Following on from the release of the GCC VAT framework, Saudi Arabia’s General
Authority of Zakat and Tax (GAZT) has released a draft version of the law as well
as a bilingual version of its VAT implementing regulations. All businesses must
now be actively preparing for VAT - 1 January 2018 is less than 100 working days away.

 

What is VAT?

  • VAT is a tax on consumption, not income or profits.
  • The GCC countries have agreed a standard VAT rate of five percent.
  • Goods and services can be exempt, zero-rated or standard-rated.
  • Registered suppliers will add VAT to the price of a good or service they supply, collect the tax and pay it to the tax authority on a regular basis.
  • Registered businesses should (where the supplies they make are either standard or zero-rated) be able to recover the VAT they have incurred in the course of making those supplies.
  • Registered businesses that make supplies that are exempt from VAT will not be able to recover the VAT they have incurred in the course of making those supplies.
  • Registered businesses that make supplies that are predominantly zero-rated will usually be in a refund position.

How will VAT affect the insurance sector?
  • General insurance provides short-term protection of assets and liabilities against any loss or damage. Any insurance other than investment-type insurance (such as life insurance) is classified as general insurance.
  • Based on the draft VAT implementing regulations released by Saudi Arabia’s GAZT, general insurance products will be taxed at the standard rate, whereas life insurance (including the reinsurance of a life insurance contract) is exempted from VAT.
  • Fee-based services such as management fees, commissions and advisory services are to be standard rated.
  • Reinsurance is a common practice in the insurance industry. The VAT rate applicable may depend on the place of the underlying risk, the place of insurer and the place of the reinsurer.
  • Input tax credits may need to be apportioned if the insurance contract has any element of investment (such as investment-type riders) as part of the policy.
  • Making exempt supplies will increase costs for insurers as they won't be able to recover VAT paid on related inputs.
  • Insurers will want to maximise the recovery of input tax credits, requiring them to carefully consider all their purchases of goods and services and determine how best to minimise any input VAT they cannot claim.  
  • Insurers may ultimately decide to increase the costs they charge their customers – but will need to be wary of regulatory constraints and the impact on their competitive advantage.
  • Transitional issues will arise if insurance plans are purchased or renewed before the VAT implementation date (1 January 2018 for Saudi Arabia and the UAE) and the coverage period straddles that date. Where insurers are required to charge VAT on insurance premiums, profits may be affected if they are unable to pass the VAT to policyholders.
What should insurers be doing now?
  • Consider all supplies made and determine their VAT treatment
  • Review cost profiles to identify any irrecoverable VAT on costs
  • Engage with customers, particularly in reinsurance, to ensure that VAT can be charged on

Important note
These briefs are based on a translation of Saudi Arabia’s draft VAT laws and general VAT principles and are provided for information purposes only. This document is not a substitute for professional advice. You should seek appropriate professional advice from a tax advisor before making any decision relating to your particular circumstances.

Mubeen Khadir
Head of Tax Consulting
mubeen.khadir@keypoint.com

+973 17206879

+973 3222 6811


George Campbell
Associate Director
george.campbell@keypoint.com

+973 17206872

+973 3833 8641