VAT Exemption to Adversely Effect European Insurance Outsourcing

The removal of exemption of value-added tax (VAT) by the European Commission is expected to result in huge tax liability for European insurance companies outsourcing their back-office operations. Countries such as the UK currently give a fairly wide scope to the VAT exemption to insurance related services, thereby encouraging the trend for insurers to outsource such services.

The removal of the exemption is expected to result in an adverse effect on the insurance business outsourced to India and the rest of the world. Insurance companies in the European Union (EU) are exempted from paying VAT, as governed by article 13(B)(a) of the sixth EU directive.

Meanwhile, to remove the distortions caused by exemptions in the field of tax, the European Commission is considering introducing VAT for financial and insurance services.

However, the removal of exemption has become a cause of concern for many outsourcing companies. Industry sources also believe that if the exemption is withdrawn, insurance companies will immediately be concerned about their current outsourcing contracts.

IDC predicts that the managed services market would reach almost EUR 10.2 billion in Western Europe in 2008, representing a CAGR of 7.3 percent. The report notes that many vendors are focusing on managed services, which makes the market even more competitive than that in previous years. Further, the difficulty for vendors to create real differentiators also emerged as a consequence. The findings reveal a near disappearance of the differentiation between outsourcing and managed services. The report further suggests that compared with previous years, the European market is becoming more mature, enterprises are more than cost conscious and look for solutions aligned with their business goals and future expansion plans.

According to a McKinsey report, China will take many years to attain a larger share of the global software outsourcing market, and pose as a significant threat to India in IT services. The hurdles that China needs to cross include the structure of the industry, fragmentation, and inadequate scale. The study highlights the need for consolidation to gain the advantages of scale, without which, it would be difficult for Chinese companies to attract international clients. China has about 8,000 providers of software services, but three-quarters of them have fewer than 50 employees. India, on the other hand, has less than 3,000 software companies, but at least 15 of them are giants, with more than 2,000 technical workers. The study also points out that despite lower costs, operating margins in Chinese software companies average only 7 percent, compared with 11 percent at similar companies elsewhere.