Legal wise

Vital VAT policies for Insurers

Insurance
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South Africa’s short-term insurance industry faces an onerous administrative burden in the wake of new accounting rules and tax policies introduced by the South African Revenue Service (SARS).

“The new policies were implemented as part of measures to identify risk and ensure VAT compliance in the short- term insurance industry,” says Gerard Soverall, Head of Indirect Tax for Gauteng. “The accounting policies are designed to ensure that short-term insurers are vigilant with regard to their accounting practices,’ says Soverall.

SARS recently introduced a Supplementary Declaration for companies and close corporations (IT4SD) which requires organisations to be cautious with respect to Value-Added Tax (VAT) accounting. The declaration is intended to reconcile financial information across employees tax (PAYE), income tax, VAT and customs tax types. The form requires the reconciliation to be accurate within R100 and it has to be completed within 21 days.

“For short-term insurers, completion of this return will be an onerous task because of reconciliation difficulties that arise as a result of timing differences with respect to VAT and financial accounting,” says Dorwin Nyaga, PwC Senior Manager for Indirect Tax.

More generally, SARS has recently stated that businesses are increasingly using sophisticated and complex financial schemes to avoid their tax obligations and minimise the effect of slow economic recovery on profitability. Examples identified by the SARS include businesses utilising domestic loopholes to avoid tax and take advantage of cross-border structuring and transfer pricing.

Companies’ VAT processes will also be under pressure as they deal with the effects of the current economic uncertainty. “This is likely to lead to increased incidences of VAT fraud, that is the over-claiming of input VAT to improve the cash flow of the business,” says Soverall. 

SARS recently published a five-year strategic plan for the financial years 2012 to 2017. The plan focuses on tax compliance and internal efficiency. In the light of the emphasis place by SARS on tax compliance, the industry cannot afford to be complacent, warns Soverall.

“Businesses will need to rethink how they conduct their tax affairs, more particularly their VAT transactions.” For instance, any transfer pricing adjustments as a result of SARS attacking the transfer price charged between related entities could lead to adjustments to the VAT declaration. Such adjustments could result in interest and penalties being imposed on businesses.

“Now in its 21st year in South Africa, the VAT system of taxation continues to present businesses with a number of challenges in terms of administration and interpretation of rules. PwC Indirect Tax Services recently launched its inaugural publication: ‘Charting the changes, 21 years of VAT in SA’, which highlights the numerous challenges facing taxpayers in South Africa and on the African continent.

In an attempt to increase compliance with VAT and promote uniformity of the tax treatment in the short-term industry, SARS has also issued an insurance guide and is in the process of finalising a class ruling relating to the sector. Based on these draft publications, SARS has provided clarity on the VAT accounting relating to certain transactions, including premiums collected by intermediaries on behalf of an insurer.

Where a premium is collected by the intermediary on behalf of the insurer, the insurer must account for VAT in the tax period when the premium is received from the intermediary.

Usually under the Short-Term Insurance Act, the premiums are payable to the insurer within 15 days after the end of each month. Therefore, the fact that the premiums are received through the intermediary should not delay VAT accounting by the insurer, says Nyaga.

“Short-term insurers need to get their houses in order and confirm the accuracy of their accounting policies to ensure compliance with the tax legislation,” concludes Soverall.

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