An updated interpretation note no. 42 was released by the South African Revenue Service in December. This comes after a court case highlighted confusion in the industry about zero-rated VAT.

An inbound tour operator was taken to court for charging zero-rated VAT on tour packages to overseas tourists. SARS argued that these items should have been charged at the standard 14% rate.

Gerhard Badenhorst, Tax Executive at ENS Africa, told Tourism Update at the time that there was a definite need to establish clear guidelines as to what the VAT treatment should be.

To read the full updated SARS VAT interpretation note no. 42, click here.

The updated VAT interpretation note gives a clearer description of the role of a local entrepreneur or DMC that supplies services as an agent, as well as when a DMC supplies services as a principal. Under the function of an agent, the DMC will provide goods and services on behalf of a principal, or overseas wholesaler, to non-resident tourists. The DMC is granted authority by the overseas wholesaler to assemble tour packages or services in South Africa for non-resident tourists. The authority granted to the DMC allows the DMC to enter into, alter or terminate legal relationships between the overseas wholesaler and non-resident tourists.

If a dispute arises, the agent, or DMC, would have to prove that the authority rested with them at the time the goods and services were provided to the tourists or altered. Both the DMC and tourist must be aware that the DMC is acting on behalf of the overseas wholesaler. It is also the responsibility of the DMC to make it clear to the tourist that the DMC is representing someone else and not acting in his or her personal capacity.

Under these conditions, a DMC arranging a tour package on behalf of the overseas wholesaler will levy VAT at the zero rate on the fee or commission charged for the service of arranging the tour package, provided the non-resident tourist or overseas wholesaler is outside South Africa at the time the tour package is assembled.

The updated SARS VAT interpretation note no. 42 also outlines the VAT treatment of the different supplies that may form part of a tour package, including international transport services, domestic transport services, accommodation, meals and game-viewing experiences. A local entrepreneur can also supply the goods or services as a principal.

Should the non-resident tourist or overseas wholesaler be in South Africa when the services of the local DMC are enlisted, the services supplied by the local entrepreneur must be standard-rated.

The zero-rating of any supplies made by the local DMC is subject to the DMC retaining the supporting documentary evidence acceptable to the Commissioner. This is set out in Interpretation Note 31 (Issue 3).

Industry can receive more information or clarity on any of the matters dealt with in the updated note by submitting an application for a VAT ruling or VAT class ruling to the Commissioner, either by email to VATRulings@sars.gov.za or by facsimile on +27 86 540 9390.