The tourism value chain is complex and involves several players, products and services. Most tourists prefer their tour experience to be arranged for them and the arrangement may involve travel agents, tour operators and tour guides. The tour operators make it possible for tourists to purchase bundles of several services or product (packages). A package, for example, may include a return ticket, ground transfers, accommodation, tour guide, porter, meals and drinks, park entry fees, sporting activities, entertainment, and clothes. And these packages, in most cases are prepaid (partly or fully). That is the tourist pays for the package well in advance, say six months before his trip. The complex network of tour operators (and other players), the packages and the methods of payments, all make the taxation of the industry very complex. It deserves special attention.
Every tax has four essential elements. One is the tax base. The ‘thing’ which is being taxed. Clarity of this and the other three elements in the tax law is very crucial if both tax compliance and tax administration are to be successful. This article will focus on the first element, the tax base for VAT purposes.
Section 14 of the VAT Act (Mainland Tanzania) requires that where a supply consists of more than one element, five criteria shall be considered when determining how VAT should apply: (1) every supply shall normally be regarded as distinct and independent; (ii) a supply that constitutes a single supply from an economic, commercial, or technical point of view, shall not be artificially split; (iii) the essential features of the transaction shall be ascertained in order to determine whether a customer (in this case a tourist) is being supplied with several distinct principal supplies or with a single supply; (iv) there is a single supply, if one or more elements constitute the principal supply, in which case the other elements are ancillary or incidental supplies, which are treated as part of the principal supply; or (v) a supply shall be regarded as ancillary or incidental to a principal supply if it does not constitute for customers an aim in itself but is merely a means of better enjoying the principal thing supplied.
Yes, we have said that a package sold by a tour operator may include a range of distinct products. But it is unlikely that the tour operator will be able to provide all the services in the package as a principal supplier. In most cases, what the tour operator does is to arrange for these services to be supplied to the tourist by the principle suppliers of each distinct service. Arguably, therefore, a typical tour operator only supplies facilitation services. But the question is to who are the facilitation services supplied? Is the tour operator acting as an agent of the tourist or the underlying service supplier (say a Hotel)? Or acting in his capacity as a principal supplying the package as a single supply? This is a question of the agency and principal models. It is an important distinction as it has a huge impact on the way VAT needs to be accounted for by tour operators.
The VAT is, in many respects, both a tax on transactions as well as a tax that applies within a geographical area. The impact of the former is that not only is it necessary to identify the various types of transactions that may be undertaken within the industry but also the relationships that arise as a result of the transactions, i.e. are the parties acting as ‘agent' or ‘principal'?
By Shabu Maurus, Tax Partner, Auditax International.