Storm over State plan to tax insurance payouts 

Insurance customers will start parting with a 16 percent tax on the money insurers pay them for their losses, if the proposal whose interpretation has divided tax experts and insurers is adopted.

The Finance Act 2023 proposes the introduction of a new subsection to Section 17 of the Value Added Tax (VAT) Act to allow the owner of taxable supplies compensated for a loss of goods to pay VAT at the rate of 16 percent.

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“Where a bona fide owner of taxable supplies, who has deducted input tax under subsection (1), is compensated for a loss of taxable supplies, the compensation shall be treated as a taxable supply,” the finance bill reads.

A 16 per cent tax could mean a person receiving Sh1 million compensation from insurance cover would partake in Sh160,000 in VAT, a move tax experts say is likely to hurt the attractiveness of insurance in a market with less than three per cent penetration.

Insurance agents are asking Parliament to exclude insurance from the list of compensation income targeted for a 16% tax as the country looks for additional funds to fund the 2023/2024 financial year budget.

Data from the Insurance Regulatory Authority shows that last year, public insurance companies paid claims amounting to 72.26 billion shekels, compared to 64 billion shekels in the previous year, with 33.85 billion shekels related to private and commercial vehicles.

The move, if passed, would mirror those in markets such as South Africa, where insurance payments are seen as a supply of goods in terms of terms, and are therefore subject to VAT.

Audit and advisory firms, including KPMG and PricewaterhouseCoopers (PwC), warn that a move to tax offsetting would hurt the general insurance business, even as the Association of Kenya Insurers (AKI), the sector’s lobby group, pushes for the exclusion of insurance offsetting. of value added tax. premium.

KPMG said the proposed provision would likely affect compensation from insurance after loss of taxable supplies where input tax has already been claimed.

PricewaterhouseCoopers says the move is inconsistent with the levied VAT as insurance compensation cannot be considered as a supply of goods and services.

“In our view, this proposed change is bound to have a significant impact on the general insurance sector, and ambiguity in the rationale and framing of the law must be subject to engagement with stakeholders before it is passed into law,” says PricewaterhouseCoopers.

AKI, aware of cases where a tax man would naturally interpret tax laws in his favor unless the courts rule otherwise, asks MPs to amend this clause and expressly states that insurance compensation is exempt from VAT.

The lobby recently sent its input to MPs and hopes that the bill that will be sent to President William Ruto for signature will be updated to exclude insurance compensation.

“Insurance is VAT-exempt, so you cannot apply VAT to insurance compensation unless you remove it from VAT-exempt status,” said Mr. Tom Jeshohi, Chairman of AKI.

“Our calls to Parliament are that if this amendment is to be maintained, it should explicitly exclude the insurance business because the insurance business is exempt from VAT.”

The government’s plan to approve part of the insurance compensation mirrors the three-year court battle between the Kenya Revenue Authority (KRA) and Sony Holdings, which owns Westgate Mall.

The KRA lost a case in which it was seeking Sh380.3 million in taxes from Sony over Sh4.4 billion in payments Kenindia Assurance remitted to Westgate in 2014 as compensation.

Westgate’s owners argued that the taxpayer had unfairly classified a portion of the compensation as revenue rather than capital to justify the tax claim.

KRA has also in the past also been in court demanding taxes from insurance companies on the sale of extinct cars.

For example, Madison Insurance in 2016 argued to the Tax Court of Appeals that proceeds from the sale of damaged vehicles are part of the compensation paid to the insured and are therefore exempt from VAT.

The insurer argued in court that in a situation where the insured chooses to keep the stock and receives an additional amount of the amount required to restore the vehicle, they will not be required to calculate VAT on the salvage.

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The KRA was seeking Sh21.28 million in VAT from Madison’s sale of salvage cars from customers but lost the case.

“The argument that salvage is an addition to the insurance business is given incorrectly because it is an integral part of the insurance business and is therefore an exempt supply under the VAT laws,” the court ruled.

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