Short-term insurers face VAT challenges
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.