With the economic, regulatory and organizational shifts currently taking place in insurance, industry players face unique challenges as they prepare for evolving insurance regulations and look to create opportunities. The most significant change short-term change is VAT which is likely to be introduced on 1 January 2018.
Insurers must act now because VAT implementation will:
The VAT treatment of insurance premiums has not been confirmed as yet, but is likely to vary between taxable, zero rated and exempt. The UAE’s Ministry of Finance has confirmed in its ongoing VAT workshops that general insurance premiums will be taxable at five percent, while life insurance premiums are currently planned to be exempt – as is the case in many economies. If this is ultimately confirmed in the UAE, providing life cover will not incur a VAT charge. However, that means that the VAT on commissions paid to insurance brokers will not be recoverable - and so will be a cost that has to be absorbed by the organization. The VAT on other business input costs will equally be unrecoverable where related to the revision of exempt insurance policies.
In Europe, all insurance products are exempt from VAT. If other GCC member states follow suit, a number of issues will arise. If a supply is exempt, recovery of VAT on business inputs will be denied, increasing business costs which in turn will put pressure on insurers to raise premiums. However, not all economies exempt all insurance products. In Australia, for example, general insurance is liable to VAT while life insurance is exempt and medical insurance is zero rated.
If, rather than being exempt, insurance products are zero-rated, some VAT recovery on inputs will be allowed. However, even being zero-rated could cause issues. To maximize VAT recovery, organizations will need to trace business input use and apportion overhead costs between those relates to taxable (either at standard VAT rate of five per cent or zero rated) and exempt activities, which is likely to increase compliance costs. Higher costs – no matter what the good or service – tends to impact demand.
Taxes in the insurance sector can be rather complicated. Additional resources – including time and budget - will be required to administer not only the VAT process but also to determine the payout under a policy between a VAT-registered claimant and one that is not. Staff will need to be trained to ensure everyone understands – and is compliant with - the new regulations and is familiar with any necessary documentation. Specific invoicing may be needed, even if the services provided are VAT-exempt. Insurance-related companies, such as agents, brokers and claims handlers, will also need to understand how VAT could affect both margins and pricing. Where insurance is taxed at five percent, insurers will need to assess if this additional cost can be passed on to their customers or whether all - or some - of this has to be absorbed due to market pressures, impacting future profits.
These are just some of the many VAT hurdles that insurers will face. It is critical that insurers plan carefully to help mitigate the impact this will have on their organization and their customers.
We have an experienced VAT team, part of a global network of VAT experts, who have been advising clients on implementation strategies, helping them comply with VAT obligations and explaining their VAT liabilities. They focus on:
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