NBAA STUDENTS

t
...._

A Supplement of the NBAAJournal "The Accountant

,:- .
r. ISSN 08-56 - 2636 NO. 23 October - December 2007

The National Board of Accountants and Auditors

 NBAA Students Newsletter (October - December 2007)

.
THE TAXABILITY OF COMMISSION UNDER
DESTINATION-BASED VAT
"The Case of Airlines Industry"
-
(ADTM (Hons), PGDTM, MSc (in finance), PhD
Financial and Tax Analyst Fellow -Treasury)

s
n ere has been not only an extinction of Commission collected on service rendered on airlines operations but also Regional
aviation anarchy which has been causing contradiction in legal interpretation regarding taxability. Of course, debarment
from the VAT should be caste-apart from the legal taxability because in practice collection of VAT prevails within the dis-
tribution chain rather than the way tax legislation would provide for tax liability.

The Government has the rights and powers to collect VAT in line with Part 11 of the VAT Act, 1997; on the other hand VAT-tax-
able persons have obligations to pay taxes in the same legal posture. In principle, when the distribution chain does not exist or
cannot be clearly determined in the Airlines operations, it is pertinent that Tax point, Place of supply, Taxable supply, Taxable
value and Nature of transaction be jointly determined to find out how room for taxability could be preserved. This paper there-
fore meditates on "What If Analysis" regarding Commission received by twenty four Airlines Agents registered for VAT in the
aforesaid service by extending analysis of the consequences of registration rule, because the main problem identified has been the
diversion of understanding between the distribution chain and legal interpretation of it in the airlines industry.

The introduction part provides the cognate explanation of terminologies with technical references to the VAT Law, second part
endows with Agency and VAT-normal practice, and third part underscores the Regional Taxability Impact and methodology. Ulti-
mately the conclusion part suggests that, it would be worthwhile to impose VAT on commission in whatsoever compartment if
the VAT law is silent. In that regard, the commissioner under best-Judgment rule may provide Practice Notice in case the VAT
law applicable in either of the States within the Region eg EAC, SADC etc has a provision that stipulates for taxability, disre-
garding as to whether VAT is a domestic tax. Though, on contrary it may not be legally jovial for the taxpayers to assume VAT
exemption or zero rating.

Introduction cept of "destination principle" ria that justify place of supply.

The Nitty-gritty of Taxability
within the VAT Scope
It is a widely held view that
under "Destination-based VAT",
the liability of the supplier that
is commonly surrogated by the
Output tax depends on the
nature of the supply of goods or
services and in the same line the
liability to remit the difference
between Output tax and Input
tax depends on the destination
principle.
The destination of the Air-
lines Agent's services should be
the time when the travelers
receive the air ticket. In that
regard, Part 11 of the VAT Act,
1997 confers powers and rights
to the Government to impose
the VAT and imposes liability to
Value added taxation to the tax-
able persons. However, the con-
should not be confused with the
"Tax point rule" though these
terms may sometimes smudge
their variances when the nature
of transactions may create equi-
librium between the destination
and tax point. ,
"The place of supply" has been
stipulated under section 7 of the
VAT Act, 1997. In epitome the
law determines as to whether
goods or services are supplied in
Mainland Tanzania by shimmer-
ing the fact that VAT is princi-
pally domestic tax. Therefore the
place of supply must not only be
the place wh.ere the Government
is entitled to collect output tax
but also where the supply of
goods or services are enjoyed.
In order to suffice these con-
ditions, the VAT law with regard
to goods, provides for the crite-
Mainland Tanzania shall be the
place of supply, (a) if the supply
of goods does not involve their
removal from or to Mainland
Tanzania, (b) if their supply
involves their installation or
assembly at a place in Mainland
Tanzania to which they are
removed.
Moreover, the place of supply
shall be outside Mainland Tan-
zania if the supply of goods
involves their installation or
assembly at a place in Mainland
Tanzania to which they are
removed. However, in the
course of their removal from a
place in Mainland Tanzania to
another place in Mainland Tan-
zania, when those goods leave,
and re-enter Mainland Tanzania,
the removal shall not be regard-
ed as a removal from 1Mainland
 NBAA Students Newsletter (October - December 2007)
Tanzania.
The VAT Act, 1997 coherently
set-out criteria that justify place
of supply with regard to services
under Section 7 subsection (4).
The focal point should be the
111 supplier of services whereby
services shall be regarded as
supplied in Mainland Tanzania
if the supplier of services (a) has
a place of business in Mainland
Tanzania and no place elsewhere
(b) has no place of business in
Mainland Tanzania or elsewhere
but his usual place of residence
is in Mainland Tanzania or has a
place of business in Mainland
Tanzania and elsewhere but the
place of business most con-
cerned with the supply of the
services is the place of business
in Mainland Tanzania (see also
in Mafwenga Mpoki H, 2005).
In this Chain, with regard to
the Airlines Operations the sup-
ply of services is made by the
,I'
Travel Agent in Mainland Tan-
zania when he satisfies the
above conditions and to accom-
plish the concept of place of sup-
ply, we have to identify a recipi-
'" I ent of services. At that juncture
the traveler who receives a ticket
is the only recipient and the
Agents of Airlines operators
remain to be an intermediaries.
The crux in the chain is actually
to identify the supplier of servic-
es between Airlines Operators
and Travel Agents. This will be
discussed profoundly later in
the second part of this paper.
Another complexity relates to
the "Time of Supply" or "Tax
Point" as mentioned above
which determines when the out-
put tax is payable. The VAT Act,
1997 provides under section 5 (1)
through subsection (3) the time
to be known as time of supply
and then under subsection (5)
the Minister responsible for
11
1
Colbert (1665) 'The art of taxation consists in so plucking the goose at to obtain the largest possible amount of feathers with the smallest possible
amount of hissing"
I ' Vidur Niti-"The King should collect his taxes without hurting his subjects just as a bee collects honey without harming the flowers"
MiM
Finance. has been given powers
to regulate the time of supply in
relation to the supply of goods
or services. The VAT Act, 1997
stipulates that time of supply
shall be; (a) when goods are
removed from the premises of
the supplier or other premises
where the goods are under his
control to the person to whom
they are supplied or when goods
are made available to the person
to whom they are supplied; (b)
when a tax invoice is issues in
respect of the supply or (c) when
payment is received for all or
part of the supply or (d) service
is rendered or performed;
whichever of the above cases
comes the earliest. However, we
could probably say firmly that
the normal time of supply is the
departure date under which
receipt of payment or issue of an
invoice triggers a tax point:
The "Value of supply" is
another concept which poses
difficulties on the commission
collected by the Agents though
it does not form part and parcel
of the passenger's ticket value.
In principle, the value of supply
is the amount the customer pays
including the margin (if any).
The VAT is levied at an invoice
value of the ticket whereby the
Agent has to charge customer
VAT on sales (Output tax) 2and
pays suppliers VAT on purchas-
es (Input tax).
The value of supply is reflect-
ed in the tickets which unfortu-
nately do not bear the element
of commission. The VAT Act,
1997 under section 13, provides
that the taxable supply where
supply is made for considera-
tion, should be the value of con-
sideration excluding the VAT, or
where is not for a monetary con-
sideration or is only partly for
such consideration, therefore the
open market value excluding
VAT or where the supply is not
the only matter to which a con-
sideration in monetary terms
relates, the supply shall be
deemed to be for such part of the
consideration as is properly
attributed to it. That's why at
the synopsis part we said "debar-
ment from the VAT should be caste-
apart from the legal taxability
because collection of VAT prevails
within the distribution chain rather
than the way tax legislation pro-
vides for tax liability" see also
observation of A. Shangwa J, D.
Kinabo and N. Mbise (2006) in
the case of Commissioner General
Vs Skylink Travelers & Tours Ltd
case No 5 of 2005 while arguing
on the legal liability of taxable
person.
Reflection of this assertion
originates from the practice of
excluding VAT from taxable
value as it may be required by
law, but it does not prohibit or
restrict taxability of VAT when
we identify the tax point, nature
of transactions, place of supply,
and taxable supply.
It should be noted at this
juncture that, exclusion does not
mean exemption; the gallows
have been made to be able to
identify the actual consideration
the extent to which VAT should
not influence -any market distor-
tion because it is levied at the
value while profit vestiges to be
a proxy for VAT rate determina-
tion.
Agency responsibility in the
VAT-normal practice
The agency agreement is gen-
uine, in particular when a travel
agent would not be expected to
take any significant commercial
risk, in that the agent should not
commit himself to buy before
selling. Agents do not act in their

own name. An agreement
whereby the Principal remains
undisclosed to the customer
would not satisfy this condition.
In the Airlines Operations the
tickets issued to the passengers
do not bear the name of the
agent but they bear the name of
Airlines Operators who are the .
Principals. Another condition
that justifies validity of agency is
documentary evidence to sup-
port the agency agreement
whereby both parties must enter
into consensus about the activi-
ties to be performed and agree-
ment should preferably be evi-
. denced in writing.
The Airlines agents have
been accepted to act as agents
for the transport provider (here-
inafter referred to as Principals)
when they satisfy including
among other things these condi-
tions. The services which are
rendered by the Airlines agents
are the issuing of tickets on
behalf of the Airlines which are
exempt from paying VAT. The
tickets are the properties of the
Principals who determine the
prices and VAT is not sur-
charged by agents on tickets
sold. After selling the tickets on
behalf of the Principals, the
Agents are paid a commission
which is just an income on the
business of the agents.
In principle, the commission
earned by the agents should be
taxable at the standard rate, but
when the commission is paid for
arranging zero-rated supply, it
should be taxable at a zero rate
and for arranging exempt sup-
ply a commission will be exempt
as was held in the case of C&E
Commissioner Vs Electronic Data
Systems Ltd ((2003) S. T.C 688)
"Service to an exempt main sup-
ply was also exempt", also in the
case of Commissioner General Vs
Skylink Travelers & Tours Ltd
(Case No 5 of 2005) the Tax Rev-
enue Appeals Board held that
the re~pondent company is
exempt from payment of VAT
amounting to Tshs
230,366,425 I=, which was
assessed and demanded by the
Commissioner General from
July, 1998 to December, 2003
because services offered by the
respondent company are
exempt supplies.
However, it is not always
possible to identify the amount
of the commission. For example,
many operators sell ferry trans-
port as agents and include the
ferry in the package price. How
much is the commission in this
case? In the case of the Airlines
Industry, to what extent the
Commissioner will be able to
identify the commissions during
the Control-verification process,
especially when agents are
engaged in multiple agreements
and earn commissions that
vary?
Furthermore, exempt servic-
es should be stipulated under
the Second Schedule of the VAT
Act, 1997 the case which does
not exist on the part of the Air-
lines Agents. The Commissioner
General however appealed
against the decision of the Board
to the Tax Revenue Appeals Tri-
bunal on the ground that the
services offered by the company
are not zero rated and are not
exempt supplies. He pointed out
that for the company to be zero
rated there must be proof to the
satisfaction of the Commissioner
in line with the First Schedule of
the VAT Act, 1997, that the com-
pany was not exporting any
services as it has no role of
exporting passengers on foreign
bound aircrafts. In addition to
that, he said that the transport of
passengers is done by the air-
lines and that the respondent
company is just a facilitator to
the Airlines or Carrier and that it
does not do the actual transport-
ing .of the passengers and servic-
NBAA Students Newsletter (October - December 2007)
es rendered by the company
have not been stipulated under
the Second Schedule of the VAT
Act~ 1997. For this reason, he
said its services are not exempt
from VAT.
The Tax Revenue Appeals
Tribunal quashed the Tax Rev-
enue Appeals Board's decision.
It held that the services which
were supplied and are being
supplied by the respondent
company i.e. issuing of tickets to
travelers are neither zero rated
nor exempt. Its services ar~ sub-
ject to VAT.
The complexities of the air-
lines industry to comply with
the VAT Act, 1997 when they
deal with both exempt and tax-
able supply can be heeded by
using methods of apportion-
ment of input and output tax, as
stipulated under the VAT Regu-
lations 8 and 14 alternatively. It
is important to make sure that a
recipient of the service in this
case Airlines Operators, do not
recover input tax before agents.
accounts for output tax. The
period between the time when
the input tax is recovered and
the output tax is accounted for is
greater .than would otherwise be
the case because this will mean
VAT avoidance.
It is an extensively complex
issue where the Airlines indus-
try is commonly engaged in the
transportation of passengers
and cargo that involve more
than one carrier, including carri-
ers not normally operating in
Tanzania, hence creating fears
for Airlines Operators to remit
VAT or even Income tax to Rev-
enue Authorities.
In the case of Air Canada Vs
Commissioner of Internal Revenue
in which taxability in the Philip-
pines was examined, the defini-
tion for Gross billings has been
stipulated by referring to sec-
tion 28A (3) (a) of the 1997 Tax
Code that covers the gross rev-
I
 NBAA Students Newsletter (October - December 2007)
emie derived from the carriage
of persons, excess baggage,
cargo and mail originating from
the Philippines in a continuous
and uninterrupted flight, the
irrespective of the place or sale
or issue and place of payment of
the ticket or passage document.
To originate would mean to
cause the beginning of; to start
(a person or thing) on a course
or journey; to begin, start (Web-
ster's Third New International
Dictionary). In other words, the
flight carrying the passengers
must have originated or started
from the Philippines.
There is a vicious arrange-
ment in the agency scope where-
by customer-based shopping
cannot clearly be identified. Is
the traveler a customer of an
agent or airlines operator? Does
a traveler's choice of aircraft rel
I on quality of services rendered
by the agents or reputation and
quality of the airlines? One xpay
say, because travel agents acl\as
intermediaries in the name and
for the account of the travelers,
traveler at such juncture is a cus-
,11 1 tomer of the Airlines Operators,
hence VAT should not apply in
whatsoever case. On the con-
trary, another scholar may say,
VAT should not apply on the
part of the Airlines Operators
but as long as commissions are
received by the Agents and a
traveler collects' tickets outright
' from,11:he' agents, VAT should
apply on commissions earned
and the passenger will be
deemed to be the customer of
the Airlines Operators.
Many Operators sell through
travel Agents. The Agents,
charge the operators commis-
sion and deduct their commis-
sion from the amounts they
remit to Operators. Without self-
billing, the normal system
would be for Agents to send
Operators a VAT invoice but
under self-billing it is operator
f
who should raise the VAT-
invoice and send it to the agent.
The OJ?erator paperwork is sim-
plified and they get the output
tax deduction sooner than they
might otherwise. The travel
Agent is liable to account for the
tax shown on the self-billing
invoice (output tax). This is not
the case applicable in Tanzania
and other countries using con-
sumption type VAT, because
Operators do not charge VAT
(input tax) on commission by
Agents. This may probably be
due to the difficulties in the tax
administration or laxity of not
being aware of taxability.
Non-taxability of commission
may open the Pandora's box to
other industries providing serv-
ices in the same nature of trans-
actions. For example, the Min-
istry of Finance pursued the pol-
icy options to exempt VAT on
commissions to Insurance Bro-
kers. This has caused pressure
fr9m the Airlines Agents to
request exemptions, demanding
for the fairness principle of taxa-
tion. The Ministry later via the
Tanzania Revenue Authority
decided to deregister such busi-
ness.
Nevertheless, in order to jus-
tify taxability it is important to
check the annual calculation by
reconciling the Airlines accounts
(Gross Profit in the Income
Statement) and travel Agents
commission, if a comm1ss10n
has been deducted in arriving at
a gross profit (see also in Devra
L. Golbe, 1986). If room is pre-
served for the Airlines Opera-
tors to reclaim input tax on com-
mission, then there is an obliga-
tion for the Agent to account for
an output tax from the passen-
ger who is a recipient of the tick-
et. This case does not prevail in
Tanzania because from the out-
set, VAT chain is broken at the
Airlines Operators' level.
Regional Taxability Impact of
Multinational Transactions
The international transactions
performed by the travel Agent
in respect of a journey relating to
international trips, should be
treated as a 'Single Service" sup-
plied by the travel Agents to the
traveler. This is domestically
taxable in the State in which the
travel Agent has established its
business or has a fixed base or
Permanent establishment. In the
case of income tax for instance,
the taxable amount is the profit
margin realized by the travel
Agent as was held in the case of
Commissioner of Internal 3Revenue
Vs American Airlines Inc that for-
eign airlines which sold tickets
in the Philippines through their
local agents, whether called liai-
son offices, agencies or branch-
es, were considered resident for-
eign 4corporations engaged in
trade or business in the country
hence subject to tax.
In the case of VAT, a taxable
amount is the invoice value on
the supply of a travel package
and the price exclusive of VAT in
respect of such services. The
margin realized is the difference
between the total amount to be
paid by the traveler exclusive of
VAT and the actual cost to the
travel Agent of supplies and
services provided by other tax-
able persons, where these trans-
actions are for the direct benefit
of the traveler. This also is in line
with the Sixth VAT Directives
under EU.
The chargeability of VAT on
commission leads to differing
application within EAC and
SADC States, a situation which
is not compatible with the prop-
er functioning of the internal
market within the Region(s) and
which distorts competition
between Agents as the case may
be, Airlines Operators. In that
regard, it may be possible for the
major Operators or Agents to set
up branches in countries where
commission is not VATable and
supply travel packages even to

third country's branches where
commission is VATable in ord~r
to avoid taxation. This may
erode market power of smaller
travel agents who do not dis-
pose of the necessary resources
to set up similar operations.
The VAT avoidance will be
made when the Airlines Opera-
tors or travel Agents do not bear
VAT when they otherwise
would or bear less VAT or bear
later than would otherwise be
the case or they obtain a VAT
credit when they would not oth-
erwise do so, or obtain a larger
VAT credit or obtain a VAT cred-
it earlier than would otherwise
be the case, especially when the
transactions originate from the
branch where taxability of com-
mission does not exist or there is
a lower rate of VAT.
It is a widely held view that,
commission does not constitute
consideration between a traveler
(hereinafter referred to as cus-
tomer of airlines operators) and
travel Agents. The commission
is actually a selling price of the
service rendered or performed
in respect of the tickets issued to
travelers. It is the selling price
exclusive of VAT because Airline
Operators are VAT exempt as
the case may be, for passengers'
tickets should be zero rated.
It should be noted that, Zero
rating means taxing goods or
services at a rate of 0% and not
exempting goods or services
from Standard rate of 20% . The
VAT Act, 1992 Statute No. 8 of
1992 in section 25 (c), Third
Schedule to that Act, Item l(d),
later in the VAT amendment Act,
2002, supports this argument as
it provides that "the supply of
international transport of goods
or passengers and tickets 5for
' All the EAC Member States have a VAT introduced in early 1990s while EU members have a VAT since early 1970s. The EU requires; 1)
close harmonization of the VAT base (the "Sixth Directive" specifies many details of how VAT should operate ) and 2) some limited harmoniza-
tion of VAT rates ( a floor to the standard rate and restrictions on the use of low rates and zero rating
'Mafwenga Mpoki (2006)-"Let us be eagles fly as eagles rather than creating association of Ducks and Eagles that cannot enable us to fly like
Eagles" EACLA Contesting Maxim tabled before the Parliament of the United Republic of Tanzania regarding Principle of Asymmetry
their transportation are zero-
rated". The VAT Act, 1997 of
Tanzania is silent of this fact.
In that regard, any local serv-
ices relating to the transporting
passengers locally, should be
taxable at a standard rate of 20%
and when those services are
exempt from VAT, the commis-
sion earned by agents should
also be exempt though the Com-
missioner may decide to tax
such commission if he thinks it
is simple and the sector is rea-
sonably buoyant. This was held
by the Tax Revenue Appeals Tri-
bunal in the case of Commission-
er General Vs Skylink Travelers &
Tours Ltd (case No 5 of 2005) that
"before considering the major
issue between the parties, we
wish to make it clear that the
question of zero rating and
exemption under the VAT Act,
No 24 of 1997 relates to supply
of goods or seruices by a taxable
person which is zero rated and
which is exempt but it does not
relate to liability of a taxable
person to pay VAT or exemption
of such person from payment of
VAT" A. Shangwa J, D. Kinabo
and N. Mbise (2006).
What if the VAT Act, 1997
does not stipulate zero-rating for
the international travel supply
alike Uganda, Kenya, and Zam-
bia? In that regard, it would be
noble to decide not to tax as long
as commission has not been nar-
rated for taxability and there is
no exclusion to the rule else-
where in the law. However, the
VAT Acts, of the other States will
not be the base for taxability or
exemption to other States,
because VAT Acts are useful
domestically.
What if Airlines Operators
are given rights to deduct input
NBAA Students Newsletter (October - December 2007)
tax on commission at the same
time be exempt from VAT and
their services rendered exempt
from VAT? The refund process
will be complex and nebulous
because Airline Operators will
not qualify for registration.
However, if Airline Operators
have been registered, a rational
decision would be to deregister
such industry.
Nevertheless, as a measure
for harmonization of VATability
within the Region, the State Par-
ties 6should give consideration
to entering into bilateral agree-
ments with each other, based on
a Regional Model Tax Agree-
ments in order to deal with,
among other things, the
exchange of information on VAT
and to make provision for mutu-
al assistance on matters such as
effective revenue collection and
promotion of aviation industry.
The parties should be entitled
to identify and explore areas of
possible co-ordination and co-
operation in the formulation of
policy and administration of the
VAT. In harmonizing VAT
Regimes the parties within the
Region should set the minimum
standard VAT rates and harmo-
nize overtime the application of
zero-rating and VAT exemption
of Airlines supply of goods and
services.
Suffice it to say that, the State
Parties are entitled to promote
the development of safe, reli-
able, efficient and economically
viable aviation industry by co-
coordinating the flight sched-
ules of their designated airlines,
liberalize the granting of air traf-
fic rights for passengers and
cargo operations, with a view to
increasing efficiency (see also in
March Ivaldi and Catherine
.
_ . .,11!11_ _
NBAA Students Newsletter (October - December 2007)

Vibes 2005) , harmonize civil
aviation rules and regulations
by implementing the provisions
of the Chicago Convention on
International Civil Aviation,
with particular reference to
Annex 9 thereof and establish
the Unified Upper Area Control
System. For sure the includes
among other things, having all
these in question as would likely
harmonize multiple rated VAT
System as the case may be
Exemption Scope in the Region ..
Justification of VATability and
lucome tax analysis
The regression analysis can be
used to explain the relationship
between tax collection from the
Airlines Operators in the Coun-
try and the Gross Domestic
Product which is an explanatory
variable presumed to determine
the buoyancy and value addi-
tion of the AirlinesOperators in
the period from year 2002 to
year 2005. The Ordinary Least
Square in that regard can be
used to explain the variations of
tax collections through the
movements in the GDP in such
four years period. The general
formula to be used is;
fAXP.F.l ) -f1u +P1GDf' ,1+/J1GDP,:+ ...
:t:-L\"iui. fl,. x(j/JJ>"' xCD/'
....... .. ....... (1)
In aggregate lagging the
expression in equation (1) we
have the following expression;
Lng(TAX,"""'' - log fl, + (1, log(GDP) + fl , log(GDP} 11~,, ,
.............. (2)
Taking logarithm in both
sides, the equation (2) becomes
as follows;
.. ....... (3)
Where w .... =Tax revenue col-
lected a t time t,f3,.fl,. etc =Beta
that measures the sensitivity of
Tax revenue to the movements
of Growth Domestic Produ ct
a n d GDP,,,WP,, . e t c = G r o w t h
Domestic Product in year 1, year
2 etc. This analysis must incor-
porate the randomness that can
prevail in the real world by pre-
suming that Tax Revenue is
independent not only on
r;w;,.,;n,;, ........Gn~. but also on the Sto-
chastic i.e random element so
that Tax Revenue is the function
of GDP and error term.
Table 1 provides the output
whereby approximately 12'1,, of
the variation in the Tax revenue
is explained by the regrrssion
model. The results suggest that
the best fitting regression line
computed by the Ordinary Least
Squares approach follows the
following specific in expression
line with equations (1) (2) and
(3) above;
TAX.,. - - - 2.581371897 + 0.35GD P +,
.... ... .... .... ... .... ....... (2)
If however, we were sure that
there only exists a uni-direction-
- ... ,1.r;rw,.+r,
al relationship between GDP
1
11
... ,. ' xGD/',-. / ' -t .fjl)f'., .>I,.. ~' tr
and Taxation we sho:.ild con-
clude that for each percentage
point increase in GDP on aver-
age Tax- paid increases by 0.35
percentage points which repre-
sents also the Beta coefficient.
It is our expe'ctation there-
fore, that there should be value
addition in the income capacity
of the Airline Operators to pay .
income tax after deregistration
from the VAT obligation . As we
can analyze the buoyancv of this
sector to be refh~cted in the GDP,
it is our concern to question why
some of the agents were not dble .
to remit their obligations.
The Commission is an
income which should be added
to the Gross Profi t in order to
arrive at the taxable profits. In
whatsoever case, at any rate the
relinquished VAT would have
been included in the invoice
value forming the total taxable
income over and above the total
income inclusive of VAT that has
been relinguished, because nei-
ther input tax nor output tax
was remitted after deregistra -
tion, thereby preserving room
for the increase in the income tax
collection.
- We can see from the His-
togram in figure 1 that, one
agent was able to remit only
Tshs 386,000 I = income tax for
the period from year 2002 to
year 2005, fourteen agents paid
Tshs 12,145,851/ =, two agents
remitted only Tshs 23,905,702/ =,
three agents paid only Tshs
35,665,553/ = and more than
Tshs 35,665,553/ = were remitted
by only four agents . The Mean
was 78542.96694 with sample
variance of 4065257162 as
reflected in figure 2.
We have seen a clear picture
that some operators are efficient
to remit their dues and some not
but none of them was effective

INCENTIVES
Exempt amount under Income Tax Act, 2004; Section 10 stipulates in the Second-Schedule exempt amount from income tax rental charges
on aircraft lease paid to a non-resident by a person engaged in air transport business
VAT ACT, 1997 Zero-rate the supply which comprise the transport of or any ancillary transport service of or loading, unloading, wharfage,
shore handling , storage , warehousing and handling supplied in connection with goods in trans it through the United Republic of Tan_za nia
whether such services are supplied directly or through an agent to a person who is not a resident of the United Republic of Tanzania
VAT Act, 1997 Zero-rates the supply of services which comprise the handling , parking , pilotage , sa lvage or towage of any foreign going ship
or aircraft while in Mainland Tanzania
VAT Act, 1997 Zero-rates the supply of serviees which comprise the repair, maintenance, insuring, broking, or management of any foreign
going ship or aircraft.
VAT Act, 1997 Exempt Aviation Spirits in the Second Schedule
VAT Act , 1997 exempt Aircraft , Aircraft engines, parts and maintenance and L~ase on aircrafts
 NBAA Students Newsletter (October - December 2007)

Tablel: SUMMARY OF REGRESSION ANALYSIS RESULTS The government therefore, is

FROM YEAR 2002 TO YEAR 2005 (TAX REVENUE Vs GDP)
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Source: As per Author's Calculation s-The Taxability of Commi ssion under Destination-based VAT
as expected by the tax policy.
However, this study has not
gone very far to find out "by how
much" airlines agents differ in
complying with the tax laws
because this is too small to be of
any practical or economic
importance.
In figure 2 we can see that in
the year 2002 Tax revenue to
GDP ratio was encouraging
though there has been a sharp
decrease in the income tax such
decrease has not affected the Tax
Revenue to GDP ratio because
an increase in the GDP has not
been in a faster pace the extent
to which maintained the Tax
entitled to eliminate counterpro-
ductive elements of whatsoever
nature to overall economic com-
0.349076211 petitiveness not only within the
0.121854201 region but also globally (see also
-0.317218698 in Stephen T.Berry 1992). If VAT-
66717779.1 ing CQ,IDIDission on passenger's
4years
ticket ' value would mean
insignificance for revenue effi-
ciency, the Fiscal policy decision
From the year 2004 to year 2005 will be to Shelter the transaction.
there was a sustainable trend Unfortunately, with the excep-
and an encouraging perform- tion of the Railway Transport in
ance for both Tax Revenue to most of the developed and
GDP ratio and the income tax developing Countries, no trans-
paid by the industry. This per- port mode receives the subsidy
formance however, is con- and tax exemptions that are cur-
tributed by few industries as rently granted to Airlines Opera-
FIGURE 1: HISTOGRAM
16
14
12
10
8
6
4
2
O I c:::::v r; i 6:I t,:..;. ' ' &e-;i;q nr:.: t J

Revenue to GDP ratio at a sus- 386000 12145851 23905702 35665553 More

tainable trend. However, there
was a sharp decrease immedi-
ately before the deregistration,
which went in tandem with a
sharp increase in the income tax
paid by the industry showing a
negative correlation between the
income tax and the Tax Revenue
to GDP ratio. After deregistra-
tion in the year 2003 the Tax
Revenue to GDP ratio is conduc-
tively high with sustainable
income tax collection.
Unfortunately, the trend
analysis shows a decrease in the
income tax paid by the industry
immediately after deregistration
in the year 2004, in almost asym-
metrically equal trends with the
income tax paid by th~ inc!ustry.
INCOME TAX PAID I Frequency!
Source: Author's Computati on and Fi scal Survey-Th e Taxability of Commi ssion under Desti-
nation-based VAT
reflected in the Histogram in fig- tors. Indeed, taxing aviation fuel
ure 1. The descriptive statistics and Airlines tickets at the same
show jointly the Measures of level _as land-based transport
Central Tendency, Standard and internalizing the costs of the
Deviation, Kurtosis and other impacts of aviation on public
parametric results which gener- health, air pollution and climate
ally show insignificance taxono- change into prices would help to
my. correct the extraordinary growth
in air passengers' numbers.
Conclusion Definitely the biggest priority
It is a widely held view that, Air- is fiscal harmonization. It is per-
port capacity is a bottleneck in tinent to harmonize the VAT
the growing aviation industry rates and taxability of whatsoev-
(see also in European Federation er nature for intermodal trans-
for Transport and Environ- port services at a zero rate or
~ent(T&E) November, 2005) . exemp_tion scope. One may say

1 Types of Corporate tax system classified according to how they relate to personal income tax are;
1 Classical where no relief for distributed profits at either company or shareholder level, tax liability of company comp letely independent
of that of its shareholders , distributed profits taxed twice and once through corporate tax, once as income of shareholder
2 Imputation where shareholder receives credit for tax paid by company and "fu ll imputation" means all the domestic corporation tax is

-~-
credited to shareholder
Split-rate where corporate tax levied at lower rate on distributed profits and provides some relief for double taxation at the company level
 NBAA Students Newsletter (October - December 2007)

all transport services, regardless
of whether they are domestic,
international, intermodal or not,
should pay VAT so that there is a
level playing field in the entire
transport market That is true
when thinking of Fairness Prin-
ciples of Taxation.
However, we must reach at
the point where some industries
should be considered cast-apart
have been scheduled, any Based on these analysis we
income , earned by facilitators, are of the confidence to argue
liaisons, or agents from the gains that the government took noble
realized by the industry should measures to deregister Airlines
be taxable under VAT Act, only agents from paying VAT on
if it is simple to administer, there com mission.
is no cascading effects and it is H owever, there is no strong
significant in the Budget. enforcement mechanisms on the
FIGURE 2: INCOME TAX TO GDP RATIO

from the others due to differ-

ences in operations, environ- 200.CXX>.cm 200000
100,000,000 t 174,396,072
180000
mental risks, infrastructural dif- 1roCXXJ.cm
..173830 7033
~4tl 489.132 r 160000
1JOOO
ferential, financial capacity etc. 14:J.CXX>,CXXl
1al.CXX>,OOJ
T ........ 131,306.522
120000
Limitations to such special treat- 100CXXJJ:X:Xl 100000
00.000,000 80000
ment must be legally instituted,
~ +
t
00000,000 52547 99337 48342 7'.l526

especially when the issue of rev- 4JCXX>,CXXJ :Jl.532,717 - 60000

JOO()
39450 42932
~J.CXX>,COJ 20000
enue adequacy comes into 0

being, whereby if 2
BASE Y EAR{ 2002-2006 J

exemptions or zero-rating

Reference:
Devra L. Golbe; "Safety and Profits in the Airline Industry" Journal of Industrial Economics, March, 1986 pp
I 305-3018.
,i 111
I East African Community (EAC) -EAC Secretariat, "The Treaty for the Establishment of the East African
Community", 7th July, 2000.
European Federation for Transport and Environment(T&Et "Airport Capacity, Efficiency and Safety zn
Europe" position paper-November, 2005.
House of Lords "Air traffic Emissions Reduction Bill (HL)"- Hansard Report -16th January, 2004.
Mafwenga Mpoki H. "The Historical Perspective of VAT Concessions regime in Tanzania," July 2005.
II
March Ivaldi and Catherine Vibes Intermodal and intramodal Competition in the Long-Haul passenger Trans-
port market, March, 2005.
Stephen T.Berry "Estimation of a Model of entry in the Airline Industry" - Econometrica Vol 60, No 4 (July
1992).
The National Assembly of the United Republic of Tanzania, The Value Added Tax Act, No 24 of 1997.
The National Assembly of the United Republic of Tanzania, The Income Tax Act, No 11 of 2004.

"Airlines Travel Agents captured in the study

Missionary Spirit Travel Ltd . World Ai r Travel and Tours Ltd , Harrison Travel Ltd, Mis Dolphin Car Rentals Ltd Coopers&Kearsley Ltd , Mis Fourways Travel Services
Ltd , Mis Serengeti Services &Tours Ltd, Masumin Tours &Safaris Ltd, Mrs. Mona Ajay Dass. Cordial Tours &Services Ltd , Easy Travel &Tours (T) Ltd, Hit Holiday
Travel &Tours Ltd , Jumbo Travel Services Ltd , Keasley Tanzania Ltd, Leisure Tours &Holiday Ltd, Skyes Travel Agents Ltd, Takims Holidays Tours, &Safari Ltd, The
Rickshaw Travels Ltd, Walji's Travel Bureau Ltd, ABC Travel &Tours Ltd , Emslies Travel Ltd , Antelope Travel Safaris Ltd, Worldlink Travel & Tours Ltd, MGM Travel
&Tours Ltd

... 1 MiW
 NBAA Students Newsletter (October - December 2007)

income tax compliance th ou gh the sector might be buoyant.

Note 1: Results of Descriptive Statistics as reflected in t he Histog ram

and Income Tax to GDP ratio (Figure 1 and Figure 2 respectively) for the
period f rom 2002 to 2005 being year 1, 2, 3, and 4 respectively,

Mean 78542.96694
Standard Error 31879.6846
Median 50445.36731
Mode #N/A
Standard Deviation 63759.36921
Sample Variance 4065257162
Kurtosis 3.859354032
Skewness 1.955612089
Range ~
134380.2735
Minimum 39450 .42982
Maximum 173830. 7033
Sum 314171.8678
Count 4

Source: Author's Fiscal Survey-The Taxability of Commission under Destination-based VAT

:..-2-- --;:::=..

ACCOUNTANT JOKES
2. On a sunny afternoon three accountants are s.tanding near a tall pole and wondering about the height
of the pole. First accountant, a CPA says, I do not think there is any authoritative guidance on how
measure the height of a pole, that is not the job of accountants. Second accountant, a professor at a
state university says, well, if we take a survey of similar locations and asked people about the height
of poles, then we may be able to deduce height of this pole, it will be a good enough estimate.

The third accountant is a professor at an Ivy league university. He confidently claims, if we measure
the shadow of the pole under different Gonditions, then I can run a multivariate regression model and
can give a very good estimate of the height: As this conservation is going on, an engineer is passing
by, he stops and asks about their discussion. Accountants 'tell him, you probably can not understand
; this complex problem. The engineer persisti and hears about the problem. He smiles, lifts the pole from
the base, measures it, and says, "twelve feet and three inches," and walks off. Accountants look at him,
laugh contemptuously and say in unison - "hell, we wanted to know the height of the pole and he tells
.us the length."

'....:1