Written by Christophe Bourdaire, Senior Client Manager

Insurance Premium Tax (IPT) is not the new kid on the block in the world of indirect taxes, with some IPT regimes having been implemented before World War II. Age aside, it is always worth taking time to reflect on the key components of IPT compliance and highlight the main requirements from local tax authorities.

Regulatory Requirements

Confirm that the appropriate licensing structure is in place

This step is important because writing on an unlicensed basis may have consequences on the legality of the contracts sold. Many jurisdictions will consider a contract as void if written on an unlicensed basis. The legal implications on both insurance company and policy-holder should not be neglected. Furthermore, in many territories, local authorities will not allow tax registration without evidence of proper authorisation: consequently, premium taxes may remain undeclared.

Tax Calculation

“Fair & Reasonable” Premium allocation

The premium allocation should be of particular interest for insurance companies writing global programs or policies with multiple coverages (e.g. All Risks). The premium allocation exercise will determine how the premium is shared out across jurisdictions and coverages. There remains little official guidance on ‘correct’ methodology to adopt, but with the increasing global interest in cross-border transfer pricing and Base Erosion and Profit Shifting (BEPS) premium allocation this will likely come under further scrutiny.

Whose tax is it anyway?

Taxes on insurance premiums can be either insurer-or insured-borne taxes. That being said, a savvy insurer will always ensure that the full economic premium tax cost is passed onto the policyholder. A classic example is  in Germany where IPT is normally borne by the insured whilst Fire Protection Tax (FPT) is borne by the insurer. In both cases, the expected tax cost can be built into the insurance cost and passed on to the policyholder.

Getting the right rate

The correct tax rate is determined by the location of risk and the class of business. Identifying the specific country’s tax legislation that should be applied to the premium is the first step. Secondly, many countries’ tax legislation contains different tax rates for different classes of business: understanding exactly what business you are writing, and being able to fit it into the right tax rate ‘box’, is crucial.

An often overlooked piece of the puzzle is ensuring that the tax information you have is accurate and up-to-date. Tax rates have a habit of changing unexpectedly, so it is crucial that the tax information you are basing your decisions on is accurate and reliable. When gathering tax information two things are key:
  1. Only gather information from those sources you consider reliable
  2. Where possible, gather multiple sources of reliable information
Filing Taxes

Be on time, every time

This is usually considered as the most important step, as this is evidence of an insurance company successfully discharging its obligations. Generally, the primary responsibility for the calculation, reporting and settlement of IPT rests with the insurance company. As with VAT, the insurer effectively acts as the collector and administrator of the tax.

There is no harmonisation of deadlines for tax submissions, they may fall in the first week of a month or the final day of a month. It is essential that you know all of your filing and payment deadlines and make sure that they are hit every month.

File your taxes on the right return

The tax point is the event that triggers the birth of the tax liability and determines in which period the tax payable needs to be reported. Not surprisingly, there is no harmonisation of tax point dates. This can be especially complicated in countries such as Spain, where different taxes on the same contract can have different tax points – if a contract is taxable under IPT and Consorcio surcharges then the cash received and inception date are the appropriate tax points, respectively.

Retain the Supporting Evidence

Once tax returns are filed and tax amounts paid, it should not be considered that the IPT compliance process stops. Indeed, some territories impose additional reporting on the taxpayers. It is the responsibility of the taxpayer to retain sufficient information on the insured persons and policies sold. However, the requirements for what must be retained differ between countries. This information may be requested if the insurer is audited or would like to make a reclaim from a tax authority. Aside from general accounting records, there are specific requirements across several countries for insurers to provide further information on a predetermined basis.

Anticipating Audits

Be prepared and stay prepared

The nature of audits are that they happen well after the fact, but if considered beforehand, they can be facilitated and risks of non-compliance managed. Over the last few years, taxpayers have witnessed increasing controls from local tax authorities with a variety of audit approaches employed:
  • Desk audit
  • Tax assessment
  • Indirect audit through a policyholder

The application of simple rules can easily be implemented internally to strengthen the internal audit processes, and also provide evidence to tax authorities that professional care is taken when managing IPT compliance. Key aspects to document are:
  • Comprehensive audit trail
  • Documented decisions
  • Consistency and fairness
If you require any assistance regarding the above, please contact us today on +44 (0)20 7036 8070