Uncertainty persists as to when precisely value added tax (VAT) will be introduced in the member states of the GCC, and the process surrounding a roll-out. However, given the fiscal pressures in the region, the introduction of the tax seems inevitable and could cause short-term cash-flow issues for insurers, said A.M. Best.
As VAT implementation laws have yet to be passed, this has resulted in a debate as to whether the target implementation date is achievable, the ratings agency said in a new briefing.
The GCC member states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE are in the process of establishing separate national legislation to simultaneously adopt the tax on 1 January 2018.
Laws for the implementation of VAT under the unified GCC VAT Framework Agreement are yet to be passed in most member states, but if the deadline is unchanged, companies and markets may have to rush towards implementation.
Whilst there may be some delay in VAT implementation, the tax is likely to be introduced as quickly as possible, said A.M. Best.
Public financing across the GCC has become more restrained in recent years, reflecting the decrease in revenue from the sharp fall in oil prices. As a result, the introduction of VAT at a standard rate of 5% appears inevitable as governments seek to bolster their inward receipts.
The implementation of the VAT rules will increase the cost of doing business for insurers in the GCC as VAT will be applied to almost all goods and services in the value chain, including outsourced services, said Ms Aneela Mather-Khan, Associate Financial Analyst, A.M. Best.
Few insurers appear to be prepared for the change in legislation, with some assuming that any impact would be limited, the briefing noted.
Mr Salman Siddiqui, Associate Director, added that “insurers should consider the implementation of VAT as part of their risk management framework, paying particular attention to the correct classification of all business transactions”.
With regards to the impact on the credit quality of insurers, there likely is to be an adjustment period when insurers will have to take a hit to move in line with the requirements, said the ratings agency. This could affect operating performance and capitalisation, although this would likely be a short-term effect, while companies adjust pricing as policies are renewed. M