From the starting of 2018, when VAT (Value Added Tax) was introduced in the UAE, the insurance sector has been struggling with a few challenges.
The introduction of VAT meant that being a consumer you will have to pay an extra 5% of the price on the majority of your purchases.
By the end of 2018, the FTA (Federal Tax Authority) gave out quite a comprehensive document, wherein the exclusion of some products & services from the VAT was detailed. Education till the university level, residential property transactions, and medical services managed to escape the tax. Hence, for your really huge expenses, you would not have felt a major change.
But, for the rest of the things, you will have to pay an extra 5 percent. For example, VAT is charged on new vehicles and fuel. Also, inevitably coverage can be availed at a five percent Value Added Tax on top it.
In terms of the insurance sector, all of this is a little more complex than you may be thinking. You must have already realized that you do pay VAT additionally with your premium cost, but there are also other things that follow.
Suppose, you are purchasing a fully comprehensive plan for a regular SUV. The minimum amount you can invest in that policy is 2,000 dirhams. Additionally, you have to make a payment of 5% VAT too. This makes your total amount to be 2,100 dirhams.
This isn’t that bitter a pill to swallow. However, the level of coverage you will be getting in the post-VAT scenario is the interesting part.
Let us now consider that you are purchasing a new vehicle. So as to keep things simple, we consider its showroom price to be 100,000 dirhams. This implies that you will have to pay 100,000 dirhams for your car and 5,000 dirhams on top as VAT.
These two amounts will be properly separated on your invoice while making the payment because the VAT is ultimately paid to the Federal Tax Authority.
But, what would be the case when you buy coverage for that vehicle? Will this policy value your car at 100,000 dirhams (the showroom rate) or at 105,000 dirhams (the rate inclusive of the VAT)?
If the policy values your vehicle at the showroom price, not considering the VAT, you will be out of pocket for that 5% while writing the vehicle off.
You will probably get around this by simply going for a policy that values your car at 105,000 dirhams. A few of the insurers will be ready for this; however, the others won’t be. In that case, you will end up paying a little bit more for that additional coverage.
The crux of this story is that with the introduction of VAT, the importance of comparing various policies before settling for one and signing up on the dotted line has increased considerably. A comparison website will come handy in such a situation.
Things can be comparatively easy for home and travel insurance. In the case of travel insurance, you usually buy a pretty standard policy that comes with the concept of one-size-that-fits-all. Such covers usually require very few information for receiving a quote.
There definitely may be variation in the rates depending upon your age or your travel destination, but there is bearing of VAT on that. Hence you can simply expect to make the payment of 5% on top of what you were paying in the pre-VAT world.
In the case of home insurance UAE, you have to declare the total value of your belongings. Suppose, you own a TV at home, which costs around 2,100 dirhams including the VAT. You can straight-forward declare that you have a television with a value of 2,100 dirhams at home. For some of you, this means making payment for a more comprehensive plan; however, for maximum people, VAT would not have much impact on how the policy is issued. You can mostly expect to pay only 5% on top for the coverage.
Coming to health insurance, you would probably not experience much change at all. Most of the people in the Emirates possess health cover offered by their employers. Still, main healthcare services will either be zero-rated or exempt from tax.
Wherever VAT applies, the small increases may be accommodated by the limits offered by the policy anyway. Hence, you can relax in this case.
Key Points in the Comprehensive Document regarding the VAT in the UAE.
- Travel insurance offered to the residents of UAE is not subjected to the 0-rate of VAT.
- Real Estate Insurance is not considered as a service in regard to real estate for the rules of the place of supply unless it is included in the composite supply, which is in relation to real estate.
- Taxpayers that are exempt partially, that is, providers offering both life & non-life insurance) need to review the position of your input tax recovery for assuring that it reflects the actual use. Taxpayers have to ensure that the apportionment of residual tax is reasonable and fair.
- The treatment of VAT of Islamic insurance (Takaful) has to be analyzed on the basis of each case, wherein the position of VAT liability of every Islamic product must be ascertained via a 4-step process mentioned in the document.
However, there are still certain uncertainties related to the treatment of VAT of particular products & arrangements like unit-linked savings plans, co-insurance, bundled product, and contracts with multiple policyholders living in different countries.
The effect of exemption of VAT in case of life insurance services may result in significant expenses for the insurers that offer these services, considering the consequent limitation on the VAT recovery levied on their own expenses.
What Do These Key Points Mean?
It is necessary for the providers and businesses that offer related services like brokers, claim handlers, and agents, to consider if their VAT treatment on the products is in coordination with the clarifications mentioned in the document. This is done for assessing exposures and managing additional non-compliance risks efficiently.
What Should You Do?
- Check the operating models for re-assessing the VAT compliance exposures and risks, specifically against the clarifications mentioned in the document. This is done with a view of taking proper action including voluntary disclosures for correcting the VAT returns submitted previously or updating contracts and various other documents with the customers.
- For insurers that are exempt partially (that is, companies offering life as well as non-life policies), carefully reviewing if the recovered input tax based on the standard method shows actual use or not is very important. If it does not, then they have to analyze which alternate method can offer a reasonable and fair result.
- Plan to make sure that the operating models and the flows for the product delivery are structures properly.
In a Nutshell!
Value Added Tax is a huge and positive decision for the UAE. It must have a minimal effect on how your insurance UAE is bought & delivered. But, due to the slight changes that may follow, comparing various available options in the market is the best way of ensuring you are receiving the right coverage.