Recently I was in Arusha for a tax seminar hosted by Auditax International. Among the seminar participants were some tour operators. During one session of the seminar, a discussion arose on some unresolved practical tax challenges facing the tourism sector in Tanzania. The most pressing being compliance with VAT law. From the discussion, I picked up some few lessons. One is that the tourism business is much more complex than I originally thought. And second is that taxing the sector appropriately needs special attention. This may minimise possible tax leakage that may come from deliberate non-compliance with tax laws or unintentional non-compliance as a result of complexities and unresolved practical challenges.
The tourism value chain is complex and involves several players, products and services. There are several and distinct tourist attractions. Think of the safaris, beaches, cultural, hunting, archaeological, mountaineering, diving and several others. And these often cut across countries. There are also several support services and products. Transportation both international and local which may include airlines (scheduled or chartered), car hire, taxis, ship, rail, buses and many other possible alternatives. Importantly also are accommodation services such as hotels, hostels, guest houses, tents and resorts. The tourists also need food, beverage and entertainment which call players such as the clubs, bars, restaurants, open-air food stalls and music bands. A tourist may also need shopping services for clothes, gifts, souvenirs, books, personal care, medicines, cosmetics and photography. For foreigners at entry and exit points, services may include customs, immigration, communication services, shops (duty-free or otherwise), transit and bureau de change.
But most tourists prefer their tour experience to be arranged for them. This call in the services of travel agents, tour operators and tour guides. And these can be distinct, related or a single enterprise. They are the packagers. They make it possible for tourists to purchase bundles of several services or products they might need for their trips and vacations. A package, for example, may include a return ticket, ground transfers, accommodation, meals and drinks, sporting activities, entertainment, and clothes. When these services can not be practically differentiated, are taxed differently or are supplied in multiple jurisdictions, it becomes a big practical tax problem. Think of a tourist whose trip includes Kenya, Zanzibar and Mainland Tanzania under one package organised by a chain of tour operators in London, Nairobi and Arusha. Tanzania Mainland, Zanzibar, Kenya and UK each have different VAT law.
The problem becomes even more complicated because most of these packages are prepaid. Should the receipt of prepayment (booking) trigger a tax liability? How should the prepayment be split (among the services and products in the package and the different tour operators in different countries)? Sometimes the booking is done even a year or more before the actual tour is made. How should cancellations or changes of packages be managed for tax purposes? Importantly also is knowing how the income from package sales is split among the different players in and outside the country. Is there any tax leakage or tax base erosion?
Every tax has four essential elements. One is the tax base. The ‘thing’ which is being taxed. The second element is the tax rate. Any tax must have someone to pay it. The taxpayer. And finally, the tax point. That is when tax is due and payable. Clarity of these elements in the tax law is very crucial if both tax compliance and tax administration are to be successful. In the next article, I will discuss some of these elements in the context of the tourism industry.
By Shabu Maurus, Tax Partner, Auditax International.