Chapter 4: Tourism Business Environment
Several points underlie the positive nature of the tourism industry in South Africa and in KwaZulu-Natal in particular:
- Full international recognition offers opportunities for growth
- Stimulatory government policies encourage industry development
- Developed legal system allows for flexibility in choice of business entity within the industry
4.1 Climate of the Industry
During the 1980s South Africa was subjected to international economic sanctions due to its political policies. This severely restricted foreign investment in the country and economic growth was hampered severely as a direct consequence of these restrictions. Since 1994, however, and the election of a fully representative government, South Africa has gained full international recognition with the result that it is now able to trade freely with the world and receive foreign investment. Rapid and sustained growth in GDP and in per capita income appear to be a reality. Such growth would lead to the development of stronger local markets and a stronger local tourism industry. Limiting factors are the shortage of development capital and both the perception and reality of the prevailing high crime rate, as well as of issues of health and grime. South Africa has a sophisticated, modern economy based primarily on primary and secondary industry, but the service sector is growing rapidly. Industrial development has centred around the largest cities, mainly Johannesburg, Durban and Cape Town. Besides the efficient and well developed infrastructure allowing rapid communication and transport, the financial and commercial sectors are also well developed. Professional services such as banking, accounting, financial and legal services are highly sophisticated and on par with those on offer in other parts of the developed world. Free enterprise has increased in recent years due to the conversion of several large state- controlled corporations to fully corporate organisations. These include the South African Coal Oil and Gas Corporation (SASOL) and the Iron and Steel Corporation (ISCOR). Privatisation of certain state-controlled corporations is set to continue.
4.2 Framework of the Tourism Industry
Manufacturing, mining and major service industries are dominated by public listed corporations, although closely held companies and family enterprises are also common. The tourism industry is largely dominated by private organisations and a few public listed companies such as Kersaf and Leisurenet. Within each sector certain companies hold significant interests.
The tourism industry can be usefully divided into the following sectors:
Car Rental Operators
Vacation Villages/Sports Villages
Static & Touring
State or Provincial Government
TOURISM /NATURAL RESOURCES
DESTINATION PROMOTION & MARKETING SECTOR
National Tourist Offices
Regional State Tourist Offices
Local Tourist Offices
TRAVEL ORGANISERS SECTOR
Retail Travel agents
Incentive Travel Organisers
Each of these sectors has its major role players. The accommodation sector is dominated by several large chains of hotels. These include Protea Hotels, Holiday Inn, Karos and City Lodge. Outside of the company-owned hotels, a plethora of privately owned hotels and other types of accommodation - bed and breakfasts, guest houses, holiday homes - existS, and the number grows daily.
The National Parks Board and KZN Wildlife offer considerable amounts of accommodation in terms of both variety of types and of bed numbers.
The privately-run Conservation Corporation Africa also plays an important role in the accommodation sector.
In the transport sector, the car hire firms are dominated by several large chains - Budget, Imperial, Hertz, Avis - but there are over 30 other car hire firms. Coach transport companies include Greyhound, Springbok-Atlas, Intercity Coaches and there are also many privately owned fleets. There are also firms which hire out combi- campers, 4x4 vehicles, caravans, mobile homes and other specialised vehicles.
Besides the national carrier, South African Airways, and the array of smaller local airlines, most airports hire out small planes and helicopters.
There is no national cruise line although South Africa does act as an agent for several lines. Smaller craft are available for hire in most of the harbours.
In the food and beverage sector, catering companies such as Kagiso, Kulani and Leisurenet represent the larger firms. Many smaller, privately run profitable concerns also exist.
4.3 Government Policy and the RDP
The Reconstruction and Development Programme (RDP), mentioned briefly in Chapter 2, was overtaken by GEAR. As regards the tourism industry the government’s standpoint is that a process of transformation must take place in view of the distortions created by past history. In this process of restructuring the industry a vast potential could be realised, both in terms of the local mass market, and in terms of increased foreign exchange. The result would be the creation of a large number of jobs in both tourism and allied industries. For this to occur, sound planning is needed, based on thorough research and consultation. The promotion of ecotourism and of South Africa’s cultural and political heritage is a priority. There is an emphasis on community involvement and partnerships with emerging black firms in the industry. Tourism is required to be integrated into provincial and local-level development programmes. As tourism could be a major industry, it should receive greater priority and support at national and provincial levels (The RDP, 1994). Government policy is directed towards stimulating economic growth, particularly in rural areas, so as to absorb the rapidly growing population, reduce the black/white wage gap, and contain inflation. Despite previously high inflation rates, a present rate of between 10% and 11% exists. The government encourages foreign investment, actively identifying international business possibilities. The form of such foreign investment is largely unrestricted.
4.3.1 Labour-Management Relations
Although there is an abundant supply of unskilled and semi- skilled labour, skilled and managerial personnel are in short supply in all areas and sectors of the industry. Staff training and service skills development remain high on the list of priorities for the tourism industry.
In line with government policy regarding foreign investment, some development assistance incentives exist to attract international investors. Tax incentives include: âh Tax write-offs in the form of annual depreciation allowances âh Exported goods are zero-rated in terms of value-added tax (VAT) and a full input credit is granted on the acquisition of capital and intermediate goods âh Income tax for companies as well as individuals is only imposed on South African income sources. Remuneration for services abroad or income generated outside the country are exempt from South African tax. Regional and local incentives also exist, mainly in the form of tax-free cash payments, and only in certain circumstances. These include establishment grants, output incentives and relocation grants of up to R1 million. Incentives are also offered to new small businesses - small, medium and micro enterprises (SMMEs) and help is frequently obtained from Business Partners (formerly the Small Business Development Corporation or SBDC) and from Business Advice Centres countrywide.
The funding of tourism enterprises is dependent upon a wide variety of factors and perhaps even a wider variety of options. Recently the Industrial Development Corporation (IDC) produced a set of outlines for their funding schemes. According to them, the development of the South African tourism industry holds major benefits for economic progress, job creation and foreign exchange earnings. From this basis they support the tourism industry through providing finance for the development, improvement and/or expansion of tourist facilities, the development of new accommodation facilities and a variety of other capital intensive tourism projects.
The IDC has two specific financing schemes - one for General Tourism and one for Ecotourism - aimed at developments in conservation areas and also in private game parks or reserves. The scheme is aimed at the provision of additional accommodation and, in some cases, the financing of related infrastructure. Such financing will not generally be considered for the acquisition of land by private sector applicants, conservation authorities could be considered. Private game parks and nature reserves are required to have their management plans approved by the relevant conservation authority (IDC, 2001; www.idc.co.za/eco/intro.html).
The IDC's general Tourism Scheme aims at providing financing to institutions offering accommodation to tourists and other capital intensive tourism projects that have the potential to affect the growth of the tourism industry, requiring medium to long term financing.
The IDC also provides information on the creation of business plans, loan application procedures, and how income statements and balance sheets should be constructed.
The IDC’s ecotourism scheme also provides financing for the development of new projects as well as the expansion and improvement of existing facilities. It is primarily aimed at the provision of additional accommodation but the financing of related infrastructure will also be considered. Financing for the acquisition of land by private sector applicants is not usually considered although conservation authorities could be assisted, and funding for the acquisition of game will not be considered. Owners, members or shareholders should, in the case of these developments, finance at least 40% of total assets.
Finance for either of these schemes will be considered only on a project-by-project basis, but the maximum IDC funding per project is not limited.
The Ithala Development Finance Corporation, recently Ithala Bank, also provides finding for tourism development projects. Such finding is frequently available on special terms and with special conditions beneficial to tourism development.
Where the tourism project has a community development aspect, funding is often considered and provided by the KwaZulu-Natal Tourism Authority, the Regional Councils and sometimes, where appropriate, by the provincial and even national departments.
A comprehensive system of direct and indirect taxation is in place: A comprehensive system of direct and indirect taxation is in place: âh Company income tax on net income at 30% âh Secondary tax of 12,5% imposed on companies distributing dividends âh Small business tax is 15% âh Capital gains tax has recently come into being and is 25% for amounts over the first R10 000 âh Value-added tax system in operation - 14%
4.4.1 Income Tax - Companies
188.8.131.52 Companies and Shareholders
Corporate taxable income is subject to normal tax in the hands of the company without any deduction for dividends declared or distributed. Companies are liable to a secondary tax on dividends distributed. Dividends received are exempt from tax. Dividends distributed to shareholders with a foreign address are not subject to withholding tax. Small Business Corporations are liable for 15% tax on income up to R100 000 and taxable income in excess of R100 000 is liable for 30% tax.
184.108.40.206 Taxable Entities
The corporate tax system applies to all associations (other than partnerships), corporations and companies incorporated in South Africa and to similar bodies incorporated outside South Africa that carry on business or have an office or place of business in South Africa and derive income from any source within or deemed to be within South Africa.
220.127.116.11 Source of Income
Under the definition of gross income, only income that arises from a source within or deemed to be within South Africa is taxable. Actual or real source is a concept that has been developed in court decisions. It has been held to refer to the originating cause of the income which has to be identified at a separate enquiry before determining its geographical location. Deemed sources are listed in the Income tax Act. South Africans are taxed on their world-wide income as from 1 January 2001.
18.104.22.168 Gross Income
Gross income is defined as the total amount, in cash or otherwise, received by or accrued to any person (including a company) from a source within or deemed to be within South Africa, excluding items of a capital nature but including certain specified items, whether they are of a capital nature or not. This presently includes income to South Africans from any sources world-wide.
22.214.171.124 Non-taxable Income
Exempt income includes the following:
âh Dividends âh Income from certain specified investments âh Interest receivable provided the investor in a non- resident company or individual that does not carry on business in South Africa and, in the case of an individual, is absent from South Africa for 183 days during the year of assessment. âh The proceeds of the sale of gold bullion or shares acquired with external funds by arrangement with the Treasury where a guarantee of exemption from tax has been provided with the approval of the Minister of Finance. âh Regional industrial development incentives.
126.96.36.199 Tax Rates
Rates of tax are fixed annually for years of assessment ending during the twelve months to March 31 of the following year. The present rates of tax are as follows: âh For companies other than mining and insurance companies - 30% âh Secondary tax on the net amount of dividends distributed - 12,5% Tax rates for branches of foreign companies are as follows: âh Normal tax on branch income - 35% âh Secondary tax on dividends declared on or after 13 March 1996 - no tax is payable
188.8.131.52 Tax Credits
Where income that is deemed to arise from a source within South Africa has been subject to a foreign tax, a credit will be available to the lesser of the foreign tax payable or the South African tax liability attributable to the income in question.
Group tax returns are not acceptable, and group tax relief allowances are not available.
4.4.2 Income Tax - Individuals
184.108.40.206 Territoriality and Residence
Individuals are subject to tax in respect of income arising from sources world-wide, and are entitled to claim any permissible deductions in calculating taxable income and any rebates (personal credits) in determining the amount of tax payable. More recently, with the relaxing of exchange controls, South Africans are entitled to invest up to R750 000 off-shore. Income on this amount is taxable.
220.127.116.11 Taxation of Spouses
There is a separate taxation of spouses, which is a departure from the earlier joint taxation system. Income earned by a woman independently of her husband is taxed separately.
18.104.22.168 Gross Income
As in the case of companies, gross income includes all amounts not of a capital nature from sources within or deemed to be within South Africa during a year of assessment.
22.214.171.124 Double Tax Relief
Individuals qualify for a credit for double tax on the same conditions as companies.
126.96.36.199 Tax Rates
Tax rates and personal allowances are generally announced in the annual budget speech in March and apply for the period from March 1 to the end of February the following year. The current top marginal rate is 40%, payable on an annual taxable income of R255 000 or above.
4.4.3 Other Taxes - Individuals
188.8.131.52 Wealth Tax
Wealth, or capital gains tax was implemented recently. This tax is payable by individuals upon disposal of their assets held world-wide. Individuals, special trusts and insurers’ individual policyholder funds pay 25% after the first R10 000 while other tax payers pay 50%. An amount of R50 000 is also exempt from individual tax in the year of death.
184.108.40.206 Donations (Gift) Tax
Donations tax at a flat rate of 20% is payable on all taxable donations made from March 14, 1996. Important exemptions include the following:
Donations between spouses.
Donations under and in pursuance of a trust.
Donations of a charitable, educational or religious nature or to any institution for the advancement of art or science.
Donations of certain property situated outside South Africa, usually where the property has been acquired from a source outside South Africa.
Donations which do not exceed an aggregate value of R35 000 per year.
220.127.116.11 Estate Duty (Inheritance tax)
Under the current law, estate duty is payable at a flat rate of 20% on the taxable value of the estate of any person dying on or after March 16, 1988. A basic deduction of the first R1 500 000 of the taxable value of the estate is allowed.
Persons who were not ordinarily resident in South Africa at the date of death are only subject to estate duty on property within South Africa.
4.4.4 Tax Treaties
South Africa's tax treaties can be divided into two categories:
those that are comprehensive and deal with all taxes on income; and
those limited to income arising from the business of sea and air transport.
The latter category generally determines that each contracting state may not tax residents of the other state on such income. As it concludes trade arrangements with a greater number of nations, the country's net of tax treaties is broadening.
18.104.22.168 Relationship to Domestic Law
Treaties are specifically incorporated in the Income Tax Act. A treaty may not authorise any additional tax. It may only provide relief from South African tax. A treaty will only retain its legal effect as long as sit is being honoured by the other country.
22.214.171.124 Withholding Taxes
Withholding taxes are levied on royalties at 12%.
In respect of dividends, withholding tax does not apply with effect form October 1, 1995. In respect of royalties, the obligation of the payer to withhold tax may be relieved by the Commissioner if he is satisfied that arrangements have been made to pay any tax due thereon by other means.
126.96.36.199 Permanent Establishment
A permanent establishment is usually defined, on the lines of the OECD model treaty, as a fixed place at, or through, which business is carried on. The definition is expanded by specific inclusions and exclusions.
188.8.131.52 Personal Services
In the absence of a tax treaty, all income earned for personal services performed in South Africa is attributable to a South African source and subject to tax.
The treatment of personal service income in the treaties varies. Some have a 183-day rule, others provide for taxation in the country where the services are performed, irrespective of the country of residence.
184.108.40.206 Elimination of Double Taxation
As a result of the source principle, income arising outside South Africa is not taxable unless it is caught by one of the deemed-source provisions.
220.127.116.11 Anti-abuse Provisions
There are no specific anti-abuse provisions apart from the normal provision limiting treaty protection where interest payable between related parties is fixed at n excessive rate, and the provision enabling either state to readjust the profits of related enterprises or persons where conditions affecting their commercial or financial dealings differ from those which would apply in an arm s- length relationship.
18.104.22.168 Exchange of Information
Most treaties provide for the exchange of information as far as is necessary to carry out the provisions of the treaty and to prevent the avoidance of tax.
4.4.5 Indirect Taxes
22.214.171.124 Value-added Tax
Value added tax is a tax on the value added by each registered vendor in the production/distribution chain and is imposed each time a taxable supply of goods or services takes place. The VAT legislation requires each registered vendor in the production/distribution chain to account for VAT on the value added by him. This tax presently stands at 14%.
VAT is a multi-stage tax that avoids tax cascading. VAT is payable each time a taxable supply takes place, and registered vendors are therefore required to bear VAT on purchases of goods or services from other registered vendors.
However, the VAT paid by a registered vendor is recoverable form Revenue as an input tax. The VAT to be accounted for by the supplier on taxable sales made by him is referred to in the Act as an output tax. The Act provides that a vendor is entitled to deduct from the sum of the amounts of output tax for which he is liable to Revenue in relation to a specified tax period, the sum of the amounts of input tax incurred by him during the same tax period.
The excess of input tax paid by a vendor over output tax or a specified period is recoverable from the Revenue authorities. The net effect of this is that registered vendors do not in fact bear any VAT unless they make exempt supplies or are denied input tax incurred.
126.96.36.199 Stamp and Transfer Taxes
188.8.131.52.1 Stamp Tax
Most legal documents and agreements executed in South Africa are subject to stamp duty.
184.108.40.206.2 Transfer Tax
Transfers of immovable property are subject to transfer tax administered by the Commissioner for Inland Revenue. It should be noted that transfers to a company or a trust attract tax at the rate of 10%, whereas transfers to a natural person attract tax at a maximum rate of 8% on values in excess of R320 000.
220.127.116.11 Excise Tax
Excise taxes are levied on a limited range of locally manufactured goods, such as alcoholic beverages, tobacco products, office machines, computer equipment, etc.
18.104.22.168 District Municipality Levies
There are two services levies: âh A regional establishment levy based on turnover, the rate of which is usually between 0,10% and 0,15%. âh regional services levy based on payroll and, in the cases of partnerships or sole traders, on drawings. The rate is usually between 0,25% and 0,35%. Both levies are a deductible expense for purposes of income tax.
22.214.171.124 Property Taxes
Municipalities and other local authorities assess rates (real estate tax) on owners (but not occupiers) based on the rateable value of land and/or buildings. Rates are levied on all properties, including undeveloped and unoccupied land and buildings as well as agricultural properties.
126.96.36.199 Wealth Tax, Net Assets Tax
South Africa does not currently levy such taxes but this is presently under consideration.
188.8.131.52 Vehicle Tax
An annual vehicle licensing fee is payable to the municipality or local authority in which the vehicle is registered. The amount payable depends on the particular local authority and on the class of vehicle.
184.108.40.206 Other Levies
Various other levies exist, portions of which are retained within the province. There is a tourism bed levy, a hotel levy and a casino levy.