Insurance Regulation European IPT |
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December 2008 Tax authorities and insurance regulators scrutinise freedom of services insurance Richard Asquith TMF VAT & IPT Services, United Kingdom Click here to read the original article
Insurers providing multi-national risk coverage across European are now attracting the interest of local tax authorities, who see Insurance Premium Tax (‘IPT’) as their newest ‘soft’ target. Richard Asquith, from TMF, takes a look at what tax authorities have been doing to catch-out unsuspecting insurers, and how European IPT works. Since the inception of the EU’s Freedom of Services provision, insurers – and especially underwriters – have been lured by the opportunities of opening up into new, foreign markets. Even for the reluctant there is no hiding as clients have been forcing the pace by demanding multi-jurisdictional policies from their provider, or else. Insurers have been queuing up to apply for the necessary Passporting Rights – just look at the Italian ISVAP website to see the regular additions of foreign insurers gaining Italian authorisation. So far, so good. Open, competitive markets; we all like those. However, what about the taxes on this type of insurance? How many insurers, brokers, captives or insured understand their liabilities in Euro Tax Authorities wise-upThe different authorities have been establishing specialist teams, who have been trained-up on how to assess the risks in their territories and how to co-operate with other tax authorities to spot non-compliance. This means unpredictable and punitive fines and penalties that have to be embarrassingly explained to bemused Finance Directors and CFO’s. For some time, tax authorities have been smartening-up on spotting signs of non-compliance. Take the example in However, what seems to have unleashed some recent tax audits in this area is the Mutual Assistance Directive, becoming the tax authorities’ new best friend. This Directive was extended to IPT just a few years ago, enabling authorities across In the past year, the various authorities seem to be tentatively exercising this measure. In particular, Germanic authorities have been applying checks on foreign insurers with their home tax authorities. They have proved adept at spotting non-compliance, and are imposing initial assessments running into the thousands of Euro’s. Another tool for the enthusiastic tax collector is cross checking Passporting Rights. Keen inspectors around the There are suggestions of the local insurance regulators actively sharing data on their insurers, but nothing concrete seems to have come of this so far. The Scope of IPTSo, how does European IPT work; what are the multitudes of other charges that come with it; and how do you stay compliant? We take a look. IPT, or variations of it, is a tax on the gross written premium for insurance risks. In the majority of states, it is the insurer or captive who is liable for the calculation and collection of these taxes. However, as default, the tax authorities may seek retributions from the insured. This seems a big concern to clients of non-EU insurers who are, understandably, ignorant of Euro IPT regulations, or, worse, blasé. IPT-type taxes are found across the globe, and, like most indirect taxes, are on the rise. In the EU, most of the ‘old’ European countries have IPT regimes; it is now catching-on in the new Accession States. For insurers writing across borders, there will probably be a requirement to comply with IPT. The crucial issue is the location of the risk covered, and therefore where the IPT liabilities arise. The broad rules for determining the location of risk in the EU were laid down in the Second Non-Life Insurance Directive. It details guidance for property, vehicle, travel, and holiday insurance. Further guidance is applied based on the residency of the insured. This brings us to the Kvaerner ECJ case, one of the most fundamental IPT developments for multi-territory insurers. The Kvaerner CaseIf there were ever any lingering doubts on the IPT liability to foreign tax authorities on risks covered in their territory, then the 2001 European Court of Justice Kvaerner case resolved them. Kvaerner, a Norwegian engineering and construction services group, took out a global policy for its group companies for professional indemnity insurance. This included cover in the The ECJ upheld this view. It added that who took out the cover (e.g. a holding company), or how it was paid was irrelevant. This view, that the IPT is due where the location of the activity covered takes place, and therefore risk assessed, means that all cross-border insurers and global programme insured parties now need to aware of their liabilities. IPT ComplianceHaving understood the potential liability to IPT, the next phase is to address compliance. Unfortunately, as with most pan-European taxes, staying the right side of the tax authorities for IPT is complex in the detail. Most alarmingly, the tax authorities will often offer conflicting guidance on even the basics. There are almost no in-depth print or online guides to be purchased – Axco Insurance Information Service provides probably the largest global guide. A number of the biggest insurers have resorted to building their own international databases. Once an insurer has established liability in a particular country, the basic requirements are as follows. The insurer must identify the taxes due on the premiums – which are based on the risk category and the appropriate rate in the target country. They must then remit the taxes charged and collected to the relevant authority. This requires the insurer to register as a taxpayer in each country, and submit periodic filings with accompanying payments. In most European countries where IPT is levied, the insurer is required to appoint a local fiscal representative. This agent assists the insurer in the initial registration and subsequent filings process, and negotiating with the local tax authorities on issues such as previous non-compliance. The fiscal rep is also the first point of contact for any tax inspection. Generally, the fiscal representative becomes jointly and severally liable of the insurer’s IPT liability, and is required under local laws to maintain detailed records on behalf of the insurer on the policies written. Pan-European VariationsUnlike VAT, IPT has limited EU co-ordination, and, as a result, scope and rates are complex in the country-by-country detail. Rates for foreign insurers vary enormously across the region. The main rates are between 1% and 45%, but can go much higher – the Swedish authorities impose a punitive 95% on group life. Most of the risk categories are similar; for example, Fire & Property and Accident are usually included. Many countries exclude Life, but insurers should be careful of the requirement to register as a taxpayer anyway in some jurisdictions, e.g. Parafiscal ChargesIf you are feeling confused by premium taxes so far, then look away now. On top of IPT, insurers are liable to pay a number of other levies, know as Parafiscal Charges, to various bodies. Popular ones include Fire Brigade charges on Property & Fire insurance. Many countries also require foreign insurers to make contributions to local insurance associations. Beyond these, national preoccupations often take over. For example, Agricultural Damage in Your fiscal representative should be able to keep you on-side for these charges, and ensure that you are registered with the appropriate organisations If you are Non-Compliant?As outlined above, most insurers who have been writing risk-coverage across European borders are probably liable to IPT. However, the complexities and dearth of guidance (and lack of fiscal reps) have meant non-compliance on a wide scale. The good news is that the club of non-compliant insurers is fairly big, and includes many of the largest global names. Fortunately, the tax authorities are acknowledging this and have been reasonably lenient to those who have come forward. In the case of non-compliance, the key seems to be to contact the tax authorities, through your fiscal representative, to explain the situation. Many countries in this situation have been very flexible. Insurers should avoid trying to calculate the possible fines and penalties remotely from the legislation as there is often scope for negotiation. SummaryIPT on cross-border insurance has always been an opaque area. A combination of wide national variations in the scope and calculation of the tax, bundled in with language, distance and cultural barriers, make compliance hard work. This has led to a mutual ignoring of the problem by the national tax authorities and insurers. However, the tax authorities are now moving on from this position as they see foreign insurers as easy prey. Emboldened by the Kvaerner Case and empowered by co-operation from their fellow tax authorities, they seem keen on this neglected source of revenue. The good news is that there remains scope for falling into line with contained cost implications. Insurers should not be intimidated by potential fines; instead they should seek dialogue with the tax authorities who appear willing to compromise when approached. But don’t wait for them to find you!
Richard Asquith heads-up TMF’s international IPT compliance services, which includes fiscal representation. richard.asquith@tmf-group.com Readers are recommended to seek formal tax advice on the matters above from their regular tax advisers. |
