Value-Added Tax VAT 421 - SARS

1 VAT 421 Guide for Short-Term insurance chapter 1. Value-Added Tax VAT 421. Guide for Short-Term insurance VAT 421 Guide for Short-Term insurance Preface Preface This guide is a general guide concerning the application of the VAT Act to short-term insurance transactions in South Africa. Although fairly comprehensive, the guide does not deal with all the legal detail associated with VAT and is not intended for legal reference. Technical and legal terminology has also been avoided wherever possible. For details about the general operation of VAT, see the VAT 404 Guide for Vendors which is available on the South African Revenue Service (SARS) website ( ). All references to the VAT Act are to the Value-Added Tax Act 89 of 1991 and references to sections are to sections of the VAT Act, unless the context otherwise indicates. The Tax Administration Act 28 of 2011 is referred to as the TA Act . Any reference to the Short- Term insurance Act 53 of 1998 and Long-Term insurance Act 52 of 1998 are referred to as the STI Act and the LTI Act respectively.

2 The terms Republic , South Africa or the abbreviation RSA , are used interchangeably in this document as a reference to the sovereign territory of the Republic of South Africa, as set out in the definition of Republic in section 1(1). The terms Commissioner and Minister . refer to the Commissioner for SARS and the Minister of Finance respectively, unless otherwise indicated. A number of specific terms used throughout the guide are defined in the Act. These terms and others are listed in simplified form in the Glossary, which also includes a selection of terminology used in the insurance industry. The information in this guide is based on the VAT legislation (as amended) at the time of publishing, up to and including the Taxation Laws Amendment Act 25 of 2015 (as per Government Gazette (GG) 39588) and Tax Administration Laws Amendment Act 23 of 2015. (as per GG 39586). This guide is not an official publication as defined in section 1 of the TA Act and accordingly does not create a practice generally prevailing under section 5 of that Act.

3 It is also not a binding general ruling under section 89 of chapter 7 of the TA Act or a ruling under section 41B of the VAT Act, unless otherwise indicated. Binding General Ruling (VAT) 14 (Issue 2) VAT Treatment of Specific Supplies in The Short-Term insurance Industry (BGR 14), Binding General Ruling (VAT) 32 VAT Treatment of Supplies in The Short-Term Reinsurance Industry (BGR 32) and Binding General Ruling (VAT) 37 Zero-rating of international travel insurance (BGR 37), which are included in Annexure A, B and C respectively, deal with some specific aspects of insurance and reinsurance and may be relied upon. All previous editions of the VAT 421 Guide for Short-Term insurance will be withdrawn from date of issue of the finalised guide. There are various other guides available on the SARS website which may be referred to for more information relating to specific VAT topics. All guides, interpretation notes, binging general rulings, forms, returns and tables referred to in this guide are available on the SARS website.

4 I VAT 421 Guide for Short-Term insurance Preface Should there be any aspects relating to VAT which are not clear or not dealt with in this guide, or should you require further information or a specific ruling on a legal issue, you may . visit the SARS website at ;. contact your local SARS branch;. contact the SARS National Contact Centre . if calling locally, on 0800 00 7277;. if calling from abroad, on +27 11 602 2093 (only between 8am and 4pm South African time);. submit a ruling application to SARS headed Application for a VAT Class Ruling or Application for a VAT Ruling" together with the VAT301 form by email to or by facsimile on +27 86 540 9390; or submit legal interpretative queries on the TA Act by email to or contact your own tax advisors. Comments regarding this guide may be emailed to Prepared by Legal Counsel SOUTH AFRICAN REVENUE SERVICE. 12 December 2016. ii VAT 421 Guide for Short-Term insurance Contents Contents Preface.

5 I chapter 1 1. Policy background .. 1. Scope of insurance topics .. 1. Approach of the guide .. 2. chapter 2 What is insurance ? .. 4. Legal principles of insurance .. 4. Ordinary meaning and general description of insurance .. 5. Long-term vs. short-term insurance .. 6. Cross-border short-term insurance .. 8. Marine and aviation insurance .. 8. Hull insurance .. 9. Stock throughput insurance .. 9. Travel insurance .. 9. Reinsurance and retrocession .. 10. chapter 3 VAT concepts, definitions and terminology .. 11. Enterprise .. 11. Supply and taxable supply .. 13. Goods, fixed property and second-hand goods .. 14. Services and imported services .. 14. Consideration .. 15. Time of supply .. 16. value of 16. insurance .. 17. Financial services .. 18. chapter 4 Agent vs 20. Introduction .. 20. Legal principles of agency .. 20. Application of agency principles .. 20. Tax invoices, credit notes and debit notes .. 24. chapter 5 Accounting for VAT.

6 26. Introduction .. 26. The mechanics of VAT .. 26. Application of VAT principles .. 27. General tax administration matters .. 27. Output tax .. 28. Input tax .. 29. chapter 6 VAT treatment of specific supplies and imported services .. 32. Introduction .. 32. insurance 32. 32. Premiums received through intermediaries .. 35. Premiums on Lloyd's policies (coverholder business) .. 36. Commission and 36. No-claim bonuses and cash incentives .. 38. Recoveries and recoupments .. 38. Recoveries made under subrogation .. 38. Recoveries from reinsurers .. 39. Contribution from other insurers .. 39. iii VAT 421 Guide for Short-Term insurance Contents Sale of salvage .. 39. Other income from taxable supplies .. 40. Imported services .. 40. chapter 7 Trade payments, indemnity payments and excess .. 42. Introduction .. 42. Trade payments .. 42. Indemnity payments .. 43. Legal provisions .. 43. The insurer .. 44. The insured .. 46. Excess .. 49. chapter 8 Short-term reinsurance.

7 53. Introduction .. 53. Time of supply .. 54. Facultative reinsurance .. 54. Non-proportional treaty reinsurance .. 54. Proportional treaty reinsurance .. 54. Intermediary and cedent services .. 55. Tax invoices, credit and debit notes .. 55. Recipient-created tax invoices, credit and debit notes .. 55. Documentary 56. Zero-rating .. 56. Input tax and other deductions .. 56. Reinsurance premiums .. 56. Cedent 57. Indemnity payments .. 58. Recoveries .. 59. Reinsurance broker commission and fees .. 61. Annexure A Binding General Ruling (VAT) 14 (Issue 2).. 62. Annexure B Binding General Ruling (VAT) 32 .. 70. Annexure C Binding General Ruling (VAT) 75. Annexure D Legal principles of insurance .. 78. Glossary .. 82. Contact details .. 93. iv VAT 421 Guide for Short-Term insurance chapter 1. chapter 1. Introduction Policy background When VAT was introduced on 30 September 1991, supplies of short-term insurance became subject to VAT, but long-term insurance was exempt (being financial services ).

8 At that time, certain other fee-based services, for example, providing financial advice, arranging financial services and debt collection services were also regarded as exempt financial services. However, from 1 April 1995, the VAT Act was amended to exclude such services from the definition of financial services from that date. The supply of credit guarantee insurance which was also initially exempt became taxable from 1 October 1996. Scope of insurance topics This guide deals with the VAT implications of transactions related to short-term insurance business in South Africa and the accounting in respect thereof. Included is a discussion on how insurance and related transactions impact on brokers, agents and other intermediaries 1. as they play an important role in the insurance industry. The guide does not deal with long- term insurance services, except to the extent that it serves to clarify the distinction between long-term insurance , short-term insurance and other goods and services supplied in the course of writing short-term insurance business.

9 The guide will focus mainly on the following aspects: The nature and meaning of insurance . Before delving into the application of the VAT law in regard to short-term insurance , we will first establish what is meant by the term insurance , which has both an ordinary legal meaning as well as a defined meaning for VAT purposes. The distinction is important in that the VAT treatment of transactions is based primarily on the characterisation of the underlying supplies. We will also mention some of the main legal principles upon which insurance is based, as well as clarify the distinction between long-term and short-term insurance . Supply of short-term insurance 2. Generally, VAT is payable at the standard rate on the supply of risk cover in terms of a short-term insurance policy. 3 There are, however, certain instances when the supply of insurance will be subject to VAT at the zero rate. Premiums payable in respect of long-term insurance such as life assurance and endowment policies are generally exempt from VAT.

10 As with any type of legal contract involving supplies, there will be a supplier and a recipient. These two parties will be referred to in this guide as the insurer or reinsurer and the insured or cedent respectively. 1. For the purposes of this guide, unless otherwise indicated, the terms agent , intermediary , broker or independent intermediary are used interchangeably and indicate the designation of a legal agent of the insurer, reinsurer, cedent or insured (principal). 2. The term insurance includes reinsurance unless the context indicates otherwise. 3. The term policy means a document which is evidence of a contract of insurance , including any renewal notice, premium notification or endorsement in respect thereof. 1. VAT 421 Guide for Short-Term insurance chapter 1. The explanation of the VAT implications of providing and receiving short-term insurance services includes . how and when VAT must be accounted for on transactions and payments.