FTA Tax Audits: A Guide for the UAE Insurance Sector

Introduction:

Since the introduction of VAT in the UAE on January 1st, 2018, the insurance sector has faced a complex landscape of regulations. While life insurance is generally exempt, other insurance products like medical and general policies are subject to 5% VAT. This blog post aims to equip you with the knowledge to navigate VAT compliance and potential FTA audits in the UAE insurance sector.

Understanding VAT in Insurance:

Don't be misled by the simple 5% VAT on insurance - the insurance industry's intricacies make VAT compliance a challenge. The insurance sector deals with various transactions like:

• Policy surrenders
• Cancellation charges
• Administrative fees
• Unit-linked life insurance
• Basmah fees
• Wakalah fees
• Transitional period pro-rata VAT adjustments
• Broker commissions

These transactions require careful analysis to determine the correct VAT treatment.

FTA Audits and You:

The Federal Decree Law No. 28 of 2022 empowers the FTA to conduct audits to assess your company's VAT compliance. An FTA Audit scrutinizes your taxability analysis and document maintenance. While the general statute of limitations is 5 years, exceptions can extend this period.

Preparing for an FTA Audit:

Here's what to expect during an FTA Audit:

• Initiation: The FTA may contact you via email requesting initial details and VAT return summaries.
• Data Submission: You'll need to provide data on purchases, sales, imports, exports, and out-of-scope transactions within a short timeframe i.e. 10 business days
• Document Requests: Be prepared to submit sample documents like contracts, financial statements, trial balances, and reconciliations.
• Potential On-Site Visit: FTA officers may visit your premises for further assessment.
• Assessment Report: Finally, the FTA will issue a report outlining their findings.

Common VAT Compliance Errors in Insurance:

Insurance companies often face challenges with:

• Incorrectly classifying out-of-scope supplies as zero-rated.
• Mishandling expenses from group companies (reimbursements vs. disbursements).
• Omitting employee recoveries from VAT returns.
• Applying the wrong VAT treatment to claims handling services.
• Errors in VAT treatment for re-insurance and co-insurance contracts.
• Incorrect VAT handling of brokerage services.
• Failing to account for VAT on customer advances.
• Missing Reverse Charge Mechanism (RCM) transactions.
• Incorrect VAT treatment for non-regular business transactions.
• Unrecoverable input VAT erroneously claimed.
• Failing to apportion input VAT for exempt supplies.
• Choosing the wrong input tax apportionment method.
• Miscalculating annual adjustments (annual washup calculations).
• Recovering input VAT on invalid supplier invoices.
• Incorrect VAT treatment of gifts and entertainment expenses.
• Using the wrong exchange rate for foreign currency transactions.
• Lack of reconciliation between financial records and VAT returns.
• Non-compliance with Tax Credit Note provisions.

Mitigating Risks through Pre-Audit Reviews:

Proactive companies can conduct internal VAT Health Check/ pre-audits to identify and address potential non-compliances. This helps ensure accurate tax remittance and adherence to FTA regulations, minimizing risks during an actual audit by FTA.

Conclusion:

The UAE insurance sector thrives on a robust understanding of VAT regulations. By familiarizing yourself with common pitfalls and taking advantage of pre-audit reviews, you can navigate potential FTA audits with confidence. Remember, the FTA offers various mechanisms for rectifying identified non-compliances. Don't hesitate to explore services offered by MBG-Tax Agents in relation to VAT Health Checks, Voluntary disclosures, Return corrections, Clarification forms, or Reconsideration requests as needed.