Gaukhar Narbekova, Partner of MinTax Group, Director of Audit Department, RoK Auditor, DipIFR (ACCA), CIPA, I Category Tax Consultant, in her article considered certain issues related to issuing invoices and levying taxes on transactions associated with tourist business.
Travel companies (hereinafter – the “Companies“) in practice very often act as a principal and have their commission agents represented by subagents – travel agents (hereinafter – “Travel Agents“), whom they employ to sell their services to customers.
In addition, the Companies also enter into direct agreements with intermediary service providers that are not agency agreements, the subject of which is the usual purchase of goods, works and services (for example, when the Companies purchase air tickets from an airline agent who does not intend to enter into an agency relationship that imply any kind of reward from the Company other than a discount from the price of the purchased air ticket specified in the contract).
Thus, taxpayers that are the Companies are often interested what is the procedure for determining the taxable turnover for the purposes of levying value added tax (VAT) and the size of taxable turnover on the acquired work and services in the following situations:
- The Company employs Travel Agents to sell its services, who, in turn are commission agents and receive a reward from the Company;
- The Company employs Travel Agents to sell its services under an agreement for sale-and-purchase of goods, work, and services, in the absence of any indication of an agency agreement;
- The Company is employed by other suppliers of work and services under an agency agreement, subject to a reward to be received by the Company from the service providers;
- The Company employs other customers to supply services under agency agreements, subject to a commission reward to be paid by the Company to such agents.
The paragraphs below describe the norms which justify the conclusions and answers to each of the questions.
According to Article 690 of the Civil Code[1], under a contract of carriage of the passenger, the carrier undertakes to carry the passenger to the destination and, if the passenger has a baggage-also deliver the baggage to the destination and hand the baggage over to a person authorized to receive it; the passenger agrees to pay the fare, and, when he has a baggage, also pay for the carriage of his baggage. The contract for the carriage of passengers and baggage is documented, accordingly, by a travel ticket and baggage check. The form of travel ticket and baggage check is established in the manner prescribed by legislative acts in the sphere of transport.
Pursuant to Article 76 of the Law on Air Transport[2], commercial air carriage shall be performed on the basis of an air carriage contract. An air carriage contract shall be validated by issuing carriage documents issued by an air company or by its authorised persons (agents). In the meantime, commercial air carriage of passengers, luggage and cargoes are performed in accordance with the Rules for air carriage[3].
According to paragraph 2 of Article 76 of the Law on Air Transport, a separate ticket is issued for each passenger, which confirms that:
1) the passenger has familiarised with the terms and conditions of the air carriage contract;
2) an air carriage contract has been concluded between the passenger and air company.
The ticket is issued on the basis of a document certifying the identity of the passenger.
According to the following sub-paragraphs of paragraph 3 of the Rules for air carriage:
9) air transport – activities of individuals and legal entities for the transportation of passengers, baggage, cargo and postal items by aircraft;
17) passenger ticket is a document for the carriage of a passenger issued by an airline or its authorized agents, confirming the passenger’s acquaintance with the terms of the air carriage contract and the conclusion of an air carriage contract between the passenger and the airline;
18) passenger is an individual who is not a member of the crew and is transported on an aircraft in accordance with the air carriage contract or on other legal grounds;
19) passenger coupon is a part of the ticket represented in the form of an electronic digital record or on paper (a strict reporting form) which certifies the conclusion of a contract for air carriage of the passenger and his baggage;
53) an authorized agent is a person representing the operator of an aircraft who is authorized directly by him or on his behalf to perform formalities related to the arrival, departure and clearance of the aircraft belonging to that operator, crew, passengers, cargo, mail, baggage and ammunition.
In accordance with paragraph 5 of the Rules for air carriage, a separate ticket shall be issued for each passenger, which confirms that:
1) the passenger has familiarised with the terms and conditions of the air carriage contract;
2) an air carriage contract has been concluded between the passenger and air company.
The ticket is issued on the basis of the passenger’s identity document. Changes to the ticket are made by the airline with the consent of the passenger or by an authorized agent with the consent of the airline and the passenger. The passenger is admitted for the carriage provided that a valid paper ticket or an electronic ticket was issued to the name of that passenger by the airline or an authorized agent.
Thus, based on the above provisions of the RoK legislation in the field of air transportation, when passengers’ tickets are purchased and sold, regardless of a number of intermediaries in the chain of air ticket sales, there may be only three types of parties to the transaction:
- Air carrier who provides the carriage service (of passengers, cargoes);
- Authorized agent (travel agencies and other agents who sell carriage services);
- Passenger (direct recipient of the carriage service).
Therefore, any person who is involved in the chain of selling the Air Carrier’s transportation services to the Passenger, that is, the one positioned between the Carrier and the Passenger, is specified as the Authorized Agent under the Law on Air Transport.
According to Article 865 of the Civil Code, under the commission contract, a party (the agent) undertakes, at the request of the other party (the principal) for a fee, to make one or more transactions on his (her) behalf at the expense of the principal. At the same time, the principal is obliged to pay a fee to the agent as provided for by the contract, and if the contract contains no clauses in that respect, the agent is obliged to fulfil the instruction in accordance with the trade custom or other commonly presented requirements on terms which are most advantageous for the principal. If the agent has made a deal on terms that are more favorable than those specified by the principal, the benefits shall be shared by the parties equally, unless the contract states otherwise.
If the commission contract was not implemented for reasons depending on the principal, the commission agent retains the right to the commission reward and also the right to be reimbursed for expenses incurred.
In this case, when it comes to the purchase of air tickets, the Passenger is a principal, and tickets are purchased to his name at his expense, while there may be several agents, because usually air tickets are purchased with a number of intermediaries involved.
Therefore, any person who has purchased a ticket for the Passenger is considered as his agent, that is, a commission agent.
According to Article 869 of the Civil Code, unless otherwise provided by the contract, the commission agent has the right to conclude a sub-commission contract with another person, while remaining responsible for the actions of the sub-agent in relation to the principal. Under the sub-commission contract, the agent acquires the rights and obligations of the principal in relation to the sub-agent, with the exception of the rights provided for in paragraph 2 of Article 867 of the Civil Code. However, in cases when legislative acts allow to make any transactions only by specially authorised persons, a sub-commission contract may be concluded only with such person.
According to paragraph 1 of Article 375 of the Tax Code[4], the following shall not be considered as the sales turnover of the commission agent:
- sale of goods, performance of work, rendering of services by the commission agent on behalf of the principal on terms conforming to the terms of the commission contract;
- performance of work, rendering of services by a third party for the principal under the transaction concluded by such third party with the commission agent.
In accordance with paragraph 4 of Article 1 of the Tax code, concepts of civil and other branches of legislation of the RoK[5] used in this Code, shall be applied in the meanings in which they are used in these branches of RoK legislation, unless otherwise is established by the Tax code.
At the same time, the Tax Code does not contain the concept of a commission contract, therefore, all concepts related to the commission contract are applied in the meaning in which they are used in these branches of the RoK legislation.
According to paragraph 1 of Article 443 of the Tax code, the amounts of taxable turnovers shall be determined on the basis of the price of sold goods, work, services proceeding from prices and tariffs applied by the participants to the transaction without inclusion of VAT in them, unless otherwise is provided for by this Article and the RoK legislation on transfer pricing.
In accordance with paragraph 9 of Article 381 of the Tax Code, when selling goods, performing work, rendering services on terms that correspond to the terms of the commission contract, transferring goods purchased for the principal on terms and conditions conforming to the terms of the commission contract from the agent to the principal, performing work, rendering services by a third party for the principal under the transaction concluded by such third party with the commission agent, the agent’s sales turnover shall be determined as the amount of its commission fee without value added tax.
Thus, in view of the fact that the direct consumer of air carriage services is the Passenger, and the document confirming the conclusion of the carriage contract between the Passenger and the carrier is a personal ticket, then all parties involved in the organization of air carriage, except for the carrier, are considered to be authorized agents either of the Passenger or the Carrier, and, therefore, any contract concluded between the authorized agents, as well as between an authorized agent with the Carrier or with the Passenger correspond to the terms of the commission contract according to the Civil Code and the law on air carriage.
Based on the foregoing, irrespective of terms and conditions stipulated in the contract between authorized agents, the sales turnover subject to VAT of such authorized agents selling tickets to Passengers, is a commission fee.
At that, in the absence of a fee, according to Article 375 of the Tax code, work performed, services rendered by the commission agent by instruction of the principal on terms conforming to the terms of the commission contract shall not be deemed as a sales turnover of the commission agent.
Thus, to summarize the foregoing:
- In cases when the Company being a principal, sells its services via Travel Agents who, in turn, are commission agents and receive a fee from the Company, the size of Company’s turnover subject to VAT should be determined on the basis of the cost of sold goods, work, services, according to prices and tariffs applied by the parties of the transaction, without VAT. In that case, the Company’s turnover from purchasing work, services subject to VAT will be a commission fee paid to the commission agents on the basis of invoices issued by them.
The above provisions do not apply to sales of air tickets, since, when selling air tickets, all intermediaries are authorized agents of the air carrier for whom the VAT-taxable turnover is a service (commission) fee of the ticket sales agent.
- If the Company sells its services via Travel Agents under the contract for sale and purchase of goods, works and services in the absence of any sign of an agency agreement, the amount of Company’s VAT turnover should be determined as indicated above, that is – on the basis of the cost of sold goods, works, services, based on the prices and tariffs applied by the parties without VAT, except for a turnover from sales of air tickets, because in selling air tickets all intermediaries are authorized agents of the air carrier, for whom VAT turnover is the service (commission) fee of the ticket sales agent.
- In cases when the Company is employed by other providers of work and services to supply services under an agency agreement against a fee, i.e. it is employed as a sub-agent for rendering services, the Company’s VAT turnover will be the amount of a fee received from the service provider, and the taxable turnover from purchased work and services in this case will be the amount of a commission fee paid to the sub-agent (Travel agent with whom the Company concluded an agency agreement to attract new clients)
Considering that in selling air tickets all intermediaries are authorised agents (sub-agents), VAT turnover from services rendered of each sub-agent should be determined on the basis of its own commission fee or additional income provided for by the conditions of the sub-agency agreement.
However, it should be noted that VAT turnover from selling air carriage services is a sales turnover of the air carrier himself, which cannot be recognized as a sales turnover of the authorised agent.
- In cases when the Company sells its services via other customers under agency agreements with a commission fee paid by the Company to such agents, then the amount of paid fees will be recognized as Company’s taxable turnover from purchased work and services. At that, the amount of VAT indicated in sub-agents’ invoices in respect of such turnovers shall be subject to offset for VAT purposes.
This material is subject to copyright. Reprinting and other use is prohibited by the copyright holder. This material expresses the author’s opinion and is a recommendation. This material is based on regulatory legal acts in force at the time of publication.
[1] Civil Code of the RoK No 409-I dated 1 July 1999 (Special Part)
[2]RoK Law #339-IV dated 15 July 2010 “On Use of Air Space of the Republic of Kazakhstan and Aviation Activity”.
[3] Order of the RoK Minister on Investments and Development #540 dated 30 April 2015 “On Approval of Rules For Carriage of Passengers, Baggage and Cargo by Air Transport’.
[4] Code of the RoK #120-VI dated 25 December 2017 “On Taxes and Other Obligatory Payments to the Budget”.
[5] Republic of Kazakhstan.
