GRIPT – GLOBAL RISKS & INSURANCE PREMIUM TAXES:
SECTION 1: PREMIUM TAX COMPLIANCE 1.1 GLOBAL PROGRAMS 1.2 ROLES & RESPONSIBILITIES 1.3 STRATEGIES FOR COMPLIANCE
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SECTION 2: PREMIUM ALLOCATION 2.1 BASIC PRINCIPLES 2.2 FAIR & REASONABLE 2.3 CONSISTENCY 2.4 COMMON METHODOLOGIES 2.5 TAX AUTHORITY VIEWS
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SECTION 3: CALCULATION OF PREMIUM TAXES 3.1 CLASS OF BUSINESS: MARINE & AVIATION 3.2 CLASS OF BUSINESS: PROPERTY 3.3 CLASS OF BUSINESS: LIABILITY 3.4 CLASS OF BUSINESS: MOTOR 3.5 CLASS OF BUSINESS: LIFE, ACCIDENT & HEALTH
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GRIPT – Global Risks & Insurance Premium Taxes - Page 1 of 32 27th November 2012 | © Fiscal Reps Limited 2012
SECTION 1: PREMIUM TAX COMPLIANCE 1.1 GLOBAL PROGRAMS TYPICAL STRUCTURE
IRMI Definition of a Global Insurance Program An insurance program with a coverage territory encompassing the entire world, including the country in which the insured is domiciled, that is arranged for a multinational business. Source: http://www.irmi.com/online/insurance-glossary/terms/g/global-insurance-program.aspx
As a general rule though, global programs can consist of;
Local policies issued by local operations of the main insurer covering local risks
Master policy sitting above the local policies harmonising coverage across territories
Financial interest covers, insuring the assets owned by the main policyholder
Fronted policies placed with local insurers but reinsured to the main insurer or a captive
Captives providing specific tailored coverage for certain risks
Premium tax legislation often refers to contracts of insurance and premiums attaching to contracts. Consequently once the program structure has been developed it is essential to review the structure from a premium tax perspective to ensure that all premium taxes potentially payable have been identified and can be subsequently settled in accordance with local legislation. Although it is correct that the insurance needs of the client must take priority, tax compliance must not be completely overlooked as failure to properly consider taxes could lead to compliance problems into the future.
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EU RISKS WITHIN A GLOBAL PROGRAM All EU risks within a global program are subject to the EU 2nd & 3rd Non-Life:
Location of risk must be established in accordance with EU definitions
Each EU risk must be subject to taxation in its “home” territory as determined by location of risk rules
What needs careful consideration is that location of risk rules within the EU, although standard across all member states, are likely to be different than rules used by other non-EU countries. For example, in Switzerland the location of the policyholder determines whether local tax is charged on the insurance contract. If the policyholder is domiciled in Switzerland the entire premium is subject to Swiss Stamp Duty. Furthermore if some of the risks are located within the EU, according to EU Non-Life Directive definitions, are therefore are subject to EU premium taxes, there is a possibility of a portion of the premium being subject to double taxation.
Example: Total premium of EUR1m covering a liability risk which is 75% in Switzerland and 25% in Germany. The policyholder is a Swiss domiciled company. Swiss stamp duty is calculated as: 1,000,000 x 100% x 5% = 50,000 German premium tax is calculated as: 1,000,000 X 25% x 19% = 47,500 Total taxes payable are therefore EUR97,500 with the German share of the risk effectively being taxed twice at a combined rate of 24%
TAX COMPLIANCE OBLIGATIONS Any risks that are deemed to be within the EU as per EU legislation are subject to EU premium taxes in the usual way. Consequently taxes should be calculated and settled in accordance with local tax rules. As the risks are within the EU, generally the insurer has the primary liability for the settlement of any premium taxes due and must take steps to discharge this liability. If the insurer does not have capability or desire to settle any EU premium taxes then alternative means must be sought to settle these liabilities.
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KVAERNER CASE IN 2001 The Kvaerner ECJ case in 2001 set a precedent whereby an insured can be held liable for any premium taxes due which have not been correctly settled by the taxpayer. Copy of FiscalReps Factsheet on the Kvaerner Case in 2001 Kvaerner plc, a UK resident company, purchased an insurance policy from an insurance company to cover all of its global operations. Included within its global operations was a Dutch subsidiary company, John Brown Engineers en Constructors BV. The insurance contract stated that the insured could be Kvaerner itself and any of its subsidiaries and associates as instructed by Kvaerner. Kvaerner paid the full premium and passed the costs onto the relevant group companies. Without specific instruction from John Brown to do so, Kvaerner included John Brown within the insurance coverage and indirectly invoiced a share of the premium to John Brown. Upon discovery of the insurance policy the Dutch tax authority billed Kvaerner for Dutch premium tax on John Brown‟s allocated share of the global premium. In 2001, the European Court of Justice ruled that the Dutch tax authorities were entitled to collect this tax and so the decision went in favour of the Dutch tax authorities. Basis of the decision Under Dutch tax law, insurance premium tax is levied on insurance premiums covering risks situated in the Netherlands. Location is defined as the principal establishment of the legal person and any other permanent presence of that legal person. Dutch tax law is in accordance with EU law, which states that every insurance contract shall be subject exclusively to insurance premium taxes in the EU country where the risk is situated. This is further described as the country where the policyholder has habitual residence or where it is a legal person. The decision The ECJ was asked to rule on three questions; > Can a tax authority of an EU country levy a legal entity established in another EU country for premium taxes due on a business establishment within its boundaries where the premium was paid to an insurer based in the EU? ECJ Ruling: Yes > Does it matter if the policyholder is not the overall parent company, but some other company in the group? ECJ Ruling: No
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> Does it matter if the cost of the insurance premium is not passed on (wholly or in part) to the subsidiary company? ECJ Ruling: No. The method of payment or invoicing is irrelevant. Even if no intra-group charge exists the tax authority can still impose a premium tax levy. Implications The obligation to pay premium tax applies to any business operating within the EU, wherever the contract of insurance is entered into or wherever the head office is located. The obligation to pay premium tax applies even when the EU operation covered is not allocated or billed a share of the premium. In most EU countries the insurer is deemed liable for the collection and payment of premium taxes. Consequently, there is a requirement that the insurer must comply with local tax regulations in every EU country where they write business. A buyer of insurance, during the negotiation process with the insurer, must be able to identify the location of all EU risks so that the insurer can allocate the appropriate share of premium for that risk to each EU country and calculate the premium taxes accordingly.
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SECTION 1: PREMIUM TAX COMPLIANCE 1.2 ROLES AND RESPONSIBILITIES NON-ADMITTED INSURERS DEFINITION OF NON-ADMITTED Extract from AllBusiness.com discussing the global implications of non-admitted insurance “A non-admitted policy is issued by an insurance company in a country in which it is not licensed and/or a country outside of the risk domicile, advantages of this include absolute control over coverage terms and insurance buying decisions; lower costs; and accelerated program implementation. The challenges associated with these programs are the inverse of those seen on the admitted side, namely: non-compliance with local laws and possibly country penalties (i.e., fines) as a result; no access to government pools; tax liability for non-compliance and for repatriating claims payments; no local premium allocations; no certificates of insurance; and the carriers position on non-admitted coverage in countries where it is not permissible varies.” Source: http://www.allbusiness.com/business-finance/business-insurance/951210-1.html#ixzz1XA9dhkXt
More recently this term has been used to describe the activity of purchasing a single insurance policy from one insurer that covers all global risks, either on an “admitted” or “non-admitted” basis depending on the regulations in each country where coverage is provided. This single insurer may be a large global insurer who is licensed in some countries but not all, or a captive which is only likely to be licensed in its own domicile (with the exception of EU passporting rights). APPLICATION WITHIN THE EU The term “non-admitted” does not appear to form part of any insurance legislation within the EU and consequently it is difficult to assess whether such transactions are permitted. Consequently the issue of non-admitted insurance remains a grey area and one for the lawyers to discuss, although in the absence of any formal legal guidance market practice seems to have determined in which countries non-admitted is permitted and in which countries it is not. TAX COMPLIANCE OBLIGATIONS Premium tax law however is explicit in terms of which insurance premiums or insurance contracts are taxable. In almost every case local tax legislation requires that premium taxes are levied on premiums or contracts that cover risks located within the country. This refers back to Article 2d of GRIPT – Global Risks & Insurance Premium Taxes - Page 6 of 32 27th November 2012 | © Fiscal Reps Limited 2012
the EU 2nd Non-Life Directive and Article 46 of the EU 3rd Non-Life Directive which were discussed in Session 2.1. Consequently the issue of whether the policy is admitted or non-admitted is irrelevant; premium taxes are still chargeable on the premiums/contracts and must be declared to the local tax authorities by the appropriate taxpayers. Example: A non-admitted insurer writes a multination insurance program covering risks located in the UK, France, Germany, Italy & the Netherlands. Based on FiscalReps experience gained since 2003:
The non-admitted insurer is able to register as a taxpayer and settle the premium taxes which are payable in the UK, Germany & the Netherlands.
The non-admitted insurer will struggle to register as a taxpayer and settle premium taxes which are due in France and Italy
Although tax compliance can be achieved in the UK, Germany & the Netherlands failure to settle taxes in France and Italy, as the insurer is unable to register as a taxpayer, could lead to a compliance failure which could lead to fines, penalties and potentially the local insured being pursued for any unpaid taxes, as per the Kvaerner ruling in 2001. In this example FiscalReps have not considered the local regulatory requirements or the status of the insurer in any of the countries.
Countries where it appears to be market practice that non-admitted business is permitted include the UK, the Netherlands, Germany & Finland. This assessment is based only on FiscalReps experience and has not been validated by reference to local laws and regulations. ISSUES OF NON-COMPLIANCE Premium tax legislation is explicit in that taxes must be charged and paid on relevant insurance premiums or insurance contracts. Compliance failures are defined within legislation and can lead to fines, penalties and potentially criminal charges in the most serious cases of tax evasion. In addition to the legal sanctions, damage to an organisation‟s reputation if such an event were to be released into the public domain could be significant. Consequently it is essential that all avenues are used in order to settle all premium taxes which are deemed as chargeable under local premium tax legislation. Where the domicile and licensing status of the insurer may mean that the insurer is unable to settle any premium taxes due, the following routes to tax compliance may exist; GRIPT – Global Risks & Insurance Premium Taxes - Page 7 of 32 27th November 2012 | © Fiscal Reps Limited 2012
Settlement of taxes via the local insured
Settlement of taxes via the local broker
Settlement of taxes via the non-admitted insurer if it can be demonstrated that no breaches in insurance regulations have occurred
Settlement of taxes via a local specialist fiscal representative who may be able to negotiate a settlement with the tax authority
In conclusion, all reasonable attempts must be made to settle all premium taxes payable and it is important that all relevant parties (insurer, broker & insured) co-operate to seek a solution which achieves full premium tax compliance.
BROKERS BROKER’S DUTY OF CARE TO CLIENT Generally a broker will not offer technical premium tax advice to a client, although often they will assist in premium allocations and offer tax information to clients. When it comes to premium taxes roles, responsibilities and inter-relationship between the broker, insured and insurer are often vague. There does not appear to be a standard approach that is consistently used throughout the insurance market and consequently there is a risk that premium tax compliance could be overlooked, ignored or managed badly. Below are a number of questions for you to consider;
Does a broker have a duty to its client to correctly calculate premium taxes?
Do brokers provide premium tax advice or information?
Does an insurer have a duty to the policyholder to accurately quote for the risk?
Should the quote include an accurate calculation of premium taxes due?
ALTERNATIVE PARTIES SOMETIMES LIABLE FOR TAXES Although generally the insurer has primary responsibility for the settlement of all premium taxes, in certain circumstances this liability can pass to other parties. If for example there is not a licensed insurer who can be pursued for the tax liabilities, some tax authorities will, in the absence of the insurer, look to the local broker for the collection of premium taxes which are due.
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Therefore from a risk management perspective it is important that a broker can identify in which countries they may potentially have a liability for premium taxes, and ensure that if they don‟t want to be saddled with settling the taxes, that alternative arrangements are made with the party with the primary responsibility to ensure that they are able to. In the Netherlands if a local Dutch broker is involved in the placement of domestic business then it is the broker who is primarily responsible for the settlement of premium taxes with the tax authorities.
POLICYHOLDERS ECONOMIC COST OF TAX Taxes on insurance premiums are not recoverable like VAT although they are potentially a corporate tax deduction from the policyholders annual profits. Premium deductibility is a complex area and is often affected by the regulatory status of the insurer who provides the insurance coverage. In reality, the economic cost of premium taxes, like most other taxes, are ultimately borne by the buyer of the insurance. This cost can be borne in one of two ways;
Directly, as an addition to the premium quoted
Indirectly, by building the tax cost into the premium cost quoted
An insurer who is aware of all the relevant taxes that apply to the coverage being offered should always aim and be able to pass 100% of economic cost onto insured. RELIANCE ON INSURER & BROKER Policyholders are often wholly reliant on the insurer and the broker when it comes to premium taxes. Examples of this reliance are;
Broker preparing premium allocations for policyholder
Broker & insurer preparing premium tax calculations
Insurer responsible for settling premium taxes with local tax authorities
A compliance failure by either the broker or insurer in any one of those areas could cause problems for the insured due to;
Poor premium allocations leading to inaccurate tax calculations
Failure to settle premium taxes resulting in local insured being held liable
Therefore it is essential that the insured takes a professional interest in tax calculations and can satisfy himself that the appropriate actions have been taken and the calculations made. GRIPT – Global Risks & Insurance Premium Taxes - Page 9 of 32 27th November 2012 | © Fiscal Reps Limited 2012
Within the EU rates of IPT vary from 0% up to 23%, consequently the tax cost can become material for some insurance contracts. The potential for error and the financial cost associated with errors can therefore be large and a thorough review of all premium allocations and tax calculations by the insured prior to inception could actually result in cost savings.
DEMAND FOR PROOF OF COMPLIANCE Increasingly insured are demanding evidence of tax compliance from their brokers and insurers. Following Kvaerner, insureds are increasingly aware of the potential to be held liable for premium taxes should the primary taxpayer (usually the insurer) fail to comply with local regulations. Whilst it may be unrealistic for an insurer to provide a receipt or other evidence to prove that a specific amount of tax in relation to a particular policyholder has been correctly settled with the tax authorities, insurers should be able to demonstrate to policyholders;
The existence of a robust system of control surrounding premium tax compliance
A depth of knowledge and skills necessary to discharge these responsibilities
A clean bill of health in terms of historical tax filing
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SECTION 1: PREMIUM TAX COMPLIANCE 1.3 STRATEGIES FOR COMPLIANCE UNDERSTAND THE INSURANCE The basics apply as always;
Identify location of risk
Establish class of business being insured
Apply the appropriate premium tax legislation
ENSURE YOUR OWN COMPLIANCE Take responsibility for your own organisations premium tax compliance. Broker
Ensure that any tax information provided to clients is relevant, accurate and up to date. When preparing premium allocations ensure that the methodology is sound, can be justified and is subject to regular reviews for reasonableness.
Ensure that the basis of all premium tax calculations are accurate, satisfy yourselves that premium allocations are appropriate and review methodologies regularly to ensure that they remain reasonable. Maintain systems of tax compliance so that premium taxes can be identified, calculated and settled with the relevant tax authorities in accordance with local rules.
Review all tax calculations and premium allocations to satisfy yourself of their accuracy. Failure to do so may lead to unnecessary tax costs. Ensure that insurers to whom you pay premiums have adequate controls over premium tax compliance and can demonstrate the ability to settle premium taxes related to your business accurately and in accordance with local regulations.
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KEEP AN AUDIT TRAIL Keep a full record of all premium tax deliberations within your organisation. As an insured don‟t rely on your broker or insurer to keep evidence for you, as they may change and personnel within the organisations may change meaning that you may not be able to obtain the evidence needed to support your position. When choosing a premium allocation model record all of the discussions and the rationale for choosing a particular method. Also keep evidence of regular reviews of the methodology. Evidence the source of tax rate information used to make calculations and ensure that procedures are in place to review this information on a regular basis.
DEVELOP & MAINTAIN EXPERTISE Premium taxes are a niche and complex area of business taxation and consequently there are only a few professionals who are suitably qualified and experienced to offer detailed advice. However a few simple steps can raise the level of premium tax awareness considerably within a business and can effectively eliminate many of the regular tax issues that can arise. Training Training courses targeted at all key employees including technical and finance teams Information Access to regularly updated tax rate information Consultancy Access to external professional experts who can offer detailed technical support when required Technology Embedding tax compliance procedures into existing systems so that premium tax compliance becomes an automatic process
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SECTION 2: PREMIUM ALLOCATION 2.1 BASIC PRINCIPLES EU 3RD NON-LIFE DIRECTIVE Article 46 of the EU 3rd Non-Life Directive states that; “Without prejudice to any subsequent harmonization, every insurance contract shall be subject exclusively to the indirect taxes and parafiscal charges on insurance premiums in the Member State in which the risk is situated as defined in Article 2 (d) of Directive 88/357/EEC” Therefore to comply with this directive the following actions must be taken;
Determine Location of Risk as per the EU 2nd Non-Life Directive (Directive 88/357/EEC)
Calculate the premiums attaching to each location so that the appropriate local taxes can be calculated as per the EU 3rd Non-Life Directive
This is effectively the premium allocation exercise as it relates to EU insurance business. It is clear within the legislation that each location of risk must be separately identified; however there is no reference within the legislation as to how exactly premiums should be allocated in order to calculate local premium taxes. LOCATION OF RISK Article 2d of the EU 2nd Non-Life Directive states that; “´Member State where the risk is situated' means: - the Member State in which the property is situated, where the insurance relates either to buildings or to buildings and their contents, in so far as the contents are covered by the same insurance policy, - the Member State of registration, where the insurance relates to vehicles of any type, - the Member State where the policy-holder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, whatever the class concerned, - the Member State where the policy-holder has his habitual residence or, if the policy-holder is a legal person, the Member State where the latter's establishment, to which the contract relates, is situated, in all cases not explicitly covered by the foregoing indents;” Location of risk rules are clearly defined within the EU legislation which means that;
The same rules apply throughout the EU without exception, and
A particular risk can only be located in one place GRIPT – Global Risks & Insurance Premium Taxes - Page 13 of 32 27th November 2012 | © Fiscal Reps Limited 2012
However there can be some confusion in the application of location of risk rules in relation to the final clause of Article 2d, usually in the cases of liability exposures. LEGAL DEFINITION Other than the EU legislation referred to above which is often repeated in local insurance legislation, there is generally not a legally defined methodology for the allocation of insurance premiums across multiple jurisdictions. HMRC have published guidance in IPT Notice 1 which is designed to assist insurers as to what allocation methodologies may be considered appropriate. Although HMRC stop short of demanding that certain methodologies be used, the guidance is clear that whatever methodology is adopted must be able to withstand scrutiny by HMRC.
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SECTION 2: PREMIUM ALLOCATION 2.2 FAIR & REASONABLE HMRC DEFINITION HMRC IPT legislation requires that taxpayers apply a “just & reasonable” method of premium allocation. Whilst there is no clear definition of what “just & reasonable” actually means, the following principles can be used as guidance when devising allocation methodologies;
Is it accepted as common market practice?
Is there a realistic alternative to the method adopted?
Does the method result in some obviously unfair allocated amounts?
Is the allocation methodology devised with the intention of minimising taxes?
In most other countries there is no clear definition of the methodology which should be adopted. The current position definitely seems to favour a self-determination approach to premium allocations, putting the onus on the taxpayer to devise a method which is fair and can be justified to tax authorities.
TAX ARBITRAGE Given the lack of tax rate harmonisation across the EU and the extreme variations in tax rates in some jurisdictions, “tweaking” the premium allocation could be viewed as a way to reduce the overall tax cost of the insurance policy. Example 1: A general liability policy has a total premium of EUR100,000. The chosen method allocates premiums as 75% UK and 25% Finnish resulting in tax payable of EUR10,250 (effective IPT rate of 10¼%). Working 1: (100,000 x 75% x 6%) + (100,000 x 25% x 23%) = 10,250 By changing the allocations to 85% UK and 15% Finnish the effective rate can be reduced to 8½%, a saving of EUR1,700 Working 2: (100,000 x 85% x 6%) + (100,000 x 15% x 23%) = 8,550 Ironically, although the UK tax authorities would probably not challenge the revised allocation as it results in an increase in tax revenue for them, if discovered the Finnish tax authorities may well decide to challenge the method as it results in a decrease in tax revenue for them. As the two tax GRIPT – Global Risks & Insurance Premium Taxes - Page 15 of 32 27th November 2012 | © Fiscal Reps Limited 2012
authorities operate independently of each other and assuming that the Finnish tax office was successful the following situation may occur; Example 2: UK tax authorities insist on keeping their increased 85% allocation but the Finnish authorities are successful in forcing a switch to the original 25% allocation in their favour. The overall tax cost would then be: (100,000 x 85% x 6%) + (100,000 x 25% x 23%) = 10,850 Resulting in an overall increase in tax payable, following the successful challenge by both tax offices. Anecdotal evidence suggests that many tax authorities are starting to review premium tax allocations as a route to securing higher premium tax revenues. There is also a fear among some compliance practitioners that should tax authorities reach the conclusion that the market practice adopted by the industry is not appropriate, legislation could be introduced to dictate the methodology adopted. As EU member states are not required to harmonise IPT policy it is unlikely that they will adopt a common methodology framework.
COMMON PITFALLS Lack of Evidence: Sufficient evidence documenting the choice of methodology is not maintained meaning that if the allocation is challenged, a taxpayer is unable document the rationale used to reach the conclusions it has and therefore is unable to defend the position taken. Lack of Review Process: There is no evidence to confirm that a regular review of the chosen methodology, which was signed off a few years earlier, is still relevant to the current circumstances. Again, the lack of supporting evidence would hamper a taxpayer when forced to defend a position that it has taken. Methodology Changes Every Year: A frequently changing methodology may also arouse the suspicions of tax authorities as it may signal an attempt to change the premium allocation to reduce the overall tax burden. Again, if sufficient evidence did not exist to support the decisions taken the taxpayer could find it hard to defend a position adopted.
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SECTION 2: PREMIUM ALLOCATION 2.3 CONSISTENCY FROM YEAR TO YEAR FROM CLIENT TO CLIENT Two very different methodologies would certainly cause concern that very likely one or possibly both methodologies are not reasonable and therefore could be challenged by tax authorities. FOR SIMILAR RISKS An insurer specialising in insuring professional liability risks for European law firms would be expected to adopt a similar premium allocation methodology for all of its risks. A lack of consistency could point to a decision making process which is unconsidered and haphazard at best, and potentially designed to artificially reduce tax liabilities at worst. RISKS OF INCONSISTENCY Due Process: The lack of a rigorous process of determining the appropriate allocation methodology could result in tax errors and could lead to challenges from tax authorities. Inefficiencies: Rather than applying the agreed internal methodology, much time can be spent with little reward, on devising new methodologies which are in reality no better than standard practice. Tax Investigations: Inconsistency of methodology can come across as a lack of thorough deliberation in the eyes of the tax authorities and can lead to tax challenges on the basis of premium allocations.
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SECTION 2: PREMIUM ALLOCATION 2.4 COMMON METHODOLOGIES The choice of allocation methodology must always be;
Easy to understand and interpret
Justifiable to tax authorities
Straight forward to calculate based on accurate and available data
Simple to test and evaluate regularly
Consequently the need for a pragmatic solution is as important as the need to be “reasonably” accurate in the allocation of premiums. CLAIMS EXPERIENCE Insurance costs are a reflection on the level of risk associated with a particular asset being insured. Consequently the claims experience is likely to have an impact on the insurance cost and should potentially be reflected in the premium allocated to it. An asset in a particular country that is perennially subject to claims against it should reasonably have a greater amount of premium allocated against it, as if the asset was insured separately it would demand a higher than normal premium. Countries that adopt strong risk management procedures and are able to demonstrate good claims records should benefit from lower premium allocations, as if they were able to purchase insurance separately from the group, they would benefit from lower insurance costs. It is also arguable that in liability programs, any litigation (and consequently claims) is often aimed at the main trading operation or head office with the “deepest pockets”. Consequently a greater share of the premium should be allocated to these operations as a reflection of the level of risk. TRANSFER PRICING OECD Transfer Pricing Guidelines state that; “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.” Transfer pricing is essentially the way that related companies share or allocate costs between themselves. In relation to multinational insurance programs, transfer pricing issues can arise when;
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A captive uses a premium allocation to invoice insured parties who are covered under a policy issued by the captive
A head office uses a premium allocation to charge subsidiaries for a share of the total cost of insurance to the group which is purchased centrally
Many tax authorities have enacted legislation surrounding transfer pricing methodologies. Where insurance buyers use premium allocations to recharge subsidiaries for insurance costs, and those costs are material, there may be transfer pricing implications which need to be considered. Inappropriate allocations could effectively result in shifting profits or costs from one jurisdiction to another which may be contrary to local transfer pricing regulations. This does not only affect premium taxes, but could potentially impact VAT and Corporate Income Taxes.
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SECTION 2: PREMIUM ALLOCATION 2.5 TAX AUTHORITY VIEWS ECONOMIC ENVIRONMENT Most EU economies are suffering financially following the credit crunch in 2007-08. A consequence of this is the requirement not only to reduce spending, but also to raise additional revenue. Revenue is traditionally raised in a number of ways;
Introduction of new forms of taxation
Closing tax “loop-holes”
Stricter enforcement of tax rules to increase collection
It would appear that the EU is, and will remain, in a period of increased taxation until the public finances of many EU governments are brought under control. Within the area of premium allocation there is an obvious avenue for tax authorities who wish to try and secure more tax revenue. By challenging premium allocations tax authorities may be able to secure a greater allocation in their favour and thus generate additional revenue. There also remains a fear that tax authorities may start to implement legislation determining the methodology to be used for premium allocations in an effort to secure additional revenue. SHARE OF TAX CAKE As each tax authority operates independently, there is no requirement to harmonise their procedures towards premium allocation. Furthermore each tax authority is effectively “competing” for premium tax revenue and therefore wants to secure the most favourable premium allocation possible. Logically therefore the situation could arise where competing tax authorities if all successful in challenging a premium allocation could have a major tax impact on the tax charges calculated. Example: The premium for a multinational risk is allocated equally between 4 countries (e.g. 25% per country). Two tax authorities successfully argue that their share of the premium should be 30% each and the two other authorities agree to a 25% allocation. If the premium was GBP1m, effectively premium taxes would now be calculated on £1.1m as; Countries 1 & 2 require an allocation of 30% each = 60% = £600k Countries 3 & 4 require an allocation of 25% each = 50% = £500k
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IMPOSITION OF METHODOLOGY Premium taxes have historically been declared and filed on a self-assessment basis. This means that that taxpayers are obliged to make declarations when taxes are payable and to take steps to ensure that all taxable premiums are identified, recorded and settled in accordance with local tax legislation. This self-assessment basis together with the lack of harmonisation across the EU has led to the situation where no formal policy for the allocation of premiums has been introduced by any tax authority. Consequently, the insurance market has been in a position of having to determine reasonable allocations and calculate premium taxes accordingly. Whilst this gives the market the freedom to determine appropriate methodologies based on their expertise and understanding of the risks, it also gives less scrupulous participants the opportunity to make allocations which unfairly favour their clients to the detriment of the tax office. As with any form of regulation, when perceived weaknesses are identified there is a strong chance that the efforts to rectify this weakness results in an overly strong response. The area of premium allocation is a good example of this for the following reasons;
Skills and knowledge of premium allocation is strong within the insurance industry
Tax authorities may decide to legislate in response to any perceived tax “leakage”
Tax authorities may impose unrealistic allocation methodologies as a consequence of their lack of knowledge and experience in the insurance market
Once legislation has been introduced, it is unlikely that it will be harmonised throughout the EU and in some countries legislation can be introduced without the requirement to consult the industry on proposed new laws
MARKET RESPONSE It is clear that the current system without legislation defining allocation methodologies is in the best interests of the insurance market, as long as the system is not abused in order to unfairly reduce the tax burden. Therefore the market as a whole should attempt to;
Use consistent premium allocation methodologies wherever possible
Give taxpayers the final say in approving methodologies adopted
Stop any practices that are intended to unfairly deny tax authorities of tax revenue
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SECTION 3: CALCULATION OF PREMIUM TAXES 3.1 CLASS OF BUSINESS: MARINE & AVIATION Covering EU Classes:
5 Aircraft 6 Ships (Sea, Lake, River & Canal Vessels) 7 Goods in transit (including merchandise, baggage & all other goods) 11 Aircraft Liability 12 Liability for Ships (Sea, Lake, River & Canal Vessels)
DOMESTIC V INTERNATIONAL In many jurisdictions ships and aircraft which are predominantly used to travel internationally are exempt from premium taxes. Generally the international exemption is only available to vessels which travel overseas in the course of a commercial activity. To determine if a vessel is engaged in international travel it is first necessary to establish which country is the location of risk. For both ships and planes the country of registration is deemed the location of risk. Example: In the Netherlands commercial aircraft used over 70% of the time for international public transport is exempt from premium tax COMMERCIAL V PRIVATE Further exemptions exist for insurance related to commercial vessels. It is generally the responsibility of the taxpayer to demonstrate that the vessel is able to take advantage of the exemption. Example: In the UK commercial ships with a gross tonnage of more than 15.24 are exempt from IPT as are commercial airlines weighing at least 8 tonnes.
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GOODS IN TRANSIT Goods in transit insurance is a very complex area, due in most part to the nature of the movement of such goods. Again often exemptions are available for the transport of goods internationally although care is required to ascertain the extent of the international element in comparison with the domestic portion. To determine location of risk and to consider if any exemptions are available a detailed understanding of the risks being insured and the local tax rules are required. Countries where exemptions exist for international goods in transit include; Austria
EXEMPTIONS The tax treatment of marine and aviation policies varies enormously and consequently local legislation will need to be reviewed in every instance. Example 1: There is a blanket exemption for all marine & aviation insurance in Ireland Example 2: In Belgium all marine hull is exempt from tax, aviation hull for international aircraft is exempt and goods in transit is taxed at a reduced rate of 1.4%
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SECTION 3: CALCULATION OF PREMIUM TAXES 3.2 CLASS OF BUSINESS: PROPERTY Covering EU Classes:
8 Fire & natural forces 9 Other damage to property
IMMOVEABLE PROPERTY Determining the location of risk for immoveable property is relatively straight forward, identification of the street address where the property is located is sufficient to determine the country of risk. Property damage insurance is generally taxed at the standard rate in all countries although variations can occur depending on the nature and usage of the property. In particular in some countries there are exemptions available for property used in connection with the agriculture industry. In some countries tax rate variations exist where the property being insured is domestic rather than business. Typically property coverages do not include terror although in some countries (e.g. UK Pool Re) top up coverage can be purchased to cover against acts of terrorism. MOVEABLE PROPERTY Moveable property poses a greater problem for defining location of risk however, by referring back to Article 2d of the EU 2nd Non-Life Directive it can be established that where the insurance is purchased by an individual the location is the habitual residence of the policyholder. For companies purchasing insurance the location of risk can be determined by reference to the location of the establishment to which the policy relates. Example: Mr Smith buys insurance to cover against damage to his television. Mr Smith lives in London therefore the location of risk is in the UK. A company buys insurance to cover damage to its machinery in a factory based in Dublin. As the establishment to which the policy relates is in Dublin the location of risk can be determined as in Ireland. Premium tax rates for moveable and immoveable property are generally the same, subject to variations mentioned above.
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FIRE COVERAGE Fire brigade taxes exist in many countries, most notably in: Germany
The purpose of the tax is to fund the activities of the fire services within these countries. Fire brigade taxes are charged only on premiums paid to obtain fire coverage. When a contract of insurance includes coverage against property damage due to fire and other causes, the fire element of the premium must be separated out so that fire brigade taxes can be charged on the fire portion alone. Market practice dictates that the fire portion of a property damage premium is usually in the region of 20% - 40% of the total premium. Example: In Finland the fire brigade charge is calculated on the fire portion of the total premium. Premium tax is calculated on the premium + any fire brigade charge.
CATASTROPHE COVERAGE In some countries levies are added to insurance premiums in order to fund catastrophe style coverages. The most well known are the CATNAT levy in France and the Consorcio levy in Spain. Although the rules, regulations and rates of levy differ the basic principle is that these levies collected are deposited into a fund which can then be used to compensate policyholders following a trigger event (such as a natural catastrophe) in the cases where insurers are unable to fulfil their obligations or the claim extends beyond the basic coverage offered. In most instances these levied are compulsory and in certain cases, certainly in the case of Consorcio, failure to pay into the funds can affect the ability of the policyholder to make a claim in the event of a catastrophe. Example: In France a fixed amount of EUR3.30 is levied on all property insurance contracts and paid to the “Common Fund for Victims of Terrorism”
GRIPT – Global Risks & Insurance Premium Taxes - Page 25 of 32 27th November 2012 | © Fiscal Reps Limited 2012
SECTION 3: CALCULATION OF PREMIUM TAXES 3.3 CLASS OF BUSINESS: LIABILITY Covering EU Classes:
13 General liability
COMPULSORY LIABILITY In many countries certain levels of liability insurance are compulsory, such as;
Lawyers professional indemnity
It is normally also a requirement that these insurances are placed with a locally domiciled insurer, as stipulated within countries general good provisions. Example: In Belgium, compulsory liability coverage covering fire or explosion for public buildings in subject to premium tax of 9.25% plus a security fund levy of 3% Generally liability risks are subject to insurance at the standard rate. Only in a few instances, as in Belgium above, are additional taxes or levies charged on insurance premiums. GENERAL, E&O, D&O As with compulsory liability coverages, other liability coverages are generally subject to premium taxes at standard rates. Many professional firms and corporates take the commercial decision to purchase very high levels of liability coverage, especially in the cases of professional E&O and corporate D&O. Such levels of coverage may not always be available in local markets where capacity is limited. Consequently these higher layers of liability coverage are often place with non-admitted insurers or captives. Although the premiums may be relatively low, the requirement to calculate and settle premium taxes still remains. However it is often difficult for non-admitted insurers to settle premium taxes in some EU jurisdictions and consequently thought has to be given in terms of how to ensure that premium taxes are settled in accordance with local regulations.
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LOCATION OF RISK Determining the location of risk for liability policies can sometimes be problematic. The final paragraph of Article 2d of the EU 2nd Non-Life Directive states that: “´Member State where the risk is situated' means: - the Member State where the policy-holder has his habitual residence or, if the policy-holder is a legal person, the Member State where the latter's establishment, to which the contract relates, is situated, in all cases not explicitly covered by the foregoing indents;” Therefore it is important to consider which of the policyholders operations benefits from the coverage in place as they are the establishment to which the contract relates. Example: The head office of a law practice purchases professional indemnity insurance to cover its main office in London plus its other offices in Paris and Madrid. The establishments to which the policy relates are all of London, Paris and Madrid, consequently the location of risk is UK, France and Spain and the premium must be allocated across those countries so that the appropriate local premium taxes can be calculated. ALLOCATION OF PREMIUMS In the previous example we saw how the location of risk for a liability program was determined. The consequences were that the premium needs to be allocated across three different countries so that all the local premium taxes can be calculated. Without any clear legislative guidance as to the appropriate methodology for the allocation of premiums on multinational risks market practice has evolved to offer a number of alternatives. Although none of the methods are a scientifically accurate method they are “reasonable” in their intention to allocate premiums fairly. Generally used allocation methods include:
Revenue per product for products liability type coverage
Revenue per office or numbers of lawyers per office for professional liability coverages
Revenue per company or number of directors per company for D&O coverages
Number of employees per office for employers liability coverages
GRIPT – Global Risks & Insurance Premium Taxes - Page 27 of 32 27th November 2012 | © Fiscal Reps Limited 2012
SECTION 3: CALCULATION OF PREMIUM TAXES 3.4 CLASS OF BUSINESS: MOTOR Covering EU Classes:
3 Land vehicles (excluding railway rolling stock) 10 Motor vehicle liability
MOTOR VEHICLE & MOTOR LIABILITY Usually motor insurance is purchased to cover vehicle damage and liability (e.g. comprehensive insurance or third party, fire & theft). However the tax rates applicable to motor damage and motor liability can vary. Example 1: In Belgium, motor damage is taxed at 9.25%. However motor vehicle liability is subject to premium taxes ranging from 0% to 9.25% plus INAMI levy which can vary from 12.85% to 17.85%. These variation depend on the vehicle type. In the UK the distribution channel can cause a variation in rate of premium tax. Example 2: Motor insurance purchased from a general insurer is taxed at a rate of 6%. However insurance that is sold to customers in connection with a supply of VATable goods or services (e.g. hire car company) is subject to a higher rate of premium tax of 20% In Austria an additional tax is levied on motor liability insurance based on the vehicle engine size. Example 3: Motor vehicles with a gross tonnage of under 3.5t are subject to an additional tax based on the cubic capacity of the vehicle. The tax can be increased if the vehicle is old and fails to meet certain emissions criteria. Certain vehicles are considered exempt, including ambulances, disabled cars and electric vehicles. The tax is calculated and levied on the motor liability premium.
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VEHICLE TYPES & USES In many countries the type of vehicle can impact the rate of tax applied to the premiums. The key vehicle types are: Motor cars
Vehicles > 12t
Vehicles > 3.5t
Certain vehicle types can also attract different tax rates with the main categories being agricultural vehicles and vehicles for the disabled. PARAFISCAL TAXES In many countries there are additional parafiscal charges on motor insurance policies. These levies are generally designed to fund specific political objectives in those countries. Examples include; Belgium
National Institute for Health & Disability
Accident & emergency services
National Guarantee Fund
National Guarantee Fund
Motor Guarantee Fund
Road Accident Victims Fund
Road accident victims
Institute for Medical Emergency
Accident & emergency services
EXEMPTIONS There are few exemptions available for motor insurance. The only main exemptions available are for vehicles that are used in connection with agricultural businesses (France) and vehicles for the disabled (Belgium and UK).
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SECTION 3: CALCULATION OF PREMIUM TAXES 3.5 CLASS OF BUSINESS: LIFE, ACCIDENT & HEALTH Covering EU Classes:
1 Accident 2 Sickness
LIFE In most EU countries life insurance policies are exempt from premium taxes, although in a number of countries it is potentially taxable, those countries include; Austria
The EU Life Assurance Directive governs the operation of the life insurance market in the EU, and the legislation has its own definition for location of risk, as per the extract below Extract from EU Life Assurance Directive Article 50: Taxes on premiums Without prejudice to any subsequent harmonisation, every assurance contract shall be subject exclusively to the indirect taxes and parafiscal charges on assurance premiums in the Member State of the commitment, and also, with regard to Spain, to the surcharges legally established in favour of the Spanish „Consorcio de Compensación de Seguros‟ for the performance of its functions relating to the compensation of losses arising from extraordinary events occurring in that Member State. Source: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2002:345:0001:0051:EN:PDF
Within the legal definitions, the “Member State of the commitment” is defined as; Extract from EU Life Assurance Directive Definitions „Member State of the commitment‟ shall mean the Member State where the policy holder has his/her habitual residence or, if the policy holder is a legal person, the Member State where the latter's establishment, to which the contract relates, is situated; Source: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2002:345:0001:0051:EN:PDF
A problem that is more commonly arising is that with the increasing numbers of individuals emigrating or retiring abroad, policies which were initially subject to one tax regime are now subject to an alternative tax regime by virtue of the change in habitual residence of the policyholder. GRIPT – Global Risks & Insurance Premium Taxes - Page 30 of 32 27th November 2012 | © Fiscal Reps Limited 2012
Identification of such policies by life insurance companies can be problematic but could leave them with premium tax compliance problems if not addressed correctly. ACCIDENT & HEALTH As with life, many countries do not tax accident and health coverages, although tax treatments do vary and need to be reviewed thoroughly in each instance. Countries where exemptions are available for accident and health insurance include; Belgium
Many exemptions exist around the provision of workplace health care although these are tightly controlled and subject to local legislation. HEALTH INSURANCE & OVERSEAS SECONDMENTS Increasingly large employers are sending greater numbers of employees on secondments or relocating them permanently. In such cases employees are often provided with health insurance benefits as part of the relocation package. Depending on the structure of the insurance provided in such packages there could be implications for the location of risk and consequently the premium taxes applicable to the policies. Any changes in the habitual residence of the individual or the establishment to which the policy relates will have an impact on the location of risk and can potentially change the taxable nature of the policy. TRAVEL Travel insurance often acts as a “composite” insurance offering a combination of coverage often including assistance, financial loss, health, accident and property damage. Consequently market practice appears to be the selection of a rate of tax which best reflects the commercial nature of the coverage provided.
GRIPT – Global Risks & Insurance Premium Taxes - Page 31 of 32 27th November 2012 | © Fiscal Reps Limited 2012
ABOUT FISCALREPS Fiscal Reps Limited was founded by Mike Stalley in 2003 to provide a full outsourced tax compliance solution for the settlement of premium taxes throughout the European Union. Since inception FiscalReps has grown to become the market leader in this field, providing outsourced tax compliance services to over 200 insurance company and captive insurer clients. Mike Stalley is a UK qualified chartered accountant, and has worked in the insurance industry for over 15 years in both Bermuda and the London Lloyds Market. In addition to its core business of outsourced tax compliance, FiscalReps is able to offer; •
Unique software solutions taxbox and taxDNA to enable insurers to embed tax compliance functionality within their existing accounting and underwriting systems
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Disclaimer: The information provided in this pack is for training and general reference purposes only. Whilst every effort is made to ensure that the material is up to date and accurate, Fiscal Reps Limited does not warrant, nor does it accept any responsibility or liability for, the accuracy or completeness of the content or for any loss which may arise from reliance on information contained in this pack. Links to external websites are provided for your convenience but Fiscal Reps Limited accepts no responsibility or liability for the content of those sites. Unless otherwise stated the copyright and any other rights in the contents of this training pack and accompanying slides, including all images, text and webcasts are owned by Fiscal Reps Limited.
GRIPT – Global Risks & Insurance Premium Taxes - Page 32 of 32 27th November 2012 | © Fiscal Reps Limited 2012