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Health insurance VAT burden being moved to consumers

The Bahamas Insurance Association (BIA) is warning Bahamians for the second time in a week about increases to insurance costs, but this time they explained in a press statement that the Department of Inland Revenue (DIR) intends to move the value-added tax (VAT) burden for those with health insurance to the pockets of consumers in April and called it a tax increase.

They added that the health insurance sector and the general public have not been widely consulted on the matter.

The Ministry of Finance (MOF) in a “rebuttal” statement explained to Guardian Business that the BIA is not being accurate in its reporting of the change that will happen in April, adding that the insurance sector met with the MOF and the prime minister about the matter.

The MOF added that the matter that is being resolved with the change in April brings the health insurance sector in line with VAT laws, as health insurers were once claiming millions in VAT returns before the DIR audited the sector and found this practice to be counter to VAT laws.

The BIA statement explains: “The Department of Inland Revenue (DIR) has advised the Bahamas Insurance Association (BIA) that they intend to increase the VAT burden on medical, dental and vision insurance (health insurance) policies, effective April 2023.

“Health insurance policies are taxable and clients currently pay VAT on their premiums. Like all other companies selling taxable products, insurance companies are currently able to recover VAT paid on health insurance claims and other inputs, so that our clients’ VAT burden is only the VAT on their premiums.

“The DIR intends to stop insurance companies from being able to recover the VAT paid on health insurance claims. This would mean that, in addition to continuing to pay VAT on their premiums, clients will now also be responsible for the VAT on the underlying medical service.

“The DIR has rationalized this change by arguing that the medical service received is between the health service provider and the insured. The DIR’s new position takes no account of the fact that the purpose of health insurance is to pay insureds’ health expenses and instead treats them as two independent services.

“As an example, if the portion of a health insurance claim paid by the insurer is $5,000, the insurer currently pays the VAT of $500 on that claim to the medical provider and recovers it from the government. However, effective April 2023, the insured receiving the service would be responsible for paying the $500 to the medical provider.”

The BIA also explains in its statement that it found out about the DIR’s “new position” on the VAT returns through one of its members.

However, the MOF rejects this claim. It explained in its statement: “The Ministry of Finance has sight of a press release by the Bahamas Insurance Association (BIA) with respect to the VAT treatment on health insurance claims and wishes to express its disappointment that the BIA would release a statement that relies so little on the facts, as this statement misconstrues key elements of the discussion and seeks to politicize a technical issue.

“For transparency purposes, the Department of Inland Revenue (DIR) in 2021, while conducting an audit of a health insurance company, discovered the incorrect treatment of VAT paid to health providers.

“Audit results revealed that the company claimed back the VAT as input VAT although it was not a beneficiary of the service provided. This is clearly against the VAT Act. This company subsequently benefitted by receiving over $20 million illegally, that should have been paid to the government.

“The DIR continued to audit different insurance companies and discovered after a similar problem surfaced at another health insurance company that this might be an industry-wide problem, rather than a problem with one company.

“However, DIR without auditing all health insurers, could not confirm this position.

“For the record, The DIR only discusses audit results with the taxpayer or his/her authorized representative. In this case the taxpayer advised the BIA of the audit results, as is the taxpayers’ right. In this regard, the BIA’s comment about the unorthodox method of finding out about this issue is misleading and not factual and seeks to cast aspersions on the professionalism of the DIR and the Ministry of Finance.”

The BIA contends that the change will now increase costs to the consumers of healthcare and could send seekers of healthcare to other jurisdictions for care.

It added that health insurance claims should be tax-deductible for health insurers, or the government will be double dipping from insurance companies given that VAT is also paid on premiums.

“The government has rejected our position,” the BIA said.

“The DIR’s new VAT rules will harm local healthcare providers. The rule change increases the cost of using health insurance to access services from Bahamian providers. Insureds can escape this additional tax burden by receiving treatment overseas. This will reduce the clientele of Bahamian healthcare providers and increase the drain on our foreign exchange reserves.”

The MOF contends the increase in costs to the healthcare seeker is likely to be nominal and without a double layer of taxation to the health insurer.

“With respect to the impact of this change on the individual or group health insurance client, the government believes that it would be insignificant,” the MOF statement said.

“The rate of VAT tax on health services is not changing, there would be no double layering of taxes.

“What is changing is the treatment of this VAT paid by the health insurance company. This would be no different from the treatment of VAT paid on insurance claims by general insurers as of April 1, 2023. Different companies will deal with these adjustments in different ways, however, the health insurance market in The Bahamas is very competitive.

“The BIA is seeking to unnecessarily alarm consumers about this adjustment, and this is unfortunate.”

And while the BIA contends there has not been enough consultation and that the consultation has been “unorthodox”, the MOF explained that discussions have been held at all levels.

The BIA said: “While we were grateful for our subsequent meetings with the DIR and the Ministry of Finance, the change has been presented as a “fait accompli” (a foregone conclusion) and our concerns and recommendations have largely been ignored.

“Despite the significant impact of this change to healthcare providers and the public, the government has not widened its consultation to include those groups. The OECD argues that consultation ‘improves the quality of rules and programs and also improves compliance and reduces enforcement costs for both governments and citizens subject to rules’.

“The BIA believes that the government erred in refusing to consult, in particular with the medical community.”

The MOF contends: “Once the BIA became involved, discussions were had at all levels including the DIR, the Ministry of Finance, the minister of economic affairs and the prime minister.

“In these discussions, the BIA acknowledged that health insurers were applying the incorrect VAT treatment and petitioned the government for a transition period to apply the correct treatment. This offer was formally made to the government by the BIA and was formally accepted by the government. The attempt by the BIA to imply that this was a unilateral decision by the government is again not factual.

“In closing, the Ministry of Finance thought that through its discussion with the BIA, all parties had reached an amicable solution to this issue, however this statement filled with misinformation from the BIA is very disappointing.”

The BIA said it dissents publicly to the “new rules” being applied by DIR.