Understanding the intricacies of taxing tour operators

Shabu Maurus, Tax Partner, Auditax International.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.

A Bill to amend the Vat Act, (Cap.148);and Several Other Laws

The Vat Act, (Cap.148);and other 8 laws  have been amended  through the Written Laws (Miscellaneous Amendments) (No. 6) of August 2019

The Written Laws (Miscellaneous Amendments) (No. 6) of August 2019  has proposed to amend 9 laws including the Vat Act, (Cap.148); Energy and Water Utilities Regulatory Authority Act, (Cap.414); Ferries Act, (Cap.173); Gaming Act, (Cap.41); Interpretation of Laws Act, (Cap.1); Merchant Shipping Act, (Cap.165); Penal Code, (Cap.16); Public Service Act, (Cap.298) and the Social Security (Regulatory Authority Act, (Cap.135).

In summary, the VAT Act proposed amendment intends to enable the Minister to grant value added tax exemption on raw materials used in the manufacturing of long-lasting mosquito nets. This exemption will be through a notice in the Gazette.

The Social Security (Regulatory Authority Act, (Cap.135) amendments intends to generally transfer the supervisory responsibility of social security sector to the Ministry responsible for social security. Effectively the Social Security Regulatory Authority (SSRA) shall be repealed.

The major proposed amendment of the Public Service Act, (Cap.298) is on empowering the Chief Secretary to be the highest authority on labour mobility in the Public Service.

The Energy and Water Utilities Regulatory Authority Act, (Cap.414) amendments intends to introduce Permanent Secretaries of Sector Ministries in the Nomination Committee of Board Members. The objective is to enhance oversight role of Sector Ministers on matters regulated by the Authority.

For details on the amendments intended by the Written Laws (Miscellaneous Amendments) (No. 6) of August 2019  refer to this link:

 

What Your Banker Must Give You Monthly

What your banker must give you monthly

Shabu Maurus, Tax Partner, Auditax International.Taxing services has never been simple. For example, applying value-added tax (VAT) on financial services has been a practical nightmare. And when services and transactions are provided electronically, the problem becomes even worse. Think of transfer of your money from your bank account to your mobile money wallet and vice versa. Or withdrawing cash from ATM.

From 2015, Tanzania made some VAT reforms to start collecting VAT on fees charged by financial services providers to their customers. However, the implementation of it has seen several glitches. With the advent of e-commerce and the emergence of new business models, some provisions of the tax laws are becoming redundant or practically unsuitable. The VAT system in Tanzania is dependent on tax invoices and fiscal receipts. These are mainly physical in nature. When you transfer money from your bank account to mobile money wallet using your phone (mobile banking) or online (internet banking), there is VAT on the fee that a bank charges you. But, practically how do you get an EFD receipt (a piece of paper) for that electronic transaction? Also, the number of financial transactions happening electronically makes the issuance of physical EFD receipts practically impossible. But the VAT law requires customers to support their VAT claims by using fiscalised tax invoices or EFD receipts.

Last year the Minister of Finance issued regulations that clarified some of these questions. The Value Added Tax (General) (Amendment) Regulations, 2018. Recently (on 23rd August 2019), TRA also issued a notice that emphasizes compliance with those regulations by financial institutions and their customers. The VAT regulations, among other things, require financial institutions to issue “periodic statements” to its customers.

What are “Periodic Statements”?

Ideally, the periodic statements are intended to serve the same functions as “tax invoices”. According to the VAT Regulations, “periodic statement” means a statement issued every month by a supplier of financial services. The VAT Regulations makes it mandatory for financial institutions to issue periodic statements to its customers who are registered for VAT within ten days after the month-end. For customers who are not registered for VAT, issuance of periodic statements is optional.

Mandatory contents

The VAT Regulations prescribe the contents of the periodic statements. The required contents make periodic statements fundamentally different from the traditional “bank statements”. In addition to the standard contents such as a date, the periodic statements need to have name, address, TIN and VAT number (VRN) of both the customer and the financial institution. The periodic statement also needs to show all transactions, the value of each transaction excluding VAT, the VAT rate applied, the amount of VAT charged and the total amount payable by the customer. So, the concept here is pretty much the same as a tax invoice.

Implications for financial institutions

To comply with the new regulations, financial institutions need to know the VAT status of all its customers. Both existing and new. The new requirements may also call for some system changes. Changes that will enable them to issue the periodic statements with the prescribed contents.

Implications to customers

According to the VAT Regulations, a customer of a financial institution who is registered for VAT will not be entitled to claim VAT charged by a financial institution unless such VAT is supported by a periodic statement at the time of filing the monthly VAT return. Under the new regulations, a periodic statement is deemed to be a tax invoice. So, if you are VAT registered, you should demand a periodic statement from your banker

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes - (3)

Shabu Maurus, Tax Partner, Auditax International.Is non-compliance with tax laws necessarily deliberate? My previous two articles highlighted some of the major factors that influence tax compliance. Both economic and behavioural factors. But both the economic and behavioural models assume that non-compliance by taxpayers is a deliberate action. But this is partly true.  Tax non-compliance can occur due to deliberate connivance or just ignorance.

Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant. Regardless of whether it is intentional or unintentional. A taxpayer may intentionally evade some of his or her obligations while unintentionally being non-compliant in other respects.

When it comes to administering penalties for non-compliance it is very difficult to distinguish whether a non-compliance action or inaction is deliberate or simply unintentional.  But in practice, inadvertent non-compliance with tax laws is widespread, especially within the SMEs and more so within the informal sector. So, what contributes to inadvertent non-compliance with tax laws? Of course, there are several possible reasons or factors.

Absence of tax management

Yes, just like any other aspect of your enterprise or organisation, you also need to manage your taxes. Tax management includes the understanding of the taxes that you are expected to comply, identifying the tax risks and putting in place effective controls to reduce both the possibility of non-compliance and the impact of non-compliance.  It is a process to respond to the tax risks and continuously evaluate the responses for improvement. For example, how you approach non-routine transactions will make a huge difference as far as tax compliance is concerned. Are you organised in such a way that you have enough time to prepare, review and pay tax liabilities? How does the board of directors of an organisation ensures that the tax affairs of their organisations are managed properly? Does the board know all taxes that their organization is obliged to comply? It is not uncommon to find out that some organizations do not even know all the taxes that they are required to comply. Arguably, most of the reasons for inadvertent non-compliance emanates from a lack of effective tax management.

Lack of requisite tax knowledge or information

Knowledge about taxes influences a taxpayer’s ability to comply with tax rules. As indicated earlier, the economic and behavioural models on tax compliance take tax knowledge as given, which may be grossly misleading. In practice, there is enough evidence that unintentional non-compliance is directly related to ignorance about and lack of understanding of tax laws.

The complexity of tax laws and rules

Tax complexity also influences non-compliance by causing misinterpretation of rules, omissions and unintentional errors. Making the tax system less complicated will lead to a reduction of tax non-compliance. Uncertainty from the interpretation of tax law is very common and may lead to unintentional non-compliance even for experienced tax experts.

Poor record-keeping

Inability to keep proper business records or lack of appropriate records about the business may lead to incorrect determination of the tax base and hence the tax liability. Due to lack of record, a taxpayer may end up paying less tax than they owe. Or even worse pay more than what is legally due. Lack of appropriate records also leads wrong, incomplete or misleading tax returns.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes - (2)

Shabu Maurus, Tax Partner, Auditax International.The higher the relative financial tax burden, the more likely a taxpayer may default. The costs associated with tax compliance, over and above the actual tax liability may also deter some taxpayers from compliance. Penalties, interest and fines for non-compliance may work but only for some time. Incentives for being compliant may have a longer positive effect. But it's not only the monetary or financial effects to a taxpayer that matters. Numerous behavioural factors also tend to influence tax compliance behaviour.

Individual differences: While many taxpayers comply with their tax obligations, some do not. Individual factors influencing behaviour include gender, age, education level, moral compass, industry, personality, circumstances, and personal assessment of risk. In his research on business tax compliance, economic psychologist Paul Webley found that those who do not comply tend to be male, younger, arrogant and have positive attitudes towards tax evasion and negative attitudes towards taxation authorities. Webley suggests that education about the taxation system has a direct impact on reducing the propensity to evade.

 

Social norms: Is tax non-compliance an acceptable norm? The “But everyone else is doing it” attitude.  If a taxpayer believes that non-compliance with taxes is widespread, they are much more likely not to comply themselves. Hence some studies indicate that if taxpayers can be made to have an accurate understanding of the good tax compliance behaviour of others, it is likely to reduce non-compliant behaviour.

 

Perceived inequity: Some taxpayers may believe ‘the system’ is unfair or they have personal experiences of ‘unfair’ treatment (dissatisfaction with tax authorities). Or that the system treats them unfairly compared to others, and that the government is doing too little with the revenue it collects. These taxpayers are less likely to comply with taxes.  In his research, Webley found a positive correlation between belief by taxpayers that the revenue authority is inefficient or unhelpful and the likelihood of their non-compliance.

 

Risk-taking: Some taxpayers view tax avoidance as a game to be played and won. They like to test their tax avoidance skills. Also, if a taxpayer has the opportunity not to comply and thinks that there is only a minimal risk of being detected, he or she will take the risk. Under-reporting of certain types of income is a typical example. Employment incomes (salaries and wages) are usually highly ‘visible’ to a tax authority because of employer reporting under the PAYE system. However, other forms of income may be much less visible and therefore subject to more ‘creative’ accounting.

 

There is no firm answer to what influences taxpayer behaviour either towards compliance or non-compliance. Hence an Australian academic Dr Valerie Braithwaite suggested that some economic and behavioural factors combine to cause individual taxpayers (individuals or businesses) to adopt sets of values, beliefs and attitudes that he described as motivational postures. There are four of them. Those who either deliberately evade their responsibilities or choose to opt-out (“The disengaged”). Also, some don't want to comply but who will comply if they can be persuaded that their concerns are being addressed (“Resisters”). But some are positive and are willing to comply but have difficulty in doing so and don’t always succeed (“Triers”). And lastly, there are those who are always willing to do the right thing (“Supporters”). Dr Braithwaite further cautions that an individual taxpayer can adopt any of these attitudes at different times. Or adopt all the attitudes simultaneously to different issues. Hence these attitudes are not fixed characteristics of a person or group.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes

Shabu Maurus, Tax Partner, Auditax International.What makes you pay your taxes voluntarily? Apart from tax payment, there are several tax compliance obligations under the tax laws. Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant.

But what sort of factors influence tax compliance (or non-compliance)? Understanding taxpayers behaviours and factors that influence compliance behaviour are crucial for a successful tax administration. But there are no hard and fast rules. The question has been a subject of numerous researches and it does not appear there is any firm consensus. Broadly the research literature identifies two broad approaches to the problem of compliance. Economic and behavioural approaches. Under these two, several factors emerge as significant in explaining or influencing tax compliance behaviours. I start with economic factors.

How big is the financial burden?

There appears to be a relationship between the amount of tax liability and taxpayer compliance behaviour. If a business owner or an individual has a tax liability that can easily be paid, likely, they may be willing to comply. But if the liability is perceived to be huge by the taxpayer and potentially threatening the viability of the business there is a good chance that the owner may avoid paying the tax. Avoiding the whole tax liability is one possibility. Another is to fraudulently adjust the data (for example, reducing sales or increasing expenses) such that a lesser amount of tax is paid.

What is the cost of compliance?

Taxpayers may face several costs of having to comply with their tax obligations over and above the actual amount of tax they pay. These include the time taken to comply with tax obligations, the cost of hiring and relying on accountants and tax consultants and the indirect costs associated with the complexity of tax laws. These can include ‘psychological’ costs such as stress that comes from not being certain that they have met all the tax rules or even knowing what those rules are. Record keeping and maintenance of documents may also be costly. The available methods of effecting tax payments may also come with a cost.  Also, taxpayers especially small businesses often express resentment about being ‘tax collection agents’ for taxes such as withholding tax and VAT. Think of when VAT is due for payment but as a taxpayer you have not or for some reasons you cannot collect the same from your customer.

Carrots or sticks?

Incentives: Are there rewards for being tax compliant? Some studies have shown that giving taxpayers incentives may have a positive effect on compliance behaviour (i.e. taxpayers becoming more compliant). I recall some few years back, TRA used to organize Taxpayers’ Day. Among other things, those who were considered as best taxpayers in various categories were rewarded. The RRA in Rwanda still has a similar practice.

Disincentives: The potential amount of interest, penalties or fines for non-compliance also tends to influence taxpayer compliance behaviour. Also, those who are compliant tend to want those who are non-compliant to be punished. However, studies of the impact of these financial deterrents as well as the threats of prosecution(s), suggest that they may have a time-limited effect on compliance behaviour of taxpayers.

By Shabu Maurus, Tax Partner, Auditax International.

IPSASB Publishes Exposure (ED) Draft 69

International Public Sector Accounting Standards Board has published ED 69 Amendment to IPSAS 41 Financial Instruments

Summary

On 27th August 2019, the International Public Sector Accounting Standards Board (IPSASB) issued an Exposure Draft (ED) 69 proposing some amendments to be made to IPSAS 41 Financial Instruments. The proposed amendment aims at ensuring representativeness and comparability of the information that a reporting entity provides in its financial statements.

Specific Matters for Comments

This ED does not cover statutory receivables and payables because they are considered to be non-financial instruments due to lack of contractual element. Further, it recognizes that concessionary loans and financial guarantee contracts issued through non-exchange transactions were addressed in the application guidance in IPSAS 41, therefore they do not form part of this ED.

In a nutshell, this ED covers monetary gold, currency in circulation, IMF quota subscriptions and Special Drawing Rights by proposing the following areas for comments;

1.    Monetary gold: Is gold bullion a financial instrument (like cash) or is it a commodity? Is monetary gold a financial instrument (like cash)?

IPSASB Perspective: IPSASB proposes that gold bullion is not a financial asset because it has no contractual right to receive cash although bullion is highly liquid. On the other hand, despite the fact that monetary gold also lack contractual rights to receive cash IPSASB considers them as financial assets since they meet many characteristics of financial assets.

2.    Currency in circulation: Does issuing currency as legal tender create a financial liability for the issuer?

IPSASB Perspective: IPSASB proposes that in determining whether financial liability is created or not, entities should consider existence of contractual obligation of which it shall be based on substance of arrangement rather than legal form. In addition to that, the said currency should be issued to evidence that two willing parties have agreed to the terms of the arrangement. That is to say unissued currency does not meet the definition of a financial instrument.

3.    Special Drawing Rights: Do Special Drawing Rights Holdings meet the definition of a financial asset? Do Special Drawing Rights Allocations meet the definition of a financial liability?

IPSASB Perspective: IPSASB proposes that both Special Drawing Rights Holdings (SDRH) and Special Drawing Rights Allocations (SDRA) meet the definition of financial assets and liability respectively on the ground that SDRH represent claims on currencies and liquidity is guaranteed by a mechanism requiring participants to deliver cash in exchange for SDRs. Similarly, SDRA represents a contractual obligation to deliver cash provided that SDR holdings are distributed to members.

Conclusion

Comments on the proposed changes are to be received by 31 December 2019.

For details on the exposure draft, see: Exposure Draft 69

IASB Issues an Exposure Draft on Disclosure of Accounting Policies

International Accounting Standards Board (IASB) has issued an exposure draft (ED) proposing some amendments to be made to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2.

Summary

The ED proposes amendments in IAS 1 by amending the requirement for reporting entities to provide disclosure regarding their ‘significant’ accounting policies and instead they shall only provide disclosure of ‘material’ accounting policies.

That is to say, the proposed amendments requires reporting entity to identify and disclose all material accounting policies that are more useful to primary users of financial statements and eliminate all immaterial accounting policies from the financial statements.

Further, IASB through exposure draft has provided guidance on applying materiality by introducing two new examples that highlight the need to focus on information that is material and useful to users of financial statements and demonstrate how the application of the four-step materiality process can address the issues of providing generic information or repeating the requirements of IFRSs on disclosure of accounting policies.

Disagreement

Although the proposed amendments are considered to be consistent with the application of materiality to other financial information, Mr Martin Edelmann one of the board member, voted against the publication of this exposure draft on the grounds that, provision of accounting policies disclosure are made to assist users of financial statements in understanding how transactions, other events and conditions are reflected in the reported financial statements. Further he argued that, not all primary users of financial statements are accounting experts hence the disclosure of accounting policies could help them to better understand an entity’s reported financial performance and financial position even if such accounting policies are not important enough to be assessed as material because they would not be expected to influence the investment decisions of users.

Therefore, according to Mr Martin Edelmann, consideration of materiality in disclosing accounting policies might lead to a loss of important information and hence impede users’ understanding of the financial statements.

Conclusion

Comments on the proposed changes are to be received by 29 November 2019.

For details on the exposure draft, see IASB proposes amendments to IFRS Standards to improve accounting policy disclosures

IPSASB Publishes Exposure (ED) Draft 68

International Public Sector Accounting Standards Board has published ED 68 on improvements to IPSAS, 2019

The objective of ED 68, Improvements to IPSAS, 2019 is to propose some improvements to existing IPSAS to provide solutions to issues raised by stakeholders. The table below summarizes the proposed improvements:

Amendments to Other IPSAS resulting from IPSAS 41, Financial Instruments

IPSAS

Summary of Proposed Change in ED 68

IPSAS 5, Borrowing Costs.

The amendments seek to update the guidance relating to the components of borrowing costs which were unintentionally omitted when IPSAS 41 was issued.

IPSAS 30, Financial Instruments: Disclosures

The amendments to IPSAS 30 are with regards to illustrative examples on hedging and credit risk unintentionally omitted when IPSAS 41 was issued.

IPSAS 30, Financial Instruments: Disclosures.

The proposed amendments to IPSAS 30 intend to update the guidance for accounting for financial guarantee contracts which were unintentionally omitted when IPSAS 41 was issued.

IPSAS 33, First-time Adoption of Accrual Basis International Public Sector Accounting Standards (IPSASs)

The proposed amendments to IPSAS 33 intend to update the guidance on classifying financial instruments on initial adoption of accrual basis IPSAS unintentionally omitted when IPSAS 41 was issued

 

Other Improvements to IPSAS

IPSAS

Summary of Proposed Change in ED 68

IPSAS 13, Leases

The proposed amendments cover appropriate reference to IPSAS in IPSAS 13 regarding impairment, in current references to other international and/ or national accounting frameworks.

IPSAS 13, Leases and IPSAS 17, Property, Plant and Equipment

The proposed amendments intend to remove transitional provisions supposed to be deleted when IPSAS 33, First-time Adoption of Accrual Basis International Public Sector Accounting Standards (IPSASs) was approved.

IPSAS 21, Impairment of Non-Cash Generating Assets  and IPSAS 26, Impairment of Cash Generating Assets

The proposed amendments aim at ensuring consistency of impairment guidance when accounting for revalued assets under IPSAS 17, Property, Plant and Equipment and IPSAS 31, Intangible Assets.

IPSAS 33, First-time Adoption of Accrual Basis International Public Sector Accounting Standards (IPSASs)

The proposed amendments to the implementation guidance on deemed cost in IPSAS 33 intends to ensure consistency with the core principles in the Standard.

IPSAS 40, Public Sector Combinations

The proposed amendments aim at including the effective date paragraph which was unintentionally omitted when IPSAS 40 was issued.

 

 

Kindly note that comments are requested by 30 September 2019.
 
For details on the exposure draft, see ED 68, Improvements to IPSAS, 2019.

 

TRA issues clarification on the usage of period of statements.

The clarification requires all banks to issue monthly periodic statements to their customers registered for VAT with the required particulars within ten days after the end of the month to which a tax period relates so as they can claim VAT charged by banks on financial transactions.  The periodic statements legally qualify as EFD receipts and are allowed to be used as evidence when submitting VAT monthly returns and claims.

The clarification is in line with the amendment made in Regulation 35(A) (1) of the VAT Act of 2018.

For details on the clarification refer to the above image.

 

 

 

 

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