INSURANCE VAT GUIDE
The FTA had issued an Insurance VAT guide called VATGIN1, to guide the people responsible for tax matters in the Insurance industry in the UAE. Insurance VAT guide contains guidance for the insurance industry to understand the characteristics of insurance and related services for VAT purposes. It specifies the insurance services which are liable and are exempted from VAT and costs on which VAT recovery is possible. The Taxable Person Guide ( VATG001) should be read in conjunction with the insurance guide.
Today’s article discusses the Insurance VAT Guide ( VATGIN1) in detail.
INSURANCE EXEMPTED FROM VAT
The Federal Decree Law and Executive Regulations exempt two specific insurance :
- Life Insurance and associated reinsurance is exempted from VAT
- Insurance relating to the international transport of goods and passengers are zero-rated. This is a contract of insurance provided in connection with the international transportation of passengers or goods and includes transfer which either begins or ends in the UAE or which passes through the UAE.
INSURANCE AND VAT
Except for life insurance and insurance related to international transportation of goods and passengers, all insurance and related services will be subject to VAT at the standard rate.
- STANDARD RATED SUPPLIES: Supply of insurance and related services are subject to VAT at the standard rate if they are treated as taxable supplies. The VAT incurred on costs wholly attributable to the standard-rated supply is fully recoverable.
- EXPORTED SERVICES: The supply of insurance and related services to a recipient established outside the GCC Implementing State is zero-rated. The VAT incurred on costs wholly attributable to the zero-rated supply is fully recoverable. However, the supply of insurance and related services to a recipient established outside UAE but within the GCC implementing state has the following VAT treatment :
- Supply of insurance or related services is outside the scope of UAE VAT where the recipient is registered or registerable for VAT in the GCC Implementing State. The recipient is liable to account for a reverse charge in the other GCC state at the prevaling rate of VAT applicable to that particular service. Input tax which is directly in respect of such supplies is still recoverable, even if the supply would have been an exempt supply if made in the UAE.
- The place of supply of insurance or related services will be in the UAE where the recipient is neither registered nor registerable for VAT in the GCC implementing state. The supply, in this case, will be liable to VAT and will have the related level of VAT recovery.
- IMPORTED SERVICES: Receipt of services by a UAE VAT registered business from a person resident outside the UAE will be liable to VAT at the standard rate. The imported services will be subject to the reverse charge mechanism in such a manner as if the importer had supplied these services to itself. The importing insurance institution is thereby required to account for VAT incurred on the imported services. Subject to the usual rules of recovery including input tax apportionment, the importing institution will also be entitled to claim input tax for such services.
- EXEMPTION: Provision or transfer of ownership of a life insurance contract or provision of reinsurance in respect of such contract would be exempted from VAT. This exemption also applies to the premium payable in respect of life insurance and reinsurance of life insurance. The VAT incurred on costs wholly attributable to exempt supplies is not recoverable.
- RECOVERY OF INPUT TAX: A mixture of taxable and exempt supplies is exempted for VAT purposes partially. Recovery of input tax takes place on the basis of partial exemption. Apportionment is only for the costs partly attributable to taxable and exempted supplies of financial services. Supplier in question makes use of input tax apportionment method to determine the amount of input tax recovered in such circumstances.
GENERAL PRINCIPLE: Supply made under an Islamic financial arrangement certified as Shariah-compliant having the intention of and achieving effectively the same result as a non-Islamic financial product is treated a manner that it gives an outcome comparable to its non-Islamic counterpart. This process ensures equality of VAT treatment between Islamic and non- Islamic finance products. Determination of VAT treatment of Islamic finance product requires consideration of its purpose, structure, and pricing.
To ascertain the VAT liability of an Islamic Insurance or reinsurance product, follow the below mentioned:
STEP 1: Analyze the Islamic Finance Structure
STEP 2: Identification of different supplies in Islamic Finance structure
STEP 3: Establishing the VAT liability of those supplies as if they were non-Islamic financial supplies
STEP 4: Application of same VAT treatment to Islamic finance supplies
TRANSITIONAL PROVISIONS: The VAT becomes due if a contract concerning a supply taking place wholly or partly after the effective date of VAT law is entered prior to the effective date of VAT law. The value of the supply stated in the contract is inclusive of VAT if the contract does not mention VAT. For VAT purposes insurance contracts are treated as continuous supplies of services with premiums payable in installments.
VAT TREATMENT FOR OTHER INSURANCE SERVICES
- HEALTH INSURANCE: Health insurance is liable to VAT at the standard rate. In the case of provision of health insurance by the employer to the employee as a part of the employment contract, the employer can recover input tax. In case of provision of health insurance by the employer to the family members of the employee, the employer can recover input tax if there is a legal obligation to provide insurance to the family members.
- REAL ESTATE INSURANCE: For the purposes of the place of supply rule in Article 30(7) of the VAT law, the supply of real estate insurance is not a service related to real estate. Place of supply of real estate insurance is determined on the basis of general place of supply rules.