News24 Nov 2016

GCC:VAT seen as likely to skew insurance industry costs

24 Nov 2016

The introduction of a GCC-wide system of value added tax (VAT) is likely to have a significant impact on financial services, particularly insurance-related businesses, although detailed rules are not yet known.

All businesses will face a host of operational issues as a result of the introduction of VAT. However, it has the potential to seriously skew the cost base of the insurance industry in particular, subject to the details of the final regime, said Mr Roger Phillips, an insurance law expert, and Mr Ian Anderson, a tax law expert, at the legal firm Pinsent Masons, in an article on the firm's information website, Out-Law.com.

The writers said: “If the European model of VAT is adopted then insurance income, which will be 'output' for VAT purposes, will be exempt from the tax. This may seem like good news - but the related restriction on the recoverability of 'input' VAT on purchases is most definitely not good news. This would increase the costs of expenses such as professional fees; outsourced back-office services including claims settlement services; data storage; and even facilities management.

“At the same time, outsourced services tend not to benefit from the VAT exemptions on insurance services and the VAT on these services cannot be recovered by an insurance company. This creates a challenge for the insurance industry given that outsourced services are predicted to grow; new areas of technology and distribution channels are being developed; and competition for secure and efficient e-commerce and data transfer services is intensifying.”

Lobbying

“At this stage, we do not know how the GCC will apply VAT to financial services and even whether it will be applied in a consistent way between countries. Regardless, the insurance industry should consider lobbying to influence the way in which insurance income is treated for VAT purposes. Even if the basic taxability of premiums and commission cannot be changed, there may still be scope to influence how outsourced related services are treated,” advised the writers.

There is no guarantee that each country in the GCC will adopt a uniform approach to the taxation of financial services. Even if the framework is similar, there remains scope for one country to treat outsourced services differently – potentially creating a competitive advantage for the insurance industry and the outsourcing market in that location.

In June, the finance ministers of the six GCC countries approved an in-principle agreement to provide a common framework to develop national tax regimes. While there is a requirement for all GCC countries to have VAT in place by the end of 2018, they are working to implement it by 1 January 2018 to avoid distortions between those who have and have not implemented a tax regime.

 

 

| Print | Share

CAPTCHA image
Enter the code shown above in the box below.

Note that your comment may be edited or removed in the future, and that your comment may appear alongside the original article on websites other than this one.

 

Recent Comments

There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.