United Arab Emirates: New VAT Implications Impacting The Region – Key Measures To Consider For Insurers In The GCC

Last Updated: 5 December 2017
Article by Raghad Hammad

Value Added Tax (VAT) is set to make its debut in the GCC in 2018, regardless of the VAT rate being one of the lowest VAT rates across the globe; its introduction will provide an alternative source of revenue for GC governments and contribute towards regional development.

The GCC member states signed the Unified Agreement for VAT (UAVAT), which provides the framework for VAT implementation, and will be implemented in all the GCC countries between January, 1st 2018 and January 1st, 2019.

The UAVAT framework includes:

  • A standard initial VAT rate of 5% applying to goods and services.
  • Mandatory registration for businesses with an annual turnover of < US$ 100,000 and businesses that generate 50% of this annually can voluntarily register for VAT.
  • The GCC States have agreed that certain industry sectors may have different VAT treatments. The classification of certain goods and services may be treated as taxable, exempt or zero-rated (0% tax rate). These industries include: Education, Health, Real Estate and Local Transport.

What is VAT?

Value Added Tax (VAT) is an indirect and consumption based tax that is levied on the supply of goods or the provision of services during each stage of production and up the final point of sale. The VAT paid on purchases and expenses is credited against the VAT charged on supplies made. Businesses are required to submit VAT returns and pay over any VAT due to the local authorities periodically.

What we know about the VAT legislation.

Based on the different jurisdictions, different rules will apply in each of the GCC states. Thus far, only KSA and the UAE have released their local VAT legislation both of which are expected to be implemented by 1 January 2018. However, the other member states are anticipated to follow the same method of application as both KSA and the UAE at a later date. Last August, KSA published the implementing regulations for the KSA VAT Law, while the UAE released Federal Decree-Law No. 8 of 2017 on Value Added Tax and business owners can now register for VAT ahead of the implementation date.

Exempt Vs. Zero-Rated

When we talk about exempt goods and services, we are referring to those which are fully exempt and shall not be VAT applicable. The seller of exempt good or services is NOT entitled to reclaim "input" VAT on business purchases.

On the other hand, zero-rated good and services have VAT applicable at a rate of 0%. Furthermore, the seller of zero-rated VAT goods or services is entitled to reclaim "input" VAT on business purchases.

VAT in KSA and UAE

        United Arab Emirates

                       Saudi Arabia

Financial Services

Fee based services: taxable

Margin based services: exempt

Fee based services: taxable

Insurance

Life insurance: exempt*

Non-life insurance: standard rate

Medical Insurance: standard rate

Life insurance: exempt*

No-Life insurance: standard rate

Medical Insurance: standard rate

Health

Specified services, medicines and medical equipment: zero-rated

Specified services, medicines and medical equipment: zero-rated

*Life premium insurance will be exempt, but fees and charges will be at standard rate.

Impact of VAT on Insurance in KSA

Under the KSA VAT Law, life insurance policies are considered "financial services", therefore the cost of providing life insurance will increase.

With respect to life insurance companies supplying both life policies (exempt) and other products (standard rated) they will need to apportion input VAT between these products. As for exempt supplies, input VAT cannot be claimed and for standard rated products input VAT can be claimed. Additionally, commission payments, if made to VAT registered brokers, will attract VAT at standards rate.

Impact of VAT on Insurance in UAE

In the UAE, the VAT Law will influence the insurance industry by establishing that life insurance policies will be exempt while non-life insurance products will be taxable. For VAT purposes, the definition of 'life insurance' is expected to be confined (like KSA) to insurance against the death of an individual only. Life insurance premiums will be exempt from tax but any fees and charges relating thereto will attract VAT.

In the case of supply of exempt goods and services, no input tax credit will be available. Therefore, the VAT cost will have to be borne by these businesses, including the VAT on commissions paid to intermediaries may not be recoverable.

Impact of VAT on Insurance in Oman and other GCC Countries.

Oman & other GCC countries must follow the GCC Unified VAT Agreement, but until now no laws or regulations have been published. However, regarding the VAT treatment of financial services, the standard rule stipulated in the Treaty is to exempt these services from VAT with a right to reclaim the input tax credit according to specific rates determined by each member state. However, each member state may opt for a different VAT treatment for financial services and in particular for the insurance industry.

Key Measures To be Taken

With respect to transitional considerations, as in other jurisdictions, the GCC VAT law may make the supplier of goods and services liable to account for VAT from the implementation date. Therefore, you need to ensure that there are explicit VAT clauses in your contracts to legally recover VAT from your policyholders, if not this will be payable by the insurer. Besides, changes in costs due to VAT will also impact your pricing policies, so an early assessment is required in order to maintain current levels of profitability.

Moreover, an assessment of the capabilities of existing ERP/IT systems and re-configuration is necessary in order to generate VAT compliant invoices and VAT returns (in the UAE including emirate by emirate revenue reporting).

One of the main issues is that non-compliance could invoke huge penalties so companies need to be absolutely sure that they are fully compliant. Consequently, the staff will need to be coached to ensure understanding and compliance with the new regulations becoming familiarized with any necessary documentation.

Tips for the insurance industry.

It is crucial for businesses to start the preparation process early, as an understanding of the potential impact of VAT on the business will reduce friction in the ongoing process. When the legislation is available the company should carefully consider: the "definitions" and the regulatory provisions; map which business activities will be impacted by VAT; analyze contractual arrangements that require action; prepare and adopt an action plan for successful compliance and execute the implementation strategy in time; and keep up to date with continuing developments.

Preparation is key because VAT liabilities are generally self-assessed, with errors often leading to harsh penalties, time consuming interaction with local tax authorities, or business disruption.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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