XO Africa Safaris CC v The Commissioner for the South African Revenue Service

XO Africa Safaris CC (XO) assembled tour packages for foreign tour operators (FTOs) arranging group and individual foreign tours to South Africa. These packages included accommodation, travel, restaurant bookings and recreational activities (local services). XO contracted with local suppliers to provide these services and separately contracted with FTOs to provide them to tour group members when they were in South Africa. The FTOs were not resident in South Africa and were not in South Africa when agreements were concluded. XO invoiced the FTOs for a lump sum including the local service provider's costs and its own mark-up. The FTOs had no knowledge of prices charged by local suppliers and could not demand disclosure. XO was responsible for ensuring local services were properly provided during tours and employed consultants to ensure this. After an audit, SARS raised a VAT assessment at the standard rate of 14% for the tax periods to February 2008 and 2009 and April 2010. XO objected, claiming the services should be zero-rated under s 11(2)(l) of the Value Added Tax Act 89 of 1991. The objection was disallowed by SARS and XO appealed to the Western Cape Tax Court, which dismissed the appeal.

• Whether the supply of services by XO to foreign tour operators attracted VAT at the standard rate or should be zero-rated in terms of s 11(2)(l) of the Value Added Tax Act 89 of 1991
• What services did XO supply?
• To whom did XO supply such services?
• Were the parties to whom such services were supplied residents of, or present in the Republic when such services were supplied?
• Whether XO directly supplied local services to the foreign tour operators or their customers

The appeal was dismissed with costs including the costs of two counsel.

Where a VAT vendor supplies services to a foreign tour operator that are intended to be consumed by, and are actually provided to, persons who are present in the Republic at the time the services are rendered, those services are supplied "directly to the said person or any other person...if the said person or such other person is in the Republic at the time the services are rendered" within the meaning of s 11(2)(l)(iii) of the Value Added Tax Act 89 of 1991. Such services are therefore excluded from zero-rating and attract VAT at the standard rate under s 7(1)(a) of the Act. The fact that the vendor contracts with the foreign tour operator and separately contracts with local suppliers to perform the services does not alter the position - the vendor is the supplier of the local services to the persons consuming them in South Africa. The statutory purpose of s 11(2)(l) is to ensure that services consumed in South Africa attract VAT at the standard rate, even when contracted through foreign non-resident intermediaries.

The court noted that Mr Charrieras conceded in evidence that if XO was not liable for output VAT charged at 14%, it was making profit at the expense of the fiscus. This supported the interpretation that would prevent the fiscus from forgoing the 14% output tax on services consumed in South Africa while XO would retain the benefit of claiming input VAT. The court also observed that the various amendments to s 11(2)(l) showed that the statutory purpose was to ensure that where services were rendered to a foreigner but the services themselves were rendered in South Africa and the benefit enjoyed in the Republic, they would not enjoy zero rating.

This case is significant in South African VAT law as it clarifies the application of s 11(2)(l) of the Value Added Tax Act 89 of 1991 regarding zero-rating of services supplied to non-residents. It establishes that where services are contracted to be provided to a foreign tour operator but are actually delivered to and consumed by individuals who are present in South Africa at the time of delivery, the services cannot be zero-rated and are subject to VAT at the standard rate. The case confirms the purpose of s 11(2)(l) is to ensure that services consumed in South Africa attract VAT at the standard rate, even when contracted through foreign intermediaries. It reinforces the principle that substance prevails over form in determining VAT treatment - the court looked at what was actually supplied and to whom, rather than accepting the contractual characterization advanced by the taxpayer. The judgment is important for the tourism industry and businesses supplying services to foreign entities where those services are consumed in South Africa.