On 11 May 2020, the Saudi Arabian government announced that the standard VAT rate would increase from 5% to 15% as of 1 July. A significant increase in the VAT rate will impact many aspects of the insurance industry, not least its effects on unearned premium reserves (UPRs).
Implications for direct insurance contracts
An increase in the standard VAT rate to 15% will impact almost all taxable insurance contracts:
- Policies entered into before 1 July 2020 with coverage beyond 1 July 2020
- New insurance policies entered into after 1 July 2020
Insurance companies should consider whether they can pass this additional cost on to customers by assessing whether:
- Their current VAT clause allows them to charge additional VAT
- The Saudi Arabian Monetary Authority (SAMA) allows insures to increase premium prices- especially for the consumer/retail segment of the market
If insurance companies cannot pass additional VAT costs to customers, they may have to account for VAT on UPRs – and absorb this cost.
Payment already made or invoice already issued?
If it seems likely the new VAT rate applies to polices spanning 1 July 2020, any payment already made by an insured party to an insurer (or any invoice issued by the insurer) triggering the initial date of supply could be subject to an additional VAT charge of 10%. If the insurance companies can / or decide to, charge the additional 10% VAT rate on the portion of supplies (or UPR) after 1 July 2020, they must issue an new tax invoice to reflect these charges.
Source Credit – Keypoint