Should VAT be levied on the commission earned for making travel bookings?
17 April 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: Should VAT be
levied on the commission earned for making travel bookings?
My client is in the travel industry but the charging of VAT
on commission is still a very grey area. Clients will request them to book a
trip on a cruise ship from Durban to the Islands at Mozambique and back to
Durban. My client then earns commission on this booking. Is there any VAT
payable on this commission or is the commission zero-rated? The traveller must
clear through customs so this is seen as international travel.
The ‘cruise ship company’ doesn’t issue any tax invoices for
the commission paid to my client, but say my client must invoice them for all
the VAT paid on the bookings and they will refund my client the VAT.
Will there be any difference if the boat trip is between
Durban and Cape Town?
A: We don’t have
enough information to provide the guidance required. For purposes of our guidance we assume that
the commission is earned from the tour operator (the cruise ship company).
The first principle is that your client, if registered as a
vendor, will be making a taxable supply of a service in this instance and will
have to levy output tax. The issue is
whether the rate of zero per cent applies.
We submit that the fact that the travel itself may qualify for the rate
of zero per cent (under section 11(2)(a) of the Value-Added Tax Act) or not is
irrelevant as your client is not supplying that service to the passenger.
We agree with the following SARS practice general
"However, if a local entrepreneur arranges a tour as agent
for a foreign tour operator, the fee received (i.e. commission only) from the
foreign tour operator for arranging the tour will be zero-rated (See section
11(2)(ℓ) of the VAT Act).”
Note also that "foreign tour operators who continually and
regularly supply goods or services in the Republic will be required to register
as vendors for VAT purposes.”
For Value-Added Tax purposes the "Republic”, in the
geographical sense, means the territory of the Republic of South Africa and
includes the territorial waters, the contiguous zone and the continental shelf
referred to respectively in sections 4, 5 and 8 of the Maritime Zones Act, 1994
(Act No. 15 of 1994). That would be
relevant for purposes of whether or not the travel qualifies as travel outside
the RSA (not relevant in this case) or whether or not the tour operator
supplies goods in the RSA. Please note
that the Act doesn’t use the phrase ‘international travel’ and that
"international carriage” is only relevant where transport is by aircraft.
Your client will have to consider two issues.
The first is that recipient must be "a person who is not a
resident of the Republic” (RSA). This is
a defined concept and basically requires that the cruise ship company must not
carry on in the RSA any enterprise or other activity and from a fixed or
permanent place in the RSA relating to such enterprise or other activity. As indicated earlier we don’t know if the cruise
ship company is a resident of or carries on an activity in the RSA.
The second issue then is that the said person (the
non-resident or cruise ship company) or any other person must not be in the RSA
at the time the services are rendered.
If we accept for the moment that cruise ship company is NOT be present
in the RSA at the time the service is rendered (section 11(2)(l)(iii)) the rate
of zero per cent can potentially apply if the recipient (the cruise ship company)
of the service is not in the RSA. If the
non-resident is present in the RSA at the time, the service will be standard
rated (section 7(1)(a))).
Please remember that the client bears the onus of proof and
must obtain and retain the documentary proof substantiating their (the
vendor’s) entitlement to apply the rate of zero per cent. The documentary requirements are set out in
Interpretation note 31 and Interpretation note 42 provides the practice
prevailing relating to the travel industry.
The cruise ship company is correct that your client must
invoice them and include output tax on the commission.
You may want to obtain a ruling from SARS regarding the rate
of zero per cent, but will need to obtain the information that we referred to
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.