separate supplies. The local entrepreneur may apply the zero rate to international travel, an exemption to local bus transport and the standard rate to goods and services supplied to tourists locally, such as hotel accommodation (see sections 8 (15) and 10 (22) of the VAT Act).
Based on this, it is clear that the provisions of section 11 (2) (l) of the VAT Act can never be applied to the aforementioned supplies as the services supplied will be consumed in the Republic and such services will not be exported nor form part of a supply by a non-resident to a vendor.
However, if a local entrepreneur arranges a tour as agent for a foreign tour operator, the fee received (i.e. commission only) from the foreign tour operator for arranging the tour will be zero-rated (See section 11 (2) (l) of the VAT Act). Foreign tour operators who continually and regularly supply goods or services in the Republic will be required to register as vendors for VAT purposes.
Question
VAT Ruling No. 52
Local package tours — foreign tourists — commission Plaaslike toerpakette — buitelandse toeriste — kommissie
An overseas tour wholesaler requests a South African travel agent to make up a tour package at a price per tourist. The agent assembles the package, adds his mark-up, and sells the package to the overseas wholesaler. The wholesaler contracts overseas with tourists for the sale of the tour. Should the supply by the local travel agent be zero-rated? Answer
The constituent parts of a package may be considered to be separate supplies. The South African travel agent may accordingly apply the zero rate to international travel, an exemption to local bus transport and the standard rate to goods and services supplied to tourists locally, such as hotel accommodation (see sections 8 (15) and 10 (22)). It is not necessary for the different elements of the package to be invoiced to the foreign tour operator separately, but the travel agent must keep the necessary records to show what portion of the supply has been properly attributed to each element. If a South African travel agent arranges atour as agent for an overseas tour operator, the fee he receives from the tour operator will be zero-rated (See section 11 (2) (l).)
28/3/2 — 27 September 1991
The aforementioned VAT Ruling No 52 listed in the Rulings Register on the SARS websiteis hereby withdrawn with effect from 1 June 2007. In view of the withdrawal of this ruling, it is recommended that the person who relied on such ruling should apply for either a VAT ruling or a binding private ruling.
4.2 Agent or principal
In the travel and tourism industry, many of the goods and services supplied by service providers are made available through local entrepreneurs. That is, such local entrepreneurs act as agents under common law in representing principals (i.e. the service providers) that supply the goods and services. Notwithstanding this, local entrepreneurs may also act as principals, for example, the purchase and resale of tour packages.
Due to the unique relationship between an agent and the principal, special provisions have been introduced in the VAT Act, to deal with the VAT consequences arising from such relationships. In order to correctly apply the VAT legislation to the concept of agents, it is necessary to identify and understand the concept of an agent, as treated in common law. An agency is a contract whereby one person (the agent) is authorised and usually required by another (the principal) to contract or to negotiate a contract with a third person, on the latter’s behalf.
• This relationship may be expressly construed from the wording of a written agreement or contract concluded by the
parties; or
• Where a written agreement or contract does not exist, the onus of proof is on the person who seeks to bind the
principal. Such person must show that the relationship was that of a principal and agent.
An understanding of the relationship between the parties is therefore a requirement in understanding the treatment of a supply of a tour package for VAT purposes.
For VAT purposes, the differences between an agent and a principal can be summarised as follows:
398 Juta’s IndIrect tax 2016