Insurers in the UAE are struggling with a problem involving millions of dirhams in uncollected VAT from policyholders, said S&P Global Ratings.
Although advance notice was given by the authorities of the VAT before it took effect on 1 January, insurers did not anticipate that they would face the problem or had perhaps expected more clarity on the issue, said Mr Sachin Sahni, primary Credit Analyst at S&P.
According to the VAT regulations, all general insurance sold last year but with a policy period that runs into 2018 are subject to 5% VAT on the premiums on this year’s portion of the policy. The main issue, which remains unresolved, is that the insurers are obliged to deposit the tax liability whether they can recover this amount from their customers or not.
The ratings agency estimates the tax liability for the total market to range between AED700 million (US$190.6 million) and AED800 million based on estimated gross (general insurance) premiums of more than AED30 billion for 2017.
Hurdles
It might be possible for insurers to collect a portion of this amount from their corporate customers who can, in turn, claim this VAT on their tax returns as an input tax. However, considering that the large number of policies (especially motor) are sold to individual retail customers, it would be practically impossible for insurers to reach out to hundreds of thousands of retail customers to recover the applicable VAT, the agency said.
There is another hurdle. Even if insurers decide to reach out to all of their clients, most policies sold in 2017 did not include any clause for a retroactive claim on VAT, with the exception of the few insurers who started inserting this clause in the latter part of 2017.
In the absence of this clause, the customer is under no legal obligation to pay this portion of VAT, unless the customer is a tax-registered entity and can claim the VAT paid to insurers as input tax.
There have been various discussions in the market about this issue and recently, the Emirates Insurance Association has appealed to the Federal Tax Authority to allow non-retroactive application of VAT on insurance policies issued last year whose term matures after 31 December 2017. There has been no official notification or clarification on this yet, and hence the tax burden still falls on insurers.
Market impact
S&P believes the challenges related to the VAT are negative for the overall UAE insurance market, but does not expect any negative rating action on any of its rated entities at this point because most have declared robust earnings during the recent past and are capable of absorbing this impact. Since most UAE insurers are composite insurers, almost all will feel the impact in one way or another, though the degree might differ among insurers.
Insurers with a heavy focus on retail lines of business would be hit the most since their clients (mostly walk-in retail customers) will not be tax-registered and hence would not be ready to share the additional cost, whether in the form of VAT on policies issued in 2017 or VAT charged by claim suppliers.
Life insurers may need to restructure their current operating model and negotiate commission terms with their primary distribution channel, brokers, or risk thinner underwriting margins. While S&P expects the challenges on the underwriting side to be met by the market, each individual insurer will have to cope with the procedural and compliance-related issues. M
AED1 = US$0.27