By Gail Hurley, Project Manager, Tax Inspectors Without Borders (TIWB), UNDP and James Karanja, Head of Secretariat, TIWB
This opinion piece was originally published by TIWB
Tourism today is among the fastest growing ‘industries’ in the world. For Small Island Developing States (SIDS), tourism revenues are even more important. The United Nations World Tourism Organisation, estimates that tourism accounted for over 25% of GDP in at least seven SIDS in 2014, creating much needed job opportunities and bringing in foreign exchange. The OECD estimates that in 2016 international tourism revenue amounted to USD 1.22 trillion worldwide.
Appropriately taxing the tourism sector – a key economic sector for most SIDS – and strengthening the capacities of national tax administrations is even more critical, as many SIDS have come under increasing international pressure to diversify their economies and move away from financial services.
Multinational enterprises are major players in the tourism sector and this presents several challenges for tax administrations in SIDS. Firstly, hotel operators have various business models – from large resort owners and operators, to managed and franchised hotels, to marketing companies and booking agents. Navigating the complexities involved with the varying business models poses considerable difficulties for SIDS’ tax administrations that lack the sector‑specific knowledge about how the different business models work, particularly as they relate to the allocation of income and costs amongst the various players.
Secondly, there is extensive fragmentation of diverse operators in the tourism supply chain – from those offering all‑inclusive accommodation, to villas and bed and breakfasts, many operating through online booking portals making the traceability of operators’ income very difficult. Technology can sometimes be both friend and foe.
Thirdly, considerable transfer pricing risks emerge since the majority of hotel owners/operators do business with entities in low tax jurisdictions thus making the bulk of income ‘earned’ in these low tax jurisdictions not subject to taxation in the country of source. Other audit risks include intra‑group services, foreign exchange risk and overstatement of capital asset values.
There are serious skills deficiencies within many SIDS tax administrations. Local tax auditors need not only to have expertise in transfer pricing, but also to understand the intricacies of the tourism industry. Without these two key skills, tax administrations will lose much‑needed revenue.
TIWB is quickly gaining ground in the niche area of international tax audit assistance aimed at tackling suspected tax abuses in diverse sectors, including the tourism sector. Technical assistance provided by TIWB is just one component of a broader suite of interventions that aim to ensure better management of the tourism industry and greater transparency across SIDS. Other efforts by SIDS to improve tax yields from the tourism sector include a review of incentive regimes, enactment of transfer pricing and advance pricing agreement legislation. Countries and jurisdictions may also benefit from the signing of robust exchange of information instruments, such as the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and the establishment of specialised units to facilitate the auditing of cases with transfer pricing issues.
Following positive feedback received from a TIWB learning event focused on tourism sector held at the United Nations in April 2018 in New York, the initiative is keen to team up with other development partners to organise a technical audit event on tourism in 2019. This event will bring together both audit and industry experts to discuss how to ensure that booming tourism contributes to achieving domestic resource mobilisation goals in developing countries.
The TIWB initiative is also working with partners such as the Business and Industry Advisory Committee (BIAC) to the OECD and regional tax associations to identify industry experts who can provide a better understanding of the specific hotel business value chains to tax officials and disseminate best practices.