Uncertainty persists as to when precisely Value Added Tax (VAT) will be introduced in the member states of the Gulf Cooperation Council (GCC), and the process surrounding a roll-out. However, given the fiscal pressures in the region, the introduction of taxation seems inevitable and could cause short-term cash-flow issues for insurers.
The GCC member states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (the UAE) are in the process of establishing separate national legislation to simultaneously adopt taxation on 1 January, 2018. Laws for the implementation of VAT under the unified Gulf Cooperation Council (GCC) Value Added Tax (VAT) Framework Agreement are still to be passed in most GCC member states, but should the deadline remain, this could mean that companies and markets may have to rush towards implementation.
In a new briefing, “VAT Implementation Poses Significant Challenges for GCC Insurers,” A.M. Best states that as implementation laws have yet to be passed, this has resulted in a debate as to whether the target date is achievable. Whilst there may be some delay, in A.M. Best’s opinion, VAT likely is to be introduced as quickly as possible. Public financing across the GCC has become more restrained in recent years, reflecting the decrease in revenue from the sharp fall in the oil price. As a result, the introduction of VAT at a standard rate of 5% appears inevitable as governments seek to bolster their inward receipts.
Aneela Mather-Khan, associate financial analyst, said: “A.M. Best notes that the implementation of the VAT rules will increase the cost of doing business for insurers in the GCC as VAT will be applied to almost all goods and services in the value chain, including outsourced services.”
The briefing also notes that few insurers appear to be prepared for the change in legislation, with some assuming that any impact would be limited. Salman Siddiqui, associate director, added: “A.M. Best believes that insurers should consider the implementation of VAT as part of their risk management framework, paying particular attention to the correct classification of all business transactions.”
With regards to the credit quality of insurers, A.M. Best believes that there likely is to be an adjustment period, where insurers will have to take a hit to move in-line with the requirements. This could affect operating performance and capitalization, although this would likely be a short-term effect, while companies adjust pricing as policies renew.
To access a complimentary copy of this special briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=262168.
Source: A.M. Best.