VAT and Commission paid by Foreign Tour Operators


Ferdie Schneider, PhD Tax

The Tax Court recently handed down judgement in Ken CC v CSARS (Case No VAT 22184) CSARS, on the application of the VAT zero rate on commission charged to foreign tour operators for assembling tour packages. The Court had to consider agent-principal arrangements and the impact thereof on the VAT treatment.

The taxpayer (Ken) assisted foreign tour operators to source accommodation and transportation services in South Africa. The taxpayer contracted with local suppliers on behalf of the foreign tour operators and charged that cost and a commission to the foreign tour operators. The taxpayer did not disclose the commission charged separately.

Ken paid the local suppliers and recovered the cost and commission from the foreign tour operators. Ken did not claim VAT on the local services paid and subjected its commission to VAT at the zero rate.

Ken argued that the supplies involved “tourism services” consumed in South Africa subject to the standard rated, but which Ken did not provide; “tourism services” consumed outside South Africa, which are zero rated; and travel package assembly services to the foreign tour operators which Ken provided, which are zero  rated. The VAT Act mandates that where a single supply would have been subject to the standard rate and zero rate, if separate considerations had been payable, each part of the supply is deemed to be a separate supply.

Ken did not have contact with the foreign tourists (who are the  foreign tour operators' clients), throughout the process and did not sell or market any tour packages, accommodation, or services to them. Ken also had no sales website, marketing arm, or other mechanism for foreign tourists or outsiders to contact it.

Ken also had no assets such as hotels or buses, and no  inventory to sell. It did not “buy” hotel rooms for on-sale to customers, nor did it take  responsibility for the performance of the service by the local supplier. Complaints were directed to the foreign tour operators.

It was found that the evidence demonstrated that Ken’s role was confined to assisting the foreign tour operators with their tour assembly, and providing assembly acting as a conduit between the foreign tour operators and local suppliers, for which it received a commission. It was demonstrated that Ken did not sell tourist packages to foreign tour operators or foreign tourists.

Cancellation, etc. were to be decided and determined solely by the foreign tour operators who contracted as the principals with regard to the local suppliers. It was found that Ken did not act as principal in respect of the services provided by the local service providers.

The Court found that SARS was grossly unreasonable in adopting the stance it did, in relation to the challenged assessments and that adopted throughout the proceedings. SARS disregarded the facts of how Ken’s business was conducted (which is in direct contrast to the facts in the XOAfrica) and the criteria in SARS' 2016 Interpretation Note.

As a result, the Court found in favour of the Ken, the taxpayer, and awarded cost to the taxpayer. It found that Ken did not acquire the local services as principal and correctly zero rated the commission charged to the foreign tour operators.