By NEIL HARTNELL
Tribune Business Editor
The Bahamas Insurance Association's (BIA) chairman has called for all property and casualty products to receive the same VAT treatment, adding that exempt status is "not the way to go".
Emmanuel Komolafe admitted to Tribune Business that he was "caught off guard" by the VAT Amendment Bill 2018, which reveals that exempt treatment extends beyond residential property coverage to embrace 85 per cent of general insurance product lines.
While the Budget communication only mentioned "insurance contracts on residential dwellings' as subject to the new VAT exempt status, the Bill also lists motor vehicle insurance; marine, transport and aviation insurance; and liability insurance as being subject to the same treatment.
While the industry is urging the Government to make it 'zero rated' as opposed to 'exempt' for VAT purposes, Mr Komolafe said that should the Government follow through with the latter option it wanted all property and casualty products - not just residential dwelling cover - to be imposed.
He explained that this would minimise administration and compliance costs for Bahamian general insurers, and told Tribune Business: "It makes sense to have one VAT treatment for all general insurance products.
"It currently covers about 85 per cent, and leaves out 10-15 per cent. That requires different [VAT] treatment and adjustments to your system, and increases compliance costs to implement for both the company and consumer. It simplifies the process by having one treatment for all general insurance products."
Mr Komolafe conceded that the VAT Amendment Bill "caught me off guard" by including numerous product lines in addition to residential dwellings, and added that the industry was still seeking clarity from the Government on a wide range of definition and implementation issues.
He explained that the 'residential dwellings' definition needed clarity itself when it came to multi-family homes, plus whether the 'exempt' status applies to insurance policies involving both VAT registrants and non-registrants.
"We just want clarity so that there's no ambiguity," Mr Komolafe said. "How does this work for claims paid after July 1? We've not seen anything.
"It's extremely important for the industry to have a very clear definition that is agreed by both the Government and itself. The reason for that is the history of VAT and challenges with interpretation. Does this apply to VAT registrants and non-VAT registrants? There's no qualification in the Bill."
The BIA chairman again reiterated the property and casualty industry's argument that it should be treated as 'zero rated', rather than 'exempt', for VAT purposes given the need to make insurance coverage more affordable and accessible in the face of hurricane threats.
While 'exempt' status means Bahamian consumers will not pay the 12 per cent levy on their premiums, insurers will be unable to use this to offset the VAT paid on their 'inputs'. As a result, the industry is warning that these increased taxation costs will likely be passed on to consumers through increased premium prices at a time when the opposite needs to happen.
"If the Government's objective in exempting property and casualty insurance products was to make them more affordable, it is the view of many in the industry that this has not been fully achieved," Mr Komolafe said of the 2018-2019 Budget's implications.
"General insurers will experience higher costs to fully indemnify customers. Our expectation was that general insurance would have been zero rated. It would have been more in line with the pronouncements of government, and more in line with the objective of making general insurance products more affordable.
"It would enable more people to insure their own risk. We had a busy hurricane season within the region, and already there is some pressure on premiums coming from a reinsurance perspective. All of this needs to be considered. Making these products VAT exempt is not the way to go."
Mr Komolafe said how much of the 12 per cent VAT is ultimately passed to consumers depends on each individual insurer and their business model. He pointed out that replacement and building material costs will increase by the same 4.5 percentage point magnitude.
"What we know for certain is, by virtue of how exempt supplies within the VAT framework work, the premiums for general insurance products will not fall by 7.5 per cent or 12 per cent," he added.