Can we ensure clarity on VAT on insurance?

Have your insurance costs increased in recent years? If so one contributor might have been the VAT Act 2014, which extended the application of VAT to general insurance services (such as motor, house etc.) as part of a broader move to widen the scope of VAT and so raise more revenue.

This change introduced by the new Act was also supported by the Value Added Tax (General) Regulations, 2015 (here referred to as the “Regulations”), and in particular Regulation 35.

Regulations are in principle expected to clarify implementation of the law. However, in this case, the specific Regulations on how VAT would apply on general insurance services had various inconsistencies with the primary legislation, namely the VAT Act.

A number of these inconsistencies were removed on 19 October 2018 as a consequence of the Value Added Tax (General) (Amendment) Regulations, 2018, which amended the General VAT Regulations. However, to the surprise of many, instead of providing more guidance in relation to insurance, the relevant Regulation on general insurance was completely removed /deleted. Therefore, whilst a number of areas of inconsistency have been removed, there is no longer a guidance on application of VAT to the insurance services outside the VAT Act itself.

One particular positive change was to remove inconsistency in relation to whether an insured person is allowed to claim input tax on insurance premium. I believe that the amendment has also removed any uncertainty as to the right of the insurer to claim VAT on costs of sales, administration and management relating to supply made under contract of insurance.

In addition to the normal rules of claiming input tax, the VAT law allows for insurance companies and insured persons who are taxable persons to make adjustments when making/receiving insurance payments a good example being claims paid in cash.

Whilst there has been progress by way of the recent amendments, there are still some areas that call for further consultation. For example: (i) In the case of invoicing and accounting of premium received through brokers, does the liability to account for VAT arises in the hands of insurer or broker? (ii)For a premium ceded out under contract of reinsurance, should the reinsurer issue tax invoice to the ceding company?  (iii) Is VAT chargeable by the broker on commission received in respect of all types of insurance including those that are exempt (i.e. life and health) or just on general insurance premiums?

In summary, whilst the amendment has come at the right time and it is expected to eliminate a number of inconsistencies between the VAT Act and the Regulations, there are still areas that call for further consultation.  In this regard, stakeholders in the insurance industry, perhaps through the Association of Tanzania Insurers (“ATI”), would be well advised to present their proposals for smooth implementation to both (1) the tax force for tax reforms and (2) the Parliamentary Standing Committee on Budget for consideration in the upcoming budget. And, with further clarity and less uncertainty, perhaps your insurance costs might reduce?

By Miriam Sudi Senior Manager at PwC – Tax Line of Service

The views expressed do not necessarily represent those of PwC. For PwC updates on tax and other matters do follow @pwc_tz or visit our website www.pwc.com/tz

Read the full article published in The Citizen (31.01.2019).