The complexities of the tourism value chain require a specific approach to apply VAT to the industry. Last week, we discussed approaches taken by South Africa and the EU in taxing the tourism industry, particularly the tour operators. In South Africa, the revenue authority issued Interpretation Note 42 back 2007 to clarify and guide the application of VAT on the supply of goods or services by the travel and tourism industry. The EU has a Special Scheme (Articles 306 to 310 of the EU VAT Directive) for taxing tour operators and travel agents generally. There are good lessons Tanzania can learn from the two.
Clarity of tax laws is one of the prerequisites for a successfully self-assessment tax system, which also apply for VAT in Tanzania. The complexities of the tourism value chain and the lack of clarity in the VAT law, pose several tax risks. Both to the tour operators and tax authority. For example, there is a risk that tour operators may, inadvertently, fail to properly account for VAT. The tax authority may not have the capacity to audit each tour operator for each period. And so, some revenue may be lost. Or worst still, tour operators may overpay VAT or overcharge the tourists. There is also a possibility of a cascading effect (the inexplicit VAT cost hidden into prices of tourism products and services). This, in the end, tends to affect the tourism industry.
Issuance of practice notes, guidelines, regulations or change of law may be a good approach in providing the required clarity. The tour operators should find some ways to engage both the tax administration and policymakers. But obviously, this may take time and the businesses must continue. So, the question is what the tour operators can do in the interim? In situations where tax risks are many and significant, tax risks management becomes even more important. Tax risks need to be identified and dealt with (managed). In Tanzania, there are various approaches, a taxpayer may deal with tax uncertainties. Of course, the approach will depend on the nature of the specific tax uncertainty that a taxpayer wants to address. I will mention two approaches that tour operators may use.
Private ruling: In the context of tax administration, a private ruling is a decision of the Commissioner-General of TRA on tax issues raised by a person (normally a taxpayer or a potential taxpayer). So, a tour operator may apply to TRA for a private ruling to obtain clarification on how VAT (and other taxes) may apply to his specific matters or arrangements. But the ruling, if issued, can only be relied on by that specific tour operator and not the others. This route works better if the tax uncertainties are specific to the individual tour operator or other operators are reluctant to join.
Class ruling: This, materially, is very similar to a private ruling. The only major exception is that more than one taxpayer (say all tour operators in Tanzania) jointly seek a ruling. And the ruling, if issued, can be relied on by all tour operators. This route works better if the tax uncertainties affect the industry (most tour operators).
The Tax Administration Act, Cap 438 (sections 11 to 14) provides the conditions and the modalities for applying the tax rulings (Class or Private). The objective of a tax ruling provisions is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws. A ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the ruling.
By Shabu Maurus, Tax Partner, Auditax International.