How to consider VAT in Your Insurance Premium and Insurance Indemnity?
November 09, 2015
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Sergey Yefimov General Counsel
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1. Is the value added tax in Ukraine included in the sum insured (value of the property insured)?
In Ukraine tax rate for VAT is broken down into three categories: 20 % default rate, 0 % special rate (e.g. for export operations) and 7 % preferred rate for some kinds of operations (e.g. pharmaceuticals trade), all specified under the current Tax Code of Ukraine
In accordance with article 9 of the Insurance Act of Ukraine, the sum insured is the sum of money which limits the amount of indemnity subject to payment by the insurance company in the case of an insured event. The origin of material assets is of key importance in this regard. Manufacturers should insure their goods at the cost price exclusive of VAT. The difference between cost price and selling price is actually short received profit and is not covered by the insurance. In the case in which the insured goods have been purchased and the insured is not the VAT payer, the sum insured should include the whole sum spent for purchasing such goods including VAT paid. If the Insured pays VAT in Ukraine, the sum of this payment is referred to the tax credit and is deducted from his tax liabilities in accordance with the Tax Code of Ukraine. In case of the insured event the VAT is not considered in the direct actual damage since the tax liabilities have previously been adjusted for it. These are the key issues to be considered when defining the sum insured under the insurance policy since unjustified inclusion of the value added tax into the sum insured entails a higher insurance premium instead of the bigger sum of the indemnity due.
2. Is the VAT in Ukraine subject to be included into the insurance indemnity?
In accordance with paragraph 196.1.3. of article 196 of the Tax Code of Ukraine insurance operations are subject to VAT in Ukraine.In accordance with paragraph 196.1.3. of article 196 of the Tax Code of Ukraine insurance operations are subject to value added tax in Ukraine. This means that insurance premiums and insurance indemnities are paid exclusive of VAT. Unfortunately frequent are the cases when the insurance companies attempt to justify excluding from the indemnity amount the sum of the VAT paid and included in the value of property insured under the policy.
The Insurance Act of Ukraine stipulates that the gross indemnity paid shall not exceed the sum of direct actual damage suffered by the Insured. In case of a total loss insured, who is the goods producer and a VAT payer, is to be indemnified in the amount exclusive of the VAT. On the contrary, those Insured who are not VAT payers are entitled to the indemnity including the VAT paid when purchasing the goods insured. For partial loss the VAT is to be included in the indemnity irrespective of an Insured’s status under the Tax Code of Ukraine as the cost of the repair and spare parts or materials used in the repair does include VAT. Ukraine’s market often witnesses cases when an insurance company pays the indemnity for the damaged property in two installments. The first one is the sum necessary for the property repair reduced by the VAT number Ukraine’s legislation stipulates. The second one is paid only after an Insured submits the documents proving that the repair has been carried out. This installment consists solely of the VAT amount paid and due for the Insured.
To our minds, such an approach is not reasonable. An insured is entitled to be indemnified in full for the damaged property in the form of restored property or the money equivalent sufficient to restore the property while spending the money received is not the prerogative of the insurance company.
It’s fair to mention that as to VAT Ukraine’s insurance companies often provide special clauses in the insurance policies stipulating the consideration of this tax in the sum insured along with premium and indemnity. That’s another reason why insurance policy deserves a close read.
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