Short-term in­sur­ers face VAT chal­lenges

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Sch­nei­der

SARS’s new rul­ing sets the guide­lines for time of sup­ply, doc­u­men­tary re­quire­ments and zero rat­ing

THE short-term in­sur­ance in­dus­try is fac­ing a num­ber of VAT chal­lenges. One set of chal­lenges has been in­tro­duced by SARS’s Bind­ing Gen­eral Rul­ing 14 (BGR14), which came into ef­fect on July 1.

Th­ese in­clude a slight change on the time of sup­ply; doc­u­men­tary re­quire­ments (which may not nec­es­sar­ily have been brought about solely by BGR14); zero rat­ing of cer­tain in­sur­ance ser­vices; and the treat­ment of in­sur­ance ex­cesses for VAT pur­poses.

Short-term in­sur­ers cur­rently ac­count for VAT on the sup­ply of in­sur­ance when they or the in­ter­me­di­aries re­ceive the pre­mium, namely on the cash ba­sis. Cur­rently, the ac­count­ing for VAT is post­poned with a VAT pe­riod where pre­mi­ums are re­ceived af­ter the 15th of the month. This dif­fer­en­ti­a­tion for VAT tim­ing pur­poses of pre­mi­ums re­ceived pre and post the 15th of the month is not catered for in BGR14. It is un­sure whether this change will have a ma­te­rial im­pact on the in­dus­try. An in­ter­me­di­ary ac­counts for VAT on its ser­vices when it re­ceives pay­ment for its ser­vices; where the in­voice or tax in­voice is­sued for the in­sur­ance or the in­ter­me­di­a­tion pre­cedes pay­ment the in­surer or in­ter­me­di­ary must ac­count for VAT when the in­voice or tax in­voice is is­sued.

In terms of BGR14 in­sur­ers do not have to is­sue tax in­voices for in­sur­ance ser­vices where the pol­icy con­tains the in­surer’s and in­sured’s name, ad­dress and VAT regis­tra­tion num­ber (where ap­pli­ca­ble) and pol­icy num­ber; the pre­mium and the value, VAT amount and con­sid­er­a­tion, or where the VAT frac­tion ap­plies, the con­sid­er­a­tion and ei­ther the VAT, or a state­ment that it in­cludes the VAT and the VAT rate; a state­ment con­firm­ing BGR4’s di­rec­tion; and a state­ment in­form­ing the in­sured ven­dor that it must be in pos­ses­sion of the pol­icy and proof that the pre­mium has been paid to claim a VAT de­duc­tion. In terms of BGR14 the bordereau or com­mis­sion state­ment does not have to con­tain the words “tax in­voice” (pre­sum­ably to con­sti­tute a “tax in­voice”).

The VAT Act con­tains four main zero-rat­ing pro­vi­sions which ap­plies to short-term in­sur­ance. Th­ese in­clude in­sur­ance of in­ter­na­tional trans­port; in­sur­ance of land or im­prove­ments out­side South Africa; in­sur­ance of goods sit­u­ated out­side SA; and in­sur­ance ser­vices sup­plied to non-res­i­dents. BGR14, read in con­junc­tion with SARS’s In­ter­pre­ta­tion Note 31 (IN31), gives guid­ance on the doc­u­men­ta­tion re­quired to ap­ply and sub­stan­ti­ate the zero rate. The VAT Act read with the 1991 VAT Short-Term In­sur­ance rul­ing catered for ser­vices span­ning the South African bor­der.

The zero rate ap­plies to in­sur­ance or the ar­rang­ing of in­sur­ance (bro­ker­age or in­ter­me­di­a­tion) of the trans­port of pas­sen­gers or goods be­tween places out­side SA. The zero rate also ap­plies to in­sur­ance or ar­rang­ing of in­sur­ance in re­spect of the trans­port of pas­sen­gers or goods be­tween SA and a for­eign coun­try or the trans­port of pas­sen­gers by air in SA where it con­sti­tutes in­ter­na­tional car­riage.

When the in­sur­ance or ar­rang­ing of in­sur­ance of the trans­port of goods in SA, which is part of the for­eign jour­ney of pas­sen­gers or goods be­tween places out­side SA or be­tween SA and a for­eign coun­try, and the do­mes­tic and for­eign ser­vice is sup­plied by the same sup­plier, it can also be zero rated. To sub­stan­ti­ate the zero rate, IN31 re­quires that the ven­dor’s copy of the zero-rated tax in­voice, a copy of the in­sur­ance or trans­port con­tracts and in the case of the ar­rang­ing of in­ter­na­tional trans­porta­tion of goods a copy of the trans­port doc­u­ment, and proof of de­liv­ery of the goods, be kept.

In­sur­ance of land or im­prove­ments thereto sit­u­ated out­side SA is in line with the prin­ci­ple that the VAT sys­tem seeks to tax fi­nal do­mes­tic con­sump­tion. The zero rate will ap­ply ir­re­spec­tive of whether the in­sured is a res­i­dent of SA. To sub­stan­ti­ate the zero rate, IN31 re­quires that the ven­dor’s copy of the zero-rated tax in­voice; and the re­cip­i­ent’s or­der or the con­tract be­tween the re­cip­i­ent and the ven­dor con­firm­ing that the land is sit­u­ated in an ex­port coun­try, be kept.

The zero rate also ap­plies to in­sur­ance of goods sit­u­ated out­side SA, where the goods are out­side SA at the time the ser­vices are ren­dered. The zero rate will ap­ply ir­re­spec­tive of whether the in­sured is a res­i­dent of SA. To sub­stan­ti­ate the zero rate, IN31 re­quires that the ven­dor’s copy of the zero-rated tax in­voice; the re­cip­i­ent’s or­der or con­tract be­tween the re­cip­i­ent and the ven­dor; and con­fir­ma­tion from the re­cip­i­ent that the mov­able prop­erty was sit­u­ated in an ex­port coun­try at the time that the ser­vices were ren­dered, if this is not stated in the or­der or con­tract, be kept.

Marine in­sur­ance sup­plied di­rectly (not through an agent) to a per­son who is not a res­i­dent of SA and not a ven­dor cov­er­ing loss to a “for­eign­go­ing ship” can be zero-rated. Hull in­sur­ance sup­plied di­rectly (not through an agent) to a per­son who is not a res­i­dent of SA and not a ven­dor cov­er­ing loss to a “for­eign- go­ing air­craft” or “for­eign-go­ing ship” can be zero rated. Tem­po­rary pres­ence in SA of the for­eign-go­ing air­craft or ship will still qual­ify for zero-rat­ing. IN31 re­quires that writ­ten con­fir­ma­tion from the re­cip­i­ent that the ship or air­craft is a “for­eign-go­ing ship” or a “for­eign­go­ing air­craft” be kept. Short-term hull in­sur­ance to a res­i­dent of South Africa is stan­dard rated.

BGR14 does not specif­i­cally ad­dress a num­ber of sit­u­a­tions, in­clud­ing in­ward poli­cies where the in­sured is not on board the ship or aero­plane; hull poli­cies to South African res­i­dents where they only en­ter SA tem­po­rar­ily; hull poli­cies to non-res­i­dents where the ship or aero­plane does not meet the tech­ni­cal def­i­ni­tion of “for­eign go­ing...”; and poli­cies in re­spect of mov­able goods sit­u­ated out­side SA where it may re-en­ter SA tem­po­rar­ily.

BGR14 in­tro­duced a changed treat­ment in re­spect of ex­cesses. Cur­rently (pre-BG14) the short-term in­sur­ance in­dus­try treats ex­cesses ef­fec­tively as VAT-sen­si­tive, mean­ing where a pol­icy is VAT-inclusive ex­cesses are cal­cu­lated on an inclusive ba­sis, and where a pol­icy is VAT ex­clu­sive ex­cesses are cal­cu­lated on an ex­clu­sive ba­sis. In a le­gal sense, ex­cesses are not sub­ject to VAT as it rep­re­sents the non-in­sured por­tion of a pol­icy. BGR14 gives ef­fect to the le­gal sub­stance of ex­cesses and views ex­cesses as nonVATable. BGR14 would now re­quire that ex­cesses be cal­cu­lated on a VAT ex­clu­sive ba­sis. VAT claims re­lat­ing to pay­ments of sup­pli­ers would also have to be limited to the net of ex­cess amounts.

Ferdie Sch­nei­der is tax part­ner for value-added tax at KPMG.

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