The UAE is all set to introduce value added tax (VAT) at 5% on insurance, except on life insurance and life reinsurance, with effect from 1 January 2018. However, all commissions- - whatever the underlying class of business, whether VAT-exempt or otherwise-- will be subject to VAT, said Mr Michael Vaughan, Senior Tax Director, Grant Thornton which is an international professional services firm.
Clarifying specific provisions of the impending regulations at a workshop organised by the DIFC Insurance Association in Dubai, Mr Vaughan said everything other than life insurance and reinsurance will come under VAT, including motor and health insurance.
The UAE issued a Federal Decree-Law on 28 August 2017 on VAT, with regulations to follow by the middle of this month.
Mr Vaughan said general insurance will be standard rated with VAT charged at 5%, and insurers can recover all VAT (input tax) incurred in purchasing supplies. For VAT purposes, insurance contracts are treated as continuous supplies of services. Health insurance will be zero rated, meaning that insurers can get a right of credit for everything they buy.
VAT will be introduced from 1 January 2018 in the UAE and Saudi Arabia, while the other GCC states will be non-implementing states until they introduce their own VAT law.
The UAE’s Federal Tax Authority has clarified that the supply of insurance or reinsurance services to a recipient in a GCC non-implementing state and overseas (whether or not they would otherwise have been exempt where supplied in the GCC) will be zero-rated. VAT treatment for both Islamic and non-Islamic products will be the same.
Brokers currently receive payments for premiums on behalf of the insurer, and transfer this amount to the insurer, after deducting their commission. After 1 January 2018, brokers are required to issue a proper tax invoice to the insurer, for the supply of service, within 14 days of the date of supply, which is dependent on when the brokers would be deemed to have received payment. It is expected that insurance companies will demand earlier receipt of premiums collected by brokers, Mr Vaughan said.
On his part, Dr Bassel Hindawi, Chairman/CEO of DIFC Insurance Association, said: “VAT is obviously happening. Our members and insurance entities need to be prepared for it. They need to plan based on best practices until the remaining few points are clarified. But the general approach is, the way we understand it, it's going to be best practice. Insurance companies are advised not to delay things (registration) and to follow the compliance requirements and reach out for outside expertise for support. It’s a learning process everyone has to go through—make sure that necessary plans are in place.”