The “Commission” Trap
In the case of VFSL (Pvt) Ltd & 3 Ors v Zimbabwe Revenue Authority (2019), several prominent tour operators in Victoria Falls challenged ZIMRA regarding VAT assessments on their “activity desk sales.”
The operators argued that when they booked a bungee jump or a safari for a tourist with a “kindred operator” (a third party), the margin they kept was a “booking fee” or “guest revenue.” ZIMRA argued it was a taxable commission. The High Court ruled in favor of ZIMRA, creating a significant tax liability for the industry.
1. The Core Dispute: Agency vs. Principal
The Industry Practice (The Business View)
Tour operators often act as a one-stop shop. If a tourist stays at Lodge A but wants to go rafting with Company B, Lodge A handles the booking.
- The Pricing: The tourist pays the “Rack Rate” (e.g., $100).
- The Split: Lodge A pays Company B the “Net Rate” (e.g., $80) and keeps $20.
- The Argument: The operators claimed this $20 was just part of an integrated holiday package and since the service was provided to a foreign tourist, it should be “Zero-Rated” (0% VAT).
The Legal Reality (ZIMRA’s View)
ZIMRA looked at the relationship between the two local companies.
- The Service: Lodge A provided a “referral” or “sourcing” service to Company B.
- The Payment: The $20 retained by Lodge A was essentially a commission paid by Company B for finding them a customer.
- The Tax: Since both companies are in Zimbabwe, this “referral service” is a local supply of services and must attract 15% VAT.
2. Key Business Takeaways & Lessons
Lesson 1: Form Matters as Much as Substance (The Procedural Death)
The case actually failed on a technicality before it even reached the merits. The operators objected to “schedules” sent by ZIMRA auditors rather than waiting for formal “Notices of Assessment.”
- Business Takeaway: In tax disputes, follow the manual exactly. If the law says you must object to a “Notice,” do not object to a “Letter” or a “Spreadsheet.” An informal objection is a legally void objection, which can kill your appeal before it starts.
Lesson 2: “Industry Standards” Don’t Overrule Tax Law
The appellants argued that their pricing model was a “worldwide tourism industry convention.” The court was unimpressed.
- Business Takeaway: Just because “everyone in the industry does it this way” doesn’t mean ZIMRA agrees. If your industry uses “Net” and “Rack” rates, ensure your tax structure accounts for the “margin” as a taxable commission unless you have a specific private ruling from the Commissioner.
Lesson 3: The Danger of “Hidden” Commissions
The court found that the tourists didn’t even know the operators were keeping a margin. This reinforced the idea that the service was being provided to the kindred operator (the activity provider) and not the tourist.
- Business Takeaway: If you are receiving a discount from a supplier and charging the customer full price, that “discount” is likely viewed as a commission for your services to the supplier. This is vatable at the standard rate.
Lesson 4: Zero-Rating is Narrowly Defined
The operators thought that because the tourist was a foreigner, the whole transaction was zero-rated. The court clarified that the “referral service” between two local companies is a separate transaction from the “activity” provided to the tourist.
- Business Takeaway: Don’t assume an export or tourist exemption covers your B2B (business-to-business) commissions.
3. Explaining the Case in Layman’s Terms
Imagine you are a Wedding Planner.
- A bride pays you $1,000 for a cake.
- You go to a baker, who gives you the cake for $800 because you bring them a lot of business.
- You keep the $200 difference as your “management fee.”
The Business Logic: You think, “The bride paid for the cake, and she’s the one getting the service. I just facilitated it.”
ZIMRA’s Logic: “The Baker paid you $200 to find them a customer. You provided a ‘marketing service’ to the Baker. Since you and the Baker are both in the same country, you must pay VAT on that $200.”
In the VFSL case, the “Wedding Planners” were the Victoria Falls tour operators, and the “Bakers” were the companies providing helicopter rides and safaris. The court ruled that the “management fee” ($200) was a taxable commission.
4. Summary for Business Owners
| Risk Area | What the Case Taught Us |
| B2B Margins | If you retain a portion of a payment intended for another supplier, ZIMRA will likely label it “Commission” and demand 15% VAT. |
| Foreign Tourists | Just because the end-user is a foreigner doesn’t mean your internal local commissions are tax-free. |
| Legal Objections | Never skip procedural steps. If ZIMRA sends an informal letter, ask for a formal “Notice of Assessment” before filing your official objection. |
| Record Keeping | The court looked closely at how these were recorded in books—labeling them “Agency Sales” in internal emails proved fatal to the “Booking Fee” argument. |
The Final Verdict
The court upheld ZIMRA’s right to tax these margins but did offer one small olive branch: The penalties were reduced from 100% to 20%. This was because the operators weren’t trying to hide the money—they genuinely (but wrongly) believed the industry practice was tax-exempt.
Final Advice: Review your agency agreements. If you are keeping a “margin” on third-party services, you should likely be charging and remitting VAT on that margin to avoid a massive future audit bill.
