Tough tax rate lesson for tour package company
IN A RECENT judgment, XO Africa Safaris CC v The Commissioner for South African Revenue Service, the Supreme Court of Appeal had to decide whether a local company, XO Africa Safaris CC (“XO”), was entitled to supply services to foreign tour operators (“FTOs”) at a zero rate for VAT.
XO assembled tour packages for FTOs to South Africa. The packages included accommodation, travel, restaurant bookings and recreational activities. XO did not provide these services itself but contracted them to local suppliers, who in turn supplied them to the FTO and the members of the tour parties. XO would invoice the FTO for a lump sum which included the local service providers’ costs together with its own mark-up.
The FTOs had no knowledge of the mark-up and were not advised of the prices charged by the local suppliers. The court had to decide whether XO was entitled, in terms of section 11(2)(l) of the Value Added Tax Act, 1991 to supply the services at a zero rate. Section 11(2) (l) allows for the supply of services to be charged with VAT at the rate of 0% where the services are supplied to a person who is not a resident of South Africa. But certain services are excluded from a zero rate, for example, if the person is in South Africa at the time the services are rendered.
XO contended the services should be zero rated because it did not supply the local services directly to the FTO or its customers, but merely organised the tour package. It was the local suppliers, not XO, who provided the customers with local supplies when they arrived in South Africa. It argued that there would need to be a direct connection between the party that supplied the services and the recipient.
The court held that although XO did contract with local suppliers to provide local services to foreign tourists, it was incorrect that the only services XO supplied were the organisational services in assembling the tour packages.
The standard terms of its contract proclaimed unequivocally that XO was providing services consisting of accommodation, meals, entertainment, etc. It was XO who undertook to provide these services to the FTOs and that is what it was paid to provide.
Therefore, as the services were rendered to persons within South Africa, they were excluded from the class of services that enjoy zero rating. Sars was therefore correct in saying that the supply of services attracted VAT at the standard rate.