Risk Magazine: Foreign insurance premium taxman cometh


Click here to read the original article 6 January 2009 (pdf)

Local Insurance Premium Tax (‘IPT’) compliance on international risk cover has always seemed a distant concern.  This is now changing.  Increasingly, the foreign tax offices are actively pursuing insurers, or approaching policyholders directly for outstanding taxes.  This means risk managers need to be aware that their insurance provider has properly settled any IPT; otherwise they may be facing an unexpected tax bill.

Richard Asquith, of TMF’s global IPT service, takes a look at how international IPT works, and why the foreign tax man may be keen for a chat.

Insurance Premium Tax: The Basics

IPT, a global tax on insurance premium contracts, is administered in many ways.  Most countries apply a percentage of the total premium, often including broker fees, to calculate the tax due.  The time of the tax liability, ‘tax point’, varies – for example when the premium is paid, or when the policy matures.

For most territories, the insurer is responsible for administering IPT.  This includes the calculation of the tax, and the collection and settlement of liabilities to each relevant tax authority.  However, in most countries, the policyholder is next in line for the tax liability.  Should the contract issuer fail to take care of the IPT, then the tax authorities are able to pursue the insured party.  For buyers of global programmes, this is becoming a hot issue. Often brokers are confused with the complexities of IPT compliance.  This is being picked-up by the tax authorities, who are seeing the policy holder as an easier target for any IPT that is due. As described below, they are now taking direct action in a number of countries.

On top of premium tax, insurance contracts also attract a number of Parafiscal Charges.  These represent additional levies to be settled alongside the IPT, and vary hugely from country-to-country.  Again, the insurer, working with the broker, should take care of these.  The complexity in this area comes from understanding the variety of taxes, to whom they are payable and how to settle.  For example, many taxes can only be paid from a bank account in country – a huge administrative burden on international programmes.

Determining Where IPT Is Due

Historically, the international IPT liability was assumed to fall due within the territory where the policy was written.  In this case, IPT was calculated locally, and paid over to tax authorities all to willing not to challenge this presumption. 

The European Union, under its Freedom of Services regime, was amongst the first trade block to review this issue.  In its 2nd Non-Life Directive, it clarified the location of the taxable insurance supply as where the risk was located.  Therefore, the risks on global insurance programmes had to be allocated by country, and the relevant IPT rules and rates applied.

In 2001, this principle was tested in the European Court of Justice.  The Kvaerner Case has come to be cited as a defining moment in the international insurance premium tax market.  Kvaerner, a large Scandinavian engineering company, purchased an international insurance plan in the London insurance markets.  At the time of writing the contract, UK the IPT rules were applied.  This case was brought by the Dutch tax office, which believed that it was due IPT, under its rules, for the Kvaerner risks located in the Netherlands.  This case went all the way to the ECJ, which found in favour of the Dutch tax authorities.

Crucially, in addition to illuminating the principle of the location of the IPT liability, the ECJ also stated that Kvaerner, as the policy holder, was liable for the IPT.  This put the policy holder directly in the sights of the tax authorities.  Since then, there has been a rush by policy issuers and risk managers to ensure that any IPT is properly allocated and accounted for.

European IPT Compliance

The EU operates the world’s largest trade block.  For a number of the European-wide taxes, such as VAT, it issues governing legislation and Directives.  However, it has no such interest in IPT even though most of its member states now charge IPT on foreign-generated risk programmes.  This means there can be large differences in rates, methodologies and timings of taxes between countries.  Most of the European IPT rates can be found on www.tmf-vat.com, which includes all of the Parafiscal Charges too.

Some 30 European countries now permit foreign insurers to provide cover in their countries without a local branch or subsidiary.  This is provided under Europe’s Freedom of Services (‘FOS’) regime, which has its roots in the EU’s original Treaty of Rome.  For insurers wishing to use FOS, they simply need to apply for local Passporting Rights from their local insurance regulatory.  This requires the assistance of their home insurance regulator.  Often, insurers are obliged to appoint a local fiscal representative who is responsible for reporting and payment of any IPT due.

Many Non-European insurers can often write business across the region on a non-admitted basis.  However, the tax authorities often then view the policyholder as liable in the first instance.  This has important implications, as we will see below.

Beyond the US & Europe

For global insurance programmes outside of the US and Europe, IPT compliance is tied-up with local insurance regulation.  For many global programmes, if there is a local underlying policy, compliance with local tax is taken care of by the local agent/broker.  No problem.

However, many insurers still work on a non-admitted basis internationally – despite it being illegal in a number of countries e.g. Brazil.  Since most countries’ regulators and legislation actually ignores non-admitted contracts, tax has been overlooked too.

To cover the risk manager’s potential IPT liability, always include a clause indemnifying the insured against any foreign taxes.

 

The Tax Man Cometh

In the past year or two, IPT has become a ‘soft’ target for foreign tax authorities.  Primarily, this is because of the increase in global programmes, fuelled by risk managers attempting to simplify their insurance cover and realise cost savings.  A further reason is the pressure felt by national insurers from their global competitors who have been writing premiums across borders.  The national insurers, via their local insurance associations, have been pressuring their tax offices to step-up IPT audits.

On a regular basis, new examples of the direct action of the tax authorities emerge.  In both Austria and Germany, the tax authorities have been contacting the large global insurers asking for details of international programmes, and confirmation of how the IPT is being administered.    In France, there are cases of the direct tax authorities co-operating with their IPT colleagues on identifying policyholders whose tax is non-compliant.

All of this activity is now showing up on the risk manager’s radar - this is no wonder with them fearing that they may have to meet any fiscal shortfall.  Most of the large corporations are now asking their insurers to provide clear documentary evidence of the management and settlement of foreign IPT.  The largest groups have gone further, and are requiring indemnity against any international insurance premium tax.  This is leading to a scramble by insurance auditors looking to spot any unresolved historic charges.

Summary

The complex variations in international IPT regulations and rates have often meant that insurers and risk managers have elected to ignore any tax liabilities.  However, the foreign tax man is now forcing a re-think as he seeks to catch-up on outstanding liabilities. Policyholders and risk managers realise that they are now in the firing line.  Corporate governance requirements aside, the thought of overseas tax authorities imposing fines and penalties is focussing minds in the industry.

Risk managers need to push their insurers or brokers to demonstrate IPT is taken care of. Otherwise they may be taking the first call from the inquisitive foreign tax man.

Richard Asquith is the MD of TMF VAT & IPT Services, which assists with IPT compliance through 79 worldwide offices.   The TMF Group is a global independent management and accounting outsourcing firm.

 
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