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Should VAT be levied on the commission earned for making travel bookings?

Friday, 17 April 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 prevailing:

"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 above.

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.



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