The insurance industry has been grappling with some Value Added Tax (VAT) related challenges since the introduction of VAT in the United Arab Emirates (UAE) at the start of 2018.
In its recently published VAT Guide on Insurance, the Federal Tax Authority (FTA) provides helpful clarifications on some of the issues faced by insurers and companies related to the insurance industry. Although the guide does not cover all insurance products and services, it provides clarity around key insurance products and insights on the FTA’s interpretation of some of the issues. The key points are:
- Travel insurance provided to UAE residents is not subject to the zero-rate of VAT.
- Insurance of real estate is not regarded as a service related to real estate for the place of supply rules, unless it is part of a composite supply that is related to real estate. This is different from the position in Saudi Arabia, where insurance of real estate is regarded as a real estate related service, as clarified by the General Authority of Zakat and Tax (GAZT).
- Partially exempt taxpayers (i.e. insurers providing both life and non-life insurance) are required to review their input tax recovery position to assure it reflects actual use. Taxpayers need to make sure that the apportionment of residual input tax is fair and reasonable.
- The VAT treatment of Islamic insurance (Takaful) needs to be analyzed on a case-by-case basis, whereby the VAT liability position of each Islamic insurance and re-insurance product should be ascertained through a “four-step” process set out in the guide.
However, there is still some uncertainty regarding the VAT treatment of certain insurance products and arrangements such as unit-linked type saving plans, bundled products, co-insurance and contracts with multiple policyholders residing in different countries.
The impact of the VAT exemption for life insurance services can result in significant costs for insurers providing these services, given the consequent limitation on the recovery of VAT incurred on their own expenses. The basis for correctly determining the extent of the recoverable/non-recoverable input tax remains unclear and something that needs to be looked at on a case-by-case basis.
What does this mean?
It is important for insurers and businesses providing insurance related services such as agents, brokers and claims handlers, to consider whether their VAT treatment of their insurance products is in line with the clarifications stated in the guide, to effectively assess exposures and manage any additional risks of non-compliance.
Companies providing both life and non-life insurance need to comply with the actual use basis for apportioning overhead input tax. These taxpayers need to analyze whether the method currently applied leads to a fair and reasonable result.
What do you need to do?
- Review your operating models to re-assess your VAT compliance risks and exposures, particularly against the clarifications provided in the guide, with a view to taking appropriate action including making voluntary disclosures to correct previously submitted VAT returns and/or updating contracts and other documentation with customers.
- For partially exempt insurers (i.e. companies providing both life and non-life insurance), it is key to carefully review whether the input tax recovered on the basis of the standard method reflects actual use, and if not, to analyze which alternative methodology would provide a fair and reasonable result.
- Plan to ensure that your operating models and flows for the delivery of products are structured efficiently.