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VAT on tourism in South Africa
In a recent court judgment the Supreme Court of Appeal in South Africa (the SCA) considered whether services provided by a local tour operator, XO Africa Safaris CC (XO Africa), to a foreign tour operator is subject to VAT at the standard rate of 14% or the zero rate.
XO Africa supplied tour packages to foreign tour operators who on-sold the tour packages to foreign tourists visiting South Africa. XO Safaris contracted with local service suppliers for tourism services to be used by the foreign tourists in South Africa. The local service suppliers invoiced XO Africa, who added a margin and invoiced the foreign tour operator.
XO Africa contended that it supplied the tour packages contractually to the foreign tour operator, and that the total cost of the tour package is subject to VAT at the zero rate. The SCA found that XO Africa acted as principal of the accommodation and tourism services and not merely as intermediary. The SCA further found that the tourism services supplied by XO Africa have been enjoyed by the non-resident tourists during their stay in South Africa, and ruled that the tour packages supplied by XO Africa were subject to VAT at the standard rate.
In view of the fact that the VAT legislation of many Southern African countries, including Namibia, Botswana Lesotho and Swaziland, is based on that of South Africa, the SCA judgment in the XO Africa case will most likely be followed on those countries as well.
Essentially, the Tax Court held that the local entrepreneur incorrectly levied VAT at the zero rate since the services rendered by the local entrepreneur fell within one of the exclusions contained in section 11(2)(l). The Tax Court concluded that the services, for example, hotel accommodation, restaurant booking, supplied by the local entrepreneur, that were physically rendered to the non-resident tourists during their stay in the Republic, satisfied the circumstances contained in section 11(2)(l)(iii), which prohibits the application of the zero rate.
The Tax Court confirmed two important principles that are currently applied by the SARS, namely:
- Services that are contractually supplied to one party but physically rendered to another party consuming the services in the Republic, cannot be zero-rated under section 11(2)(l)
- In determining whether section 11(2)(l)(iii) is applicable, the time that the service is actually rendered to the recipient must be considered rather than the time of supply of the service as contemplated in section 9
The judgment of the Supreme Court of Appeal
Dissatisfied with the outcome in the Tax Court, XO Africa Safaris CC lodged an appeal at the Supreme Court of Appeal (SCA). Having considered oral evidence and documents such as the contracts between the local entrepreneur and the foreign tour operator, the SCA found the appellant’s arguments contradictory to the facts submitted by the witnesses and contained in the agreements. These included, amongst others, the letter of agreement, the standard terms and conditions of the contracts and the itinerary attached to the letter of agreement, which all clearly identified the local entrepreneur as the provider of the services.
In the SCA’s view the agreements were indicative of the fact that the local entrepreneur was the one who undertook to provide the services to the foreign tour operator and the local entrepreneur received payment for those services provided. The SCA further held that the local entrepreneur did not directly provide the goods or services so acquired to the foreign tour operator but to the non-resident tourist who was in the Republic at the time that the goods or services were provided. These services were therefore sufficiently distinct from the class of services envisaged in section 11(2)(l) and could not be zero-rated. This interpretation had regard to the historical purpose underlying the zero-rating provisions contained in section 11(2)(l) and found that it was clear that such services would attract VAT at the rate of 14% instead, as these services were rendered by the local entrepreneur in the Republic and consumed by the non-resident tourist in the Republic.
In dismissing the appeal, the SCA agreed that the local entrepreneur had contracted with local service providers in order to render the local services to the non-resident tourist during their tour in the Republic. It was, in the SCA’s view, incorrect to hold that the only services supplied by the local entrepreneur to the foreign tour operator were nothing other than organisational services involved in assembling the tour packages.
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VAT on tourism services seems to have a substantial impact on tourism revenue, particularly in developing countries for which tourism has become a major source of revenue. Tanzania introduced VAT at 18% on tourism services from 1 July 2016 (previously VAT exempt), and experienced a drop in hotel occupancy since then. It has also been reported that Zimbabwe has lost approximately $124 million in tourism revenue in the last fiscal year as a result of the tourism services being subject to VAT at 15%.