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ABD CC v CSARS (VAT 969) 30 March 2015

Friday, 10 April 2015   (0 Comments)
Posted by: Author: SARS
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Author: Erich Bell (SAIT)


This case considers an appeal to the Cape Town Tax Court against the Commissioner’s decision to disallow the section 11(2)(l) zero-rating of the Value-Added Tax Act (No. 89 of 1991) ("VAT Act”) through the application of section 11(2)(l)(iii) for services rendered by the appellant to non-residents through supplying tour packages.


The appellant is a registered vendor and supplies tour packages to Foreign Tour Operators ("FTOs”) by entering into agreements with them to arrange tours in South Africa for their customers. The tour packages include inter alia, hotel accommodation, restaurants, guided tours and excursions. The appellant would then enter into agreements with local service providers which would entail the local service providers supplying the respective services included in the tour packages to the customers during their tours in South Africa. The local service providers invoice the appellant for their local services which is paid for by the appellant. The appellant then in turn invoices the FTOs for a lump sum that consist of the local service providers’ costs, a fee for its ancillary services and a mark-up on both. 

Both the FTOs and all their customers are non-residents for VAT purposes. At the time the appellant enters into the agreement for the tour package with a FTO, neither the FTO, nor its customers are in South Africa. However, when the local services are rendered, the customers are in South Africa. As a result, the customer invoiced the FTOs at the zero-rate in terms of section 11(2)(l) of the VAT Act. The Commissioner disallowed the objection on the basis that the appellant directly supplied services to the FTOs’ customers while they were in South Africa, hence the application of the section 11(2)(l)(iii) exclusion that states the following:

"(2) Where, but for this section, a supply of services…would be charged with tax at the rate referred to in section 7 (1), such supply of services shall… be charged with tax at the rate of zero per cent where—

(l)the services are supplied to a person who is not a resident of the Republic, not being services which are supplied directly—



(iii) to the said person or any other person, other than in circumstances contemplated in subparagraph (ii) (bb), if the said person or such other person is in the Republic at the time the services are rendered…”

The appellant, however, argued that the Commissioner’s approach to deny the zero-rating is incorrect as it did not render any services to the FTOs’ customers while they were in South Africa. The appellant argued that the only services supplied by it was the services supplied to the FTOs through selling the tour package, at which stage, neither the FTOs, nor their customers were in South Africa. It was further contended by the appellant that it did not directly supply services to the FTOs as it merely purchased the local services as an agent and on-sold it to the FTOs who then sold the services to its customers. 


After referring to the obiter of Malan JA in Master Currency v CSARS (155/2012) [2013] ZASCA 17 (20 March 2013) at paragraph [17] to emphasize the principle that services consumed in the Republic attract VAT at the standard rate, the following was held by Le Grange J at paragraph [23] of the judgement (emphasis added):

"In my view it follows that in terms of s 11(2)(l), the supply of a service to a non-resident excludes the zero rating provisions if a recipient of such a service or any other person to whom the service is rendered is in the Republic at the time the service is actually rendered. There can be no doubt that the Legislature, by inserting the words "at the time the services are rendered”, rather than the usual reference to a "supply of services”, in paragraph (iii) of subsection 11(2)(l) intended that the zero rated provisions would not apply if the recipient was in the Republic at the time the services were actually supplied, even though such recipient was not in the Republic when the services were deemed to have been supplied as provided for in terms of s 9(1) of the Act…”

The court therefore held that it is important to identify the type of services supplied by the appellant and exactly when these services were supplied for purposes of the exclusion in section 11(2)(l)(iii). 

The court held that a number of contracts between the appellant and the local suppliers expressly stated that the services were supplied to the appellant and not to the FTOs or to their customers. In this regard the court referred to an agreement between the appellant and a hotel where it was stated that the appellant is a tour operator and "is in the business of selling hotel rooms to third parties”. It was held that the service could only have been rendered by the appellant at the time the hotel rooms were made available to the customers when they were physically present in South Africa.

During cross examination it was conceded that should a hotel room not be made available to an FTO’s customer by the hotel, the customer must lodge a complaint with the appellant who would then resolve the issue with the hotel. It was further held that the appellant ensured that the local suppliers provided proper services to the customers for which the appellant was paid by the FTOs as stated above. This fee also formed part of the budgets presented to the FTOs when selling the tour packages.

Due to the above, it was held that the appellant’s argument that the neither the FTOs, nor the non-residents were in South Africa at the time the services were rendered and that it was merely acting as an agent on behalf of the FTOs must fail. 

The appeal was accordingly dismissed.

Please click here to view full judgement.



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