Insurers in the GCC need to be VAT-ready and will need to map and realign their business transactions, supply chains and IT systems to make them effective on introduction of 5% tax from January 2018.
The introduction of VAT, which has been confirmed at a rate of 5% from 1 January 2018, will pose significant challenges for the insurance industry in the GCC.
“Though it is still unclear how insurance income will be treated for VAT purposes, the industry needs to be prepared as the tax will have significant impact on financial services, particularly insurance, and there are a number of elements which the industry needs to be aware of in order to act early,” said Dr Bassel Hindawi, Chairman and CEO of DIFC Insurance Association, opening a seminar.
International accountancy firm Grant Thornton in the UAE, in partnership with the DIFC Insurance Association, hosted the seminar on the topic “VAT and the challenges which the insurance industry needed to be prepared for”.
The panel of speakers included Grant Thornton’s expert leaders Mr Gurdeep Randhay, Tax and Head of VAT, Tax Specialist Directors Mr Mike Vaughan and Mr Andrew Barrah from Grant Thornton Australia.
“Businesses need to be VAT ready and will need to map and realign their business transactions, supply chains and IT systems to make them more efficient and effective post-VAT introduction,” said Mr Gurdeep.
Businesses in the UAE will need to adjust their processes to the impending tax and the measures they should consider now prior to the introduction of VAT.
The seminar also addressed areas such as cross-border challenges, key lessons learned from other jurisdictions and implications for the insurance, banking and finance and Islamic finance industries.
“Timing and preparation are crucial, as VAT is going to delve into every aspect of a business. This includes ensuring that IT systems are upgraded and tested in advance, legal teams are involved early on, especially in reviewing contracts.
A well-resourced VAT project will also require steering committees and project management experts getting involved in risk assessments and mapping, and in-house training for staff in different functions are in place prior to the VAT “go live date”, said Mr Gurdeep.
Companies should ensure they have robust internal controls and processes to adhere to the new law to avoid any unforeseen penalties.
Premiums and commissions
Clarity was sought as to how premiums and commissions will be brought under the purview of VAT and how outsourced services will be treated.
For example, it was clarified that the provision of any add-on insurance products (“riders”) is treated separately from the basic life insurance coverage. No VAT will apply on a basic life policy if a policyholder takes a life insurance policy and tops it with health. However, VAT will apply on the “riders”.
Currently in other jurisdictions, zero rating – VAT at 0% – is granted on certain insurance services. Zero rating applies when insuring property or assets outside the country; insuring a person who is not a resident; and when a risk insured is outside the country. Insurers in the GCC are advised to be prepared if zero rating is applied in the region also.
Outsourced services – shared accounting or IT services – are subject to VAT at the standard rate in other jurisdictions.
The cost of doing business will increase if outsourced services and inputs are subjected to VAT in the GCC.
Businesses in the UAE will be able to register online for VAT from October 2017 and subsequently file returns on a regular basis. They will be required to keep records that will allow authorities to identify the details of the business activities and review transactions.