BINDING GENERAL RULING (VAT) 14 (Issue 3)

DATE: 24 March 2020

ACT : VALUE-ADDED TAX ACT 89 OF 1991
SECTION : SECTIONS 1(1), 7, 8, 9, 11, 16, 20, 21, 54 AND 72
SUBJECT : VAT TREATMENT OF SPECIFIC SUPPLIES IN THE SHORT-TERM INSURANCE INDUSTRY

Preamble

For the purposes of this ruling, unless the context indicates otherwise –

“BGR” means a binding general ruling issued under section 89 of the Tax Administration Act 28 of 2011;
“bordereau” means a document issued by an insurer or intermediary in the form of a memorandum, statement or invoice, which contains detailed information such as –
insurance premiums collected;

commission and fees payable in respect of intermediary services supplied; and

claims paid;

“inbound insurance policy” means a travel policy that provides insurance cover in respect of a passenger transported from an export country into the Republic or between two places in the Republic as part of an international journey;
“indemnity payment” means a cash payment made by the insurer under an insurance policy to indemnify the insured on the occurrence of the insured event;
“insurer” means any vendor supplying “insurance” as defined in section 1(1);
“intermediary” means any broker or agent supplying intermediary services to an insurer or insured;
“intermediary services” has the meaning assigned thereto in section 1 of the Financial Advisory and Intermediary Service Act 37 of 2002 and includes the management and administration of a policy as well as the collection of premiums and processing of claims;
“international journey” means a journey commencing from the “point of departure” in the Republic to a destination outside the Republic (and vice versa), including (where applicable) stopovers en route to the destination, time spent in the destination country and the return journey;
“outbound insurance policy” means a travel policy that provides insurance cover in respect of a passenger transported from the Republic to a destination
in an export country or from a place outside the Republic to another destination outside the Republic as part of an international journey;

“policy document” means a document which is evidence of a contract of insurance, including any renewal notice, premium notification or endorsement in respect thereof;
“section” means a section of the VAT Act;
“standard rate” means the current rate of VAT which is payable on a taxable supply or taxable importation of goods or services under section 7(1);

“temporary presence” means a period of six months or less;
“third party supplier” means a supplier of goods or services receiving trade payments from insurers;
“trade payment” means a payment made under a contract of insurance by an insurer to a third party supplier to replace or repair the insured’s goods which were lost, damaged or destroyed;
“VAT” means value-added tax;
“VAT Act” means the Value-Added Tax Act 89 of 1991; and
any other word or expression bears the meaning ascribed to it in the VAT Act.

This BGR is updated as a result of the amendments to section 72 made in terms of section 73 of the Taxation Laws Amendment Act 34 of 2019, which came into effect on 21 July 2019, and is based on the wording of section 72 as it read before 21 July 2019. (See 2.7.2 and 2.7.3.)

‌Purpose
This BGR sets out the VAT treatment of the issues listed below:

The time of supply in relation to the supply of insurance and related intermediary services

International transport insurance including stock throughput, goods in transit and marine insurance policies

Hull and associated liability insurance

Insurance cover provided in respect of fixed property and movable property located in an export country

Excess payments

Indemnity payments

Third party payments

Recoveries

Group accident claims

Intermediary services

Documents accepted as alternatives to tax invoices in respect of the supply of insurance and related intermediary services

Approval to issue recipient-created tax invoices, debit and credit notes

‌Ruling
This ruling constitutes a BGR issued under section 89 of the Tax Administration Act 28 of 2011.

‌Time of supply – Insurance
An insurance policy, renewal notice or endorsement that does not notify the insured of an obligation to make payment is not regarded as an invoice and will therefore not trigger the time of supply. In instances where the insurer (or its intermediary) does not issue an “invoice”, the supply of insurance is deemed to be on the date the insurer (or the insurer’s intermediary) receives the insurance premium in respect of that supply.

‌International transport insurance‌
The supply of insurance under any inbound or outbound insurance policy, including insurance cover during periods in which “ancillary transport services”1 are supplied, may be zero-rated under section 11(2)(d).

‌Stock throughput insurance‌
The supply of stock throughput insurance is regarded as international transport insurance (see 2.2) to the extent that insurance cover is provided in respect of goods transported from an export country to South Africa (and vice versa) as part of an international journey.

‌Insured goods transported or stored in South Africa
The supply of insurance under a stock throughput policy which provides cover for insured goods whilst the goods are transported between places in South Africa (including periods during which “ancillary transport services” are supplied in respect of those goods) is subject to VAT at the zero rate under section 11(2)(d). The zero-rating is only applicable if the transport service (including any “ancillary transport services”) is supplied by the same supplier providing the international transport services as envisaged by section 11(2)(c).

‌Insured goods in South Africa but not transported or stored
Insurance cover provided while insured goods are in South Africa and not being transported (or stored) as part of an international journey does not qualify for zero- rating under section 11(2)(d).

‌Single insurance premium
Insurers that levy a single premium in respect of the single supply of stock throughput insurance relating to both standard and zero-rated supplies are, under section 8(15), required to allocate the premium to the various risk components which were used to determine the premium and to apply the applicable VAT rate to each component. The same ratio must be used in respect of subsequent adjustments to the premium, unless the insurer can determine the allocation more accurately. The insurer is required to notify the insured and, where applicable, the intermediary of the original allocation of the premium between the standard and zero-rated portions as well as any subsequent adjustments in respect thereof. The insurer is required to retain proof of such notification.

‌1 “Ancillary transport services” include storage of the insured goods while being (or to be) transported.

‌Hull insurance‌
The supply of hull insurance is regarded as a service provided in connection with the operation or management of a “foreign-going aircraft” or “foreign-going ship”, and may therefore be zero-rated under section 11(2)(h)(ii) if supplied directly (that is, not through an agent or other person) to a non-resident that is not a vendor.

‌The temporary presence of the underlying insured foreign-going ship or aircraft in South Africa will not disqualify the supply from being zero-rated.

‌Insurance cover for fixed property situated in an export country
Insurance is regarded as being supplied directly in connection with the insured land, or any improvement to it, situated in an export country and is therefore subject to VAT at the zero rate under section 11(2)(f).

‌Insurance cover for movable property situated in an export country
Insurance is regarded as being supplied directly in respect of the insured movable property and is subject to VAT at the zero rate under section 11(2)(g)(i), provided that the insurer obtains and retains proof that the movable property is situated outside South Africa during the period for which the insurance cover is provided. Such proof may be reflected in the insurance contract or a declaration provided by the insured.

The temporary presence of the movable property in South Africa will not disqualify the supply of insurance relating to the property from being zero-rated.

‌Excess payments
‌Insured pays excess directly to third party supplier
The third party supplier must issue two tax invoices, that is, one to the insured to the extent of the excess payment and one to the insurer to the extent of the trade payment.

‌Insurer pays full amount to third party service provider and recovers excess from insured‌
An excess payment received by an insurer from the insured does not constitute “consideration” as the payment is not received in respect of any taxable supply made by the insurer. The insurer is, however, required to issue documentation to the insured in respect of the receipt of the excess payment which must include the following minimum information:

The insurer’s name, VAT registration number and address.

The insured’s name, VAT registration number (where applicable) and address.

The third party supplier’s name and VAT registration number (where applicable).

A full description of the goods or services supplied by the third party service provider.

The date on which the supply was made by the third party service provider.

The amount of the excess paid or payable by the insured reflecting either the VAT amount separately or a statement that the amount payable includes VAT and the rate at which VAT was charged.

The insurer is, under section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier. The deduction must be calculated as follows:

(Total VAT inclusive amount paid to the third party supplier less excess received from insured) × tax fraction.

The insured may deduct the VAT incurred in relation to the excess payment made to the insurer. The deduction is calculated as follows:

Excess payment × tax fraction.

‌Decision made under section 72‌
A decision is hereby made under section 72 to regard the document referred to in 2.7.2, which is issued by the insurer to the insured in respect of excess received or due to be a “tax invoice” for the purposes of section 16(2)(a). This arrangement is only applicable if –

the insured is a registered vendor;

the third party supplier is a registered vendor; and

the insured and insurer obtains and retains the document issued by the insurer in respect of the excess payment.

‌Indemnity payments
The input tax deduction allowed under section 16(3)(c) applies not only to indemnity payments made in respect of “indemnity insurance” cover, but also in respect of “non- indemnity insurance” such as personal accident and third party liability cover that may be included in an insurance policy.

An insurer making an indemnity payment which gives rise to a deduction under section 16(3)(c) must issue a document to the insured informing the insured of a potential output tax liability that may arise under section 7(1)(a) read with section 8(8). This requirement applies irrespective of whether the insured is a vendor or not.

‌Recoveries
An insurer is not liable to account for output tax on amounts recovered from a third party or the third party’s insurer under a subrogation claim, irrespective of whether the whole or only a portion of the claim is recovered.

‌Group personal accident insurance
‌Insurer
An insurer may deduct VAT under section 16(3)(c) in respect of indemnity payments made to the insured under group personal accident insurance.

‌Employer acting as principal
An employer, being a vendor, may deduct input tax in respect of the taxable supply of group personal insurance acquired to the extent it is acquired for the purpose of making taxable supplies.

Any indemnity payments received by the employer (as principal) under a contract of insurance will result in the employer being liable to account for output tax under section 8(8). The employer will not be entitled to deduct any VAT in respect of amounts subsequently paid to the employee.

‌Employer acting as agent on behalf of employees
The employer, when acting as the agent of its employees in entering into a group personal accident insurance contract with an insurer, will not be entitled to deduct input tax in respect of that contract. The employer will not be required to account for output tax under section 8(8) if the employee receives an indemnity payment from the insurer, irrespective of whether the payment is made through the employer or directly to the employee.

‌Intermediary services
The zero rate may be applied to services consisting of the arranging of –

the insurance of goods or passengers transported internationally2 under section 11(2)(d); or

hull3 insurance in respect of a foreign-going aircraft or ship under section 11(2)(i)(ii) if the arranging service is supplied to a non-resident who is not a vendor (Refer to 2.4).

An intermediary arranging stock throughput insurance may however only zero rate the supply of intermediary services to the extent that the underlying stock throughput insurance qualifies for zero-rating under section 11(2)(d). (Refer to 2.3.3.)

‌Tax invoices, credit and debit notes
‌Supply of insurance
The Commissioner directs, under section 20(7)(a) and 21(5)(a), that the policy document, although not an invoice, is regarded as a tax invoice, debit note and credit note which need not contain the words “tax invoice”, “VAT invoice”, “invoice”, “debit note” and “credit note” provided –

the insurer retains proof that the insured paid premiums in accordance with the policy document; and

the policy document reflects all the other information as required by section 20(4); and

the policy document contains the following statement (or substantially similar wording):

“In terms of Binding General Ruling 14 this document constitutes a tax invoice, debit note and credit note as contemplated in sections 20(7)(a) and 21(5)(a) of the VAT Act.”

‌2 Refer to 2.2, 2.3 and 2.5.

‌3 Refer to paragraph 2.4.

‌Supply of intermediary services
The Commissioner directs, under sections 20(7)(a) and 21(5)(a), that the document (generally known as a bordereau) issued by the intermediary to the insurer in respect of the supply of intermediary services does not have to contain the words “tax invoice”, “VAT invoice”, “invoice”, “credit note” or “debit note” (as the case may be). However, the bordereau must reflect the other information as prescribed in sections 20(4) and 21(3) respectively.

‌Recipient-created tax invoices, credit and debit notes
An insurer that is required to determine the consideration payable in respect of intermediary services may, under sections 20(2) and 21(4), issue recipient-created tax invoices, credit or debit notes in respect of the supply of intermediary services.

This approval is subject to –

the recipient-created tax invoice, credit or debit note complying with sections 20(4), (5), 21(3) or the special approval set out in 2.12, as applicable; and

the insurer complying with all other requirements listed in Interpretation Note 56 “Recipient-created tax invoices, credit and debit notes”.

In addition, permission is granted under sections 20(7)(a) and 21(5)(a) that the bordereau issued by the insurer to the intermediary in respect of the supply of intermediary services does not have to contain the words “tax invoice”, “VAT invoice”, “invoice”, “credit note” or “debit note” (as the case may be).

‌Conditions
Zero-rating
The zero-rating of supplies contained in this BGR is conditional upon the insurer and intermediary (as applicable) obtaining and retaining the documentary proof as provided for under section 11(3) read with Interpretation Note 31 “Documentary Proof Required for the Zero-Rating of Goods and Services” (Interpretation Note 31). Failure to obtain and retain the required documentary proof within the required time period will result in the vendor being required to make the relevant adjustments as stipulated in Interpretation Note 31.

Input tax and other deductions
The statements contained in this BGR regarding input tax and other deductions are conditional upon the vendor obtaining and retaining the documentary proof contemplated in section 16(2) (including the bordereau referred to in 2.12) by the time the relevant VAT return is submitted. The deductions are subject to section 16 and 17. Failure to obtain and retain the required documentary proof will result in the vendor not being entitled to make the deduction.

‌Period for which this ruling is valid
This BGR (except for 2.7.2 and 2.7.3) applies from date of issue until it is withdrawn, amended or the relevant legislation is amended.
The decision in 2.7.2 and 2.7.3 applies from 21 July 2019 until 31 December 2021.
To the extent that this BGR does not provide for a specific scenario in respect of the supply of short-term insurance, vendors may apply for a VAT ruling or VAT class ruling in writing by sending an e-mail to VATRulings@sars.gov.za or by facsimile to 086 540 9390. The application should consist of a completed VAT301 form and must comply with the provisions of section 79 of the Tax Administration Act 28 of 2011, excluding section 79(4)(f), (k) and (6).

Group Executive: Interpretation and Rulings SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 26 March 2013 Date of 2nd issue : 18 March 2016