Motor premiums to shoot up under VAT
According to Khalid Al Bustani, director-general the UAE Federal Tax Authority, the Emirates would implement a five per cent GCCwide VAT on January 1, 2018, and excise tariff by the fourth quarter.
Mustafa Vazayil, managing director, Gargash Insurance Services, said the insurance industry is gearing up for VAT implementation.
“The IT system and accounting software are being modified to ensure seamless implementation. It is our understanding that VAT will be charged and will become payable by customers on top of the agreed premium. The exceptions, as of now, are life insurance, and hopefully, mandatory basic medical insurance products,” said Vazayil.
Jacob Koshy, managing director of Northern Insurance Brokers, said since vehicle insurance is not exempted under the proposed tax law, motorists would have to pay higher premiums once VAT becomes effective in January.
Tax experts clarified that VAT on motor insurance is not a cost to insurance companies but to be borne by the public — companies and individuals.
Experts at KPMG clarified that the VAT treatment of insurance premiums has not been confirmed as yet, but is likely to vary between taxable, zero rated and exempt.
“The UAE’s Ministry of Finance has confirmed in its ongoing VAT workshops that general insurance premiums will be taxable at five per cent, while life insurance premiums are currently planned to be exempt — as is the case in many economies. If this is ultimately confirmed in the UAE, providing life cover will not incur a VAT charge. However, that means that the VAT on commissions paid to insurance brokers will not be recoverable — and so will be a cost that has to be absorbed by the organisation. The VAT on other business input costs will equally be unrecoverable where related to the revision of exempt insurance policies.
While a zero rate of VAT will be applied to both education and healthcare services, health insurance does not count under the healthcare sector. Healthcare services could include medical and dental services and extend to room accommodation and meals for patients, prescription drugs and medical equipment supplied to patients in the course of receiving exempt healthcare services; input tax incurred in making these supplies will be irrecoverable.
In 2016, the UAE insurance sector reported Gross Written Premiums (GWPs) of Dh40 billion, up from at Dh37 billion in 2015 and Dh33.4 billion in 2014. In the UAE, the implementation of the GCC-wide tax is expected to boost GDP by about 1.5 per cent with the implementation of the five per cent VAT, the International Monetary Fund has said.
For the UAE, VAT could generate Dh12 billion in its first year and Dh20 billion in its second year, according to Sultan Al Mansouri, Minister of Economy.
issacjohn@khaleejtimes.com