Administrative costs paid to insurance firms VAT free - Tribunal rules

An illustration of an insurance cover. There are many opportunities in the market for all insurance players especially the local ones to grow. FILE PHOTO

What you need to know:

  • URA had contended that Britam was acting as a broker and therefore should have charged VAT on the reinsurance companies. But this was objected before the Tax Appeals Tribunal on the understanding that the services it provided were incidental or ancillary to the provision of reinsurance service.
  • URA had argued that fronting and facultative fees constitute a commission for sourcing insurance business which falls under general insurance and not re-insurance.

Fronting and facultative fees earned by insurance firms to cater for administrative costs in respect of reinsurance services are exempted from Value Added Tax (VAT), the Tax Appeals Tribunal has ruled.

Fronting and facultative commissions are fees where a primary insurer issues a policy, then passes on the risk to a reinsurer.

Three members of Tax Appeals Tribunal comprising of Dr Asa Mugenyi, Dr Stephen Akabway and Mr Siraji Ali ruled that services rendered in the provision of re-insurance are incidental to re-insurance services and are, therefore, VAT exempt.

“Insurance business involves insuring risks. At times an insurance company may not have the capacity to underwrite all the risks it has taken. It cedes part or all of the risks to a reinsurance company. Where an insurance company cedes part of the risk to a reinsurance, the insurance company retains facultative fees. Where it cedes all the risk, it will retain fronting fees. Under the Value Added Tax Act, reinsurance business is exempt,” they held.

The tribunal’s decision arose out of an application filed by Britam Insurance Company, challenging assessments issued by Uganda Revenue Authority for the period 2014-2016, in respect of VAT on fronting and facultative fees worth Shs250m, received from other insurers.

URA had contended that Britam was acting as a broker and therefore should have charged VAT on the reinsurance companies. But this was objected before the Tax Appeals Tribunal on the understanding that the services it provided were incidental or ancillary to the provision of reinsurance service.

URA had argued that fronting and facultative fees constitute a commission for sourcing insurance business which falls under general insurance and not re-insurance.

It argued that Britam played the role of an agent and fronts policies in respect of which it was paid commission.
Britam Insurance Company Uganda Limited brought the suit challenging URA’s decision not to treat fronting and facultative fees as VAT exempt.

“This application does not only affect the applicant but also other insurance companies that receive the same fees. The tribunal advised the applicant not to add other insurance companies as parties as it would delay the trial and involve repetitions in evidence and multiple witnesses,” observed TAT adding that the decision would affect all insurance companies that received fronting and facultative fees.

According to the tribunal, Reinsurance services cannot exist without fronting and facultative arrangements.

“Britam is an insurance intermediary performing ancillary services which are VAT exempt. The consumer or insurer may never meet the reinsurer. The service of a reinsurance intermediary is to spread the risk of high exposure cover,” the tribunal ruled.