The Emirates Insurance Association has called for the non-retroactive application of value added tax (VAT) on insurance policies issued last year whose term matures after 31 December 2017.
The Association has called for the application of the tax to all insurance policies sold only in 2018 and thereafter. The VAT system took effect on 1 January 2018.
Insurers are facing VAT collection problems because there is a lack of a mechanism to oblige customers or agencies to pay tax on the 2018 portion of insurance policies issued in 2017, reported Emirates Today. Several insurance policies sold last year do not contain a clause providing for the retroactive collection of VAT.
The insurers say that it is difficult for them to review all their clients and seek to recover the VAT that is applicable to the part of the policies that have effect this year.
"Insurance companies operating in the domestic market started to collect VAT on new policies issued this year, but they do not have a retroactive tax collection mechanism for the policies issued last year," said Mr Bassam Chilmeran, General Manager of Al Wathba National Insurance Company.
However, the Federal Tax Authority can collect the VAT on the 2018 portion of the insurance policies from insurers, regardless of whether the latter are able to collect them or not from customers.
Referring to motor insurance sold through auto dealers, Mr Jihad Faitrouni, CEO of Dubai Islamic Insurance & Reinsurance (Aman), said:”The problem is the collection of tax from dealers for a policy issued several months ago.” If the dealer does not respond, the insurance company may have to bear the tax.
Mr Faitrouni said: "The amounts may be simple, but there were too many policies issued last year, so insurance companies may find themselves forced to pay a lot of money that will be very difficult to collect, and this will affect their performance."
Not all is gloom. Insurance companies and intermediaries have begun to address clients that deal with them in group business to collect the tax retroactively. However, this is more difficult for policies sold to individuals. Some insurers though have resorted to a clause in their insurance policies stating that they are entitled to collect the tax retroactively if the VAT becomes effective.