Insurance companies are asking policyholders to pay value added tax (VAT) with effect from 1 January on contracts issued last year and which were or are in-force in part of the current year 2018.
A 5% VAT has been implemented by the government since 1 January this year. However, several insurers had not provided for this when they sold insurance policies that took effect last year but continued to have effect this year. If the insurers fail to collect the VAT retroactively, their bottomlines would be affected this year.
One insurance company told Okaz Newspaper that the insurance industry is the only sector allowed to collect taxes on sales completed during 2017.
Insurers in the UAE, which has also imposed the 5% VAT since 1 January, face the same problem regarding VAT on insurance policies sold last year that continue to have effect this year. UAE insurers have been following up with clients for payment of the VAT on polices issued in 2017 that stretch into 2018 and some larger clients have agreed to pay.
The VAT recovery issue has arisen because several insurers heavily involved in retail lines had failed to stipulate in the insurance policies issued last year that they would make a retroactive VAT claim. Some lack direct access to their customers (if policies were sold through brokers). Inconsistent VAT treatment by different brokers are forcing insurance companies to have different systems to deal with different brokers. Not all parties involved are VAT registered, thus creating further operational hurdles, a Milliman report said.