South Africa: Tax developments concerning insurance industry

The South African Revenue Service (SARS) is expected to challenge the tax treatment of new and untested contractual arrangements between businesses and their customers.

Insurers are responding to the challenge of differentiating themselves through innovative solutions. The more innovative, the more they will need to work with SARS to reach consensus on what these changes mean to both parties. Tax professionals have noticed stricter revenue collection methods and more queries being raised by SARS.

The KPMG member firm in South Africa has prepared a report that examines proposed tax amendments and recent court cases (briefly noted below) relevant to the insurance industry that may lead to SARS audits and queries.

• Corporate income tax rate: The Minister of Finance proposed in the 2021 budget speech to reduce the corporate income tax rate from to 27% (from 28%). The lowering of the corporate income tax rate would affect the accounting for and determination of deferred tax, but there is uncertainty concerning the interpretation of when the measure is “enacted or substantively enacted.” Insurers need to assess the effect on the annual financial statements and confirm when and how the change in the corporate income tax rate is to be reflected.
• Prepayments: The Supreme Court of Appeal—in a case concerning the tax treatment of once-off cash incentive bonuses paid to “dealers” (in the case of insurers, these would be commission earners and agents on the sale of initial policyholder contracts)—held that the period over which the expenditure may be claimed must be the period over which the true benefit is actually enjoyed. When considering the insurance industry, deferred acquisition costs may be affected.
• Loyalty programmes: The Constitutional Court—in determining whether a retailer was entitled to claim a section 24C allowance in terms of the income tax law in respect of future expenditure to be incurred under its loyalty programme—held that the income earned on the sales contract with customers was not the same as the contract that customers entered into regarding the loyalty programme contract. Because many insurance companies have loyalty programmes for their policyholders, they may need to consider the income tax implications of loyalty programmes.

Read an October 2021 report [PDF 260 KB] prepared by the KPMG member firm in South Africa