The VAT liability of UAE insurers on unearned premiums for policies issued in 2017 that run into 2018 is estimated at AED800m ($217.8m).
“The market has a non-life premiums of about AED27bn in 2017, and if half of that is for the unexpired period, the VAT works out to about AED800m,” said Mr Arvind Kashyapa, chairman and CEO, Howden UAE.
This estimation comes at a time when there is lack of clarity surrounding the treatment of VAT on unearned premiums at 31 December 2017 and this has raised concerns as insurers find it difficult to reclaim the tax from policyholders that the former had paid with effect from 1 January 2018. They may have to absorb a large amount of this tax liability which may reduce their profitability in 2018.
“Insurance companies have been asked to pay. The question arises as to who will bear this liability – the insurance companies or the clients. Larger clients may pay, but the question is about thousands of smaller clients or policyholders. There are efforts from brokers to get some recovery from clients,” he said.
Insurers have been following up with clients for payment of the VAT on policies issued in 2017 that stretch into 2018 and some larger clients have agreed to pay.
“The difficult task is to get from those individual clients, as thousands of policies have been issued. It is impractical to contact each one of them,” said Mr Kashyapa.
The introduction of the tax has increased the administrative burden and costs for insurers due to heavy investments in VAT compliant infrastructures, said a Milliman report.
This is so for insurers heavily involved in retail lines that failed to stipulate in the insurance policies that they would make a retroactive VAT claim or who do not have direct access to their customers (if policies were sold through brokers). Inconsistent VAT treatment by different brokers are forcing insurance companies to have different systems to deal with different brokers. Not all parties involved are VAT registered, thus creating further operational hurdles, the report said.
The risk of reduced profitability due to VAT that is not reclaimed is most significant for those insurers which have large unexpired risks at 31 December 2017 and are unable to either amend the insurance policy with relevant customers and/or collect the VAT recoverable by the end of 2018. M
AED1 = $0.27