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Key points on VAT for insurance firms

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GDN Online Desk


This is the fourth in a series of VAT articles by Keypoint.

This week’s article has been developed by Sheikh Omar Hisham, a Malaysian GST/VAT expert who has prepared over 20 insurance companies in Malaysia, the UAE, Saudi Arabia and Bahrain for the challenges and opportunities posed by VAT.

While the GCC VAT treaty specifies how VAT applies to general and life insurance and reinsurance products, VAT’s impact on the insurance industry goes well beyond that.

Insurance is a highly regulated, complicated industry.

Supply chains – including insurers, brokers, reinsurers, service providers (such as hospitals, car workshops, third party administrators and surveyors), overseeing regulating bodies and consumers (most impacted financially by VAT) - are complex.

Meeting regulatory obligations set out by regulating bodies can be difficult even before VAT adds further intricacies. Understanding regulatory requirements, from an operational, legal and taxation standpoint, requires a deep appreciation of the insurance supply chain.

VAT issues for insurance companies

Unlike manufacturing and trading, where place of supply mainly depends on the location of consumption, the nexus between the place of consumption and the location of the underlying “risk” should not be ignored under an insurance arrangement.

The location and type of an insured risk has to be understood to determine the appropriate tax treatment – irrespective of the product.

However, determining the appropriate VAT treatment of an insurance premium is only the tip of the iceberg.

Reinsurance, brokering, claims settlements and co-insurance often have specific intricacies.

If these are misunderstood or incorrectly applied, tax efficiencies may be affected or – much worse – the insurer may be judged to be non-compliant.

One immediate issue is the impact of VAT on unearned premium reserves (UPRs) straddling the implementation of VAT.

The requirement to account for VAT on UPRs has significantly impacted the cash flow and financials of insurance businesses – especially on the retail side where VAT paid to tax authorities by insurance companies since January 1 is unlikely to be recoverable from consumers.

Other factors, such as the point where VAT crystallises (and so needs to be accounted for) and revolving insurance settlements are among the issues some Saudi and UAE insurers have failed to anticipate, contributing to their pain – even though VAT is not intended to be a cost to businesses.

Identifying the extent to which VAT can be recovered by a business is also complicated.

Any VAT paid on business expenses to further the business should be claimable unless specifically blocked.

Where a supply (such as medical costs or car repairs) is ‘enjoyed’ by the insured rather than the insurer, it can be argued that any VAT incurred on those costs relate to the insurer’s business activities and so should be reclaimable by the insurance company. Clarity from the relevant tax authority on such issues would be very welcome.

What should insurers be doing now?

Learning from what has happened in the UAE and Saudi Arabia as well as Malaysia, discussions at an industry-to-government level should be initiated immediately.

A uniform approach across the industry – covering not just VAT but also other regulatory requirements – should be collectively developed and adopted as soon as possible.

Fundamentally, based on the nature of its business, aren’t the insurance industry’s stakeholders best placed to understand the impact VAT will bring?

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