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.
In this article, we continue with the discussion on the intricacies of taxing tour operators in Tanzania. Specifically, the value-added tax (VAT). Last week we indicated the uncertainties around defining the tax base. What exactly the operators supply? A single supply of package or resale of multiple supplies constituting the package. Also attached to that is the status of operators as suppliers. Whether they are agents or principals. Absence of clarity of these elements in the law and practice is likely to lead to inadvertent non-compliance by the tour operators.
One thing is important to point out is that the VAT complexity on tour operators is not only in Tanzania. Similar challenges face other countries with VAT when it comes to taxing the tourism sector. But what is lacking in Tanzania is guidance.
In South Africa, for example, the South African Revenue Service (“SARS”) issued an Interpretation Note 42 in 2007 to clarify guide the application of VAT on the supply of goods or services by the travel and tourism industry. Part of Note reads “this Note provides guidance to local entrepreneurs in applying current VAT legislation to the supply of tour packages and related goods or services to non-resident tourists and foreign tour operators…...". The Note explains the principles and uses several possible supply scenarios to guide the application of VAT. It is a good administrative practice that, in Tanzania, the Tanzania Revenue Authority (TRA) can emulate. Yes, there are some differences in the VAT laws of Tanzania and South Africa, but most of the VAT principles are the same.
Probably, the only VAT complexity that South Africa may not have but exists in Tanzania is the Union. In Tanzania, VAT is not one of the union matters. And so is the tourism sector itself. There are two VAT laws. One for Mainland Tanzania and the other one for Zanzibar. And the two are not very harmonious. There are several glitches when it comes taxing the intraunion businesses, including the tourism sector.
So, perhaps, a leaf can be borrowed from the European Union (EU). Articles 306 to 310 of the EU VAT Directive specially deal with taxing tour operators and travel agents generally. This Special Scheme aimed at simplification and efficient revenue allocation between the EU Member States. The Special Scheme has been in place for over 40 years. But the world has changed significantly. Over the years, there has enormous growth in international travel, changes in technology, deregulation in the airline industry, and disruptive business models that have led to new ways of conducting business. The EU commissioned a study in 2016 (“Study on the review of the VAT Special Scheme for travel agents and options for reform”) and a report issued in 2017. There are several lessons Tanzania can learn from this EU report. At least the importance accorded to the matter.
By Shabu Maurus, Tax Partner, Auditax International.