ITS YEAR ANNIVERSARY
GLOBAL INDIRECT TAX REPORT 2013
FLEXIBILITY How to adjust to the fast changing world of tax legislation
VERSATILITY How captive structures can best withstand changing market and tax conditions
MULTI-UTILITY Why todayâ€™s economic circumstances demand for varied and capable tax solutions
GLOBAL INDIRECT TAX REPORT 2013
A CERTAINTY OF LIFE “
he only things certain in life are death and taxes,” famous words once written by Benjamin Franklin. It has been estimated that the number of centenarians in the US has increased from just over 2,000 in 1950 to over 70,000 now. If this trend continues there is a chance that Mr Franklin may be proved wrong, with taxes being the only certainty in life. Premium taxes remain a headache for many businesses operating in the insurance industry. Which rates to apply? Where the risks are located? How to settle taxes due? And who is responsible for the settlement of premium taxes? All are questions which have been continually asked by confused practitioners. Things have also become even more
complex as last year saw a record number of changes in premium tax legislation with many governments increasing taxes in an attempt to balance their budgets. FiscalReps has always sought to make sense of premium taxes. By offering outsourced compliance services, technology solutions, consulting and training, FiscalReps have given over 200 insurance companies, captives, brokers and risk managers a level of certainty surrounding tax that has previously been lacking. Now in 2013, we are planning on celebrating our 10th anniversary by expanding our offerings to include an American ofﬁce, VAT practice and Australian premium tax compliance services. With such a landmark date coming up, we decided at FiscalReps
to take a collective look at the state of premium tax compliance and present them to you within these pages. We hope you ﬁnd these articles informative and come to better understand all facets of the inevitability that is tax. By Mike Stalley
MEET THE TEAM Mike Stalley FCA, chief executive, founded FiscalReps, a specialist professional tax consultancy, in 2003 after experiencing the difﬁculties involved in achieving international premium tax compliance. Previously, Mike had worked in the insurance industry in both Bermuda and the Lloyds market in London after qualifying as a chartered accountant in 1995.
Christophe Bourdaire, client manager, is a native French speaker and is an IPT Specialist for francophone countries. He also manages the IPT compliance process for his portfolio of clients. Christophe earned a degree (certiﬁcate) in Journalism at Ecole Nouvelles in Nice, France and a bachelor degree in Applied Territorial studies completed at the University of Strasbourg.
Peter Hewitt CTA (Fellow), client director of European tax practice, brings a wealth of VAT knowledge to FiscalReps. After eight years with HMRC he spent 25 years in Ernst & Young’s indirect tax practice. He has helped FiscalReps to offer indirect tax outsourcing, consulting and training services.
Ladislav Hanak, client manager, joined FiscalReps in 2010. In 2006 he graduated from the Faculty of National Economy of the University of Economics in Bratislava, Slovakia where he earned a Masters Degree (diploma) in Economics. As a client manager he is responsible for managing the IPT compliance for several major accounts.
Nazaret Gonzalez, client manager, has received training from Consorcio covering all areas of CLEA and Extraordinary Risks levies since joining FiscalReps, being the ﬁrst person ever to receive such training. Nazaret joined FiscalReps straight from University where she completed a Masters Degree in Economics at Alicante University.
Karen Jenner, client director for the captive practice, joined FiscalReps with over 20 years of experience, providing invaluable global technical insurance guidance. The majority of her career was spent at Chartis - Major Accounts Practice - responsible for the global insurance programmes of some of the top 100 FTSE companies.
Joseph Finbow, client manager, joined FiscalReps in 2011 from KPMG with three years’ experience in dealing with global IPT issues. He’s responsible for the delivery of IPT compliance services to FiscalReps’ captive insurance clients and is a member of FiscalReps’ IPT Technical Committee which approves all IPT technical information gathered and maintained by FiscalReps.
Asher Harris, US consultant, conducts a boutique law practice and gives clients access to the type of tax expertise normally only available in large law ﬁrms, together with the personal attention, responsiveness, and cost-efﬁciency of a small law practice.
GLOBAL INDIRECT TAX REPORT 2013
A brave new world As tax continues to enter the limelight as a result of the global economic crisis – and a whole manner of country-speciﬁc issues – Mike Stalley examines where these trends are heading and how FiscalReps is ensuring it stays ahead of the curve
The changing landscape of IPT
A small world after all
A year in the life of a direct writing captive
With global insurance programmes still facing fresh hurdles, Karen Jenner discusses the issues insurers need to keep in mind when becoming involved in such complex structures
A week is a long time in politics, and a year is an exceptionally long time in the life of a direct writing captive. Karen Jenner examines the ongoing processes involved within 365 days of such a captive structure.
With legislative change sweeping Europe, Joseph Finbow examines how IPT will be the most signiﬁcantly affected and where
Joseph Finbow, Nazaret Gonzalez, Christophe Bourdaire and Ladislav Hanak give a quick overview of IPT compliance in some of the most important insurance markets in Europe: Germany, France, Italy and Spain
The art of outsourcing
The VAT exemption
Across the pond
Case study – VAT for captives
Insurance considerations down under
A complicated matter to many, Peter Hewitt examines the issue of VAT for captives and the exemptions available for captive management
In order to help you understand the elements of VAT that are relevant to captives, Peter Hewitt examines the jurisdiction of Gibraltar as a case study
Ten years in the making... A timeline of some of the key developments that helped FiscalReps celebrate its 10 year anniversary in 2013
HEAD OF CONTENT, CAPTIVE REVIEW Matthew Broomﬁeld +44 (0)20 7832 6533 m.broomﬁeld@captivereview.com
PUBLISHING DIRECTOR Nick Morgan +44 (0)20 7832 6635 email@example.com
REPORT EDITOR Jon Yarker +44 (0)20 7832 6541 firstname.lastname@example.org
PUBLISHING ACCOUNT MANAGER Jo Cole +44 (0)20 7832 6636 email@example.com
STAFF WRITER Roberto Barros +44 (0)20 7832 6543 firstname.lastname@example.org GROUP HEAD OF CONTENT Gwyn Roberts
PUBLISHING ACCOUNT MANAGER Nick Bantin +44 (0)20 7832 6631 email@example.com
As the trend of delegating non-core business activities continues to gather momentum, Mike Stalley examines the merits of outsourcing premium tax compliance
For insurance specialists faced with US or Canadian taxes for the ﬁrst time, the task can appear daunting. Although the approaches to legislation, application and collection vary greatly, a number of overriding themes can be identiﬁed which will help managers deal with tax compliance effectively as Mike Stalley and Asher Harris explain
With FiscalReps’ comprehensive global reach, Mike Stalley examines the speciﬁc considerations of premium tax compliance that need to be understood in Australia and New Zealand
DATA/CONTENT SALES Nick Byrne firstname.lastname@example.org +44 (0)20 7832 6589
Captive Review is published monthly by Pageant Media, Thavies Inn House, 3-4 Holborn Circus, London, EC1N 2HA
HEAD OF PRODUCTION Claudia Honerjager DESIGNER Jack Dougherty
ISSN 1748-2410 Printed by The Manson Group
SUB-EDITORS Rachel Kurzﬁeld, Eleanor Stanley
© 2013 All rights reserved. No part of this publication may be reproduced or used without prior permission from the publisher
CEO Charlie Kerr
GLOBAL INDIRECT TAX REPORT 2013
A brave new world As tax continues to enter the limelight as a result of the global economic crisis – and a whole manner of country-speciﬁc issues – Mike Stalley examines where these trends are heading and how FiscalReps is ensuring it stays ahead of the curve “
lus ça change, plus c’est la même chose”, were words once written by a French satirist in the mid-19th century that could easily be applied to the world of premium taxation. As the fallout from the credit crunch and the resulting global economic crisis continue to cause great ﬁnancial uncertainty, the actions of tax ofﬁcials continue to add complexity to an area of taxation which remains to be little understood but widely feared. The year 2012 saw an unprecedented increase in premium tax changes, all with one objective; to increase the amount of tax revenues collected by national governments. National tax authorities all approach the subject of taxing insurance premiums from slightly different angles. In Germany, the authorities are looking to simplify legislation to make tax compliance easier for tax payers and to make tax collection more cost effective for tax ofﬁcials. The Dutch have taken the route of substantial premium tax rises in an attempt to secure additional revenue, no doubt banking on the assumption that insurance buying will be maintained at pre-increase levels. In Hungary and the Canadian province of Manitoba, new taxes have been introduced to tap into a new source of tax revenue. The US Inland Revenue Service and the Hacienda in Spain are both looking to enforce legislation that has existed for many years in statue but to date has been largely ignored. Recent natural disasters in both the UK and Australia have generated debate as to the role of insurance and insurance taxes in funding catastrophic losses. Global surveys conducted by many of the major accountancy ﬁrms ﬁnd that global taxation will continue to shift from the taxation of income and
WHILST THE RATES OF TAX CONTINUE TO RISE, THE COMPLEXITY OF PREMIUM TAX COMPLIANCE DOES NOT APPEAR TO BE EASING”
proﬁts to the taxation of transactions and consumption suggesting that the taxation of insurance premiums will continue to increase into the future. Whilst the rates of tax continue to rise, the complexity of premium tax compliance does not appear to be easing. Premium taxes are relatively unique in the fact that is common for taxpayers to not be resident in countries where they are required to settle tax liabilities. This causes many operational difﬁculties; language, political and cultural differences being the most obvious. Understanding local legislation, handing multiple currencies and dealing with differing styles of foreign tax ofﬁcials all add to the mix, making many organisations very wary when dealing with overseas tax regimes. At FiscalReps we invest a great deal of time building relationships with tax ofﬁcials. By building business relationships and understanding their motives and operational methodology we become better equipped to determine what tax ofﬁcials want and ensure that advice to our clients is based on a detailed understanding of the practical operational requirements of premium tax compliance. In more recent times we have actually been in a position to advise some ofﬁcials on operational implementation of tax legislation and offer feedback in terms of how the insurance market interprets the laws that they are required to comply with. Therefore these relationships are mutually beneﬁcial. And with our company policy of not pursuing aggressive tax avoidance strategies we are able to focus our efforts on compliance and keep tax ofﬁcials on side. Being able to engage with tax ofﬁcials in their own language and with an understanding of their culture is the reason why FiscalReps continue to invest in staff with foreign language skills, many of whom are native speakers in the language of the tax ofﬁcers. The world of premium taxation will continue to change, creating uncertainty for insurance companies, brokers and insurance buyers; that deﬁnitely seems to be the trend right now. The ability to understand what tax ofﬁcials are looking to achieve and the ability to access reliable, up-to-date tax information continues to be a vital element of the premium tax compliance process. Ironically, in spite of all the changes, rumoured developments and uncertainty, the application of a few basic principles means that premium tax and premium tax changes need not be feared. In a world of constant change however, there are two inevitable truths, insurance premiums will continue to be subject to taxation and tax ofﬁcials the world over will seek to maximise their revenue from this area of taxation. The more things change, the more they stay the same.
GLOBAL INDIRECT TAX REPORT 2013
The changing landscape of IPT With legislative change sweeping Europe, Joseph Finbow examines how and where IPT will be impacted
o remain fully tax compliant, insurers must be able to adapt to the multiple changes of tax legislation that are now taking place. However, they must also build in a compliance system which can identify and manage future changes to Insurance Premium Tax (IPT) legislation. Recent events suggest that the IPT landscape across the EU is likely to be subject to much change in the near future. As a result, insurers must act now to avoid complications further down the line. In addition to the number of legislative changes that have recently been identiﬁed, many tax authorities are investing more time and resources into enforcement and are seeking to increase tax revenues through the use of tax investigations and assessments. A stricter application of penalty regimes is also being encountered, which demonstrates that tax authorities are getting tough when it comes to tax collection.
THE NETHERLANDS On 18 December 2012 the Dutch Parliament passed an amendment to the Dutch Budget for 2013. This includes a more than doubling of the IPT rate from 9.7% to 21%, bringing this in line with the VAT rate, which itself increased from 19% to 21% on 1 October 2012.
UNITED KINGDOM Following the major ﬂoods suffered by many parts of the UK in early 2012, HM Treasury has mooted the idea of a ﬂood levy to cover the costs of ﬂood damage. To date, no ﬁrm proposals have been made. However, given the more recent ﬂood damage, there is every chance that this may become more of a reality.
GERMANY SPAIN Four provinces in northern Spain have made the decision to exercise existing powers to collect premium taxes directly from taxpayers, rather than via the national tax authority in Madrid. The provinces of Navarra, Álava, Guipúzcoa and Vizcaya have had the power to do so under Spanish law 12/1981, de 13 de Mayo, which gives these Autonomous Communities the right to collect their own taxes, including IPT. Until now, however, this power has never been enforced. It is thought that this decision is a consequence of the ailing economic situation in Spain. Although this has no impact on the amount of IPT payable, it does add to the administrative burden for taxpayers. This follows a similar stance taken by Italian provinces in relation to IPT on motor vehicle liability premiums, where IPT levels are set independently by each of the 80 Italian provinces. It is possible that other regions in Spain, such as those in Catalonia, will see this as an opportunity to demand such powers, despite the fact that the current legislation only covers the four provinces mentioned above.
In May 2012, the German Ministry of Finance introduced a number of proposals to amend the IPT legislation currently in place. The main objectives of these proposals are not only to widen the scope of IPT collection, but also to reduce the administrative burden for both taxpayers and tax authorities in order to streamline the tax compliance process. Although a number of the changes are still being considered, Germany has now introduced changes to the IPT reporting requirements (monthly, quarterly and annually), the frequency for each insurer being determined according to the level of IPT liabilities in the previous year.
DENMARK On 12 June 2012, the Danish Parliament approved the introduction of a 1.1% premium tax on non-life insurance premiums, which replaced the existing stamp duty on 1 January 2013. Exemptions apply to speciﬁed insurance classes, such as maritime, transport and aviation policies. The tax does not apply to the Faroe Islands and Greenland. From the same date, the Stamp Duty Act will be repealed. All insurers liable to pay the tax must register for the tax and account for it at monthly intervals. The Minister of Taxation may provide more detailed rules in this regard, including rules for digital tax returns. Certain insurers, such as those insurers established outside the EU, will be required to appoint a Danish ﬁscal representative; however, it will no longer be a legal requirement for an EU insurer operating on a FOS basis to appoint a ﬁscal representative in Denmark.
FINLAND On 30 November 2012 the Finnish Parliament approved an increase in the standard rate of IPT from 23% to 24%, with effect from 1 January 2013. This follows on from an increase from 22% to 23% in 2011.
CZECH REPUBLIC Based on information released by the Czech authorities, it would appear that the new IPT regime will not be implemented until Parliament has approved the IPT legislation. This will most likely be in 2014. In accordance with Decree Nr. 361 from 23 May 2012, the Czech Government instructed the Ministry of Finance to present the draft IPT legislation to Parliament for its approval by 31 December 2013.
GREECE The operation of the Motor Guarantee Fund (MGF) in Greece is about to undergo major changes. For a number of years, the MGF has struggled with serious ﬁnancial problems, which are also being impacted by the deterioration of the economic situation in Greece. First, an increase in the rate of levy from 5% to 6% has been proposed, together with a widening of the scope of the taxable base to include both net premium and policy fees. Secondly, all FOS participants in the MGF will be required to pay a one-off membership fee of ¤50,000 and guarantee a minimum annual contribution to the MGF of ¤10,000 per annum. For all but the largest insurers, writing motor business in Greece could become un-commercial as a result of these signiﬁcant increases in the MGF levy.
In July 2012 Hungary published details of a new premium tax which came into force on 1 January 2013. The new tax applies to gross premiums at the rate of 15% on comprehensive ‘casco’ policies (EU classes 3 to 6) and 10% ‘accident and property’ classes. The wide deﬁnition given to ‘accident and property’ means that the tax applies to many more insurance classes than previous taxes. The premium tax replaces the Fire Brigade Tax, but the 30% tax on compulsory motor third party insurance will remain in force. Despite the relative technical simplicity of applying for IPT, the increasing pace of tax changes across the EU is making it increasingly administratively challenging. It is therefore a matter of urgency for insurance businesses to tighten up their tax compliance, and to be adaptive to future change - or risk the potentially punitive consequences of non-compliance.
GLOBAL INDIRECT TAX REPORT 2013
The four giants At the moment in Europe, insurance contracts attract more than 75 taxes and paraďŹ scal taxes, a ďŹ gure constantly increasing in the actual economic climate. Unlike VAT, Insurance Premium Tax (IPT) suffers from a lack of harmonisation between the member States of the EU. Joseph Finbow, Nazaret Gonzalez, Christophe Bourdaire and Ladislav Hanak give a quick overview and rate difďŹ culty levels of IPT compliance in some of the most important insurance markets in Europe: Germany, France, Italy and Spain
Star rating system J^[ijWhioij[ch[fh[i[djiZ_\Ă“Ykbjo_dcW_djW_d_d] compliance in each of the areas, with one star being the easiest and ďŹ ve stars being the most difďŹ cult.
GERMANY Complexity of tax compliance Âš=[hcWdoWff[WhijeX[WijhW_]^j\ehmWhZYekdjhom^[d_jYec[i jefh[c_kcjWnYecfb_WdY["m_j^edbojmeWffb_YWXb[jWn[i0?FJ WdZ<_h[Fhej[Yj_edJWn<FJ$>em[l[h"j^[hkb[i_diec[Wh[Wi e\j^[jWn[iYWdX[gk_j[Yecfb[nWdZj^[Wkj^eh_j_[iWh[ijh_Yj_d their implementation of them.
Registration requirements ;WY^_dikh[hef[hWj_d]edW<EIXWi_i"Yel[h_d]h_iaibeYWj[Z_d =[hcWdo"_ih[gk_h[Zjeh_ij[hjefWo?FJ$?\j^[_dikh[hYel[hi Ă“h[h_iai"_jckijh_ij[hWiWjWnfWo[he\<FJ$ J^[h[_ideh[gk_h[c[dj\eh<EI_dikh[hijeWffe_djWĂ“iYWbh[fh[# sentative and they can act directly with the authorities. Tax rates and calculation of insurance taxes ÂšJ^[ijWdZWhZ?FJhWj[_i'/"Xkjj^[hWj[iYWdhWd][\hec)je ((Z[f[dZ_d]edj^[jof[e\h_ia$?FJ_i][d[hWbboYWbYkbWj[ZWiW percentage of the insurance premium, but can, in some instance, \eh[nWcfb[^W_b_dikhWdY["X[YWbYkbWj[Zedj^[Ikc?dikh[Z$ ÂšM^[h[<FJ_iZk["j^[YWbYkbWj_ed_iYecfb[nm_j^j^[fh[c_kc X[_d]Wffehj_ed[ZX[jm[[d?FJWdZ<FJ$?dj^[i[_dijWdY[ij^[ Yeije\j^[<FJm_bbX[Xehd[Xoj^[_dikh[h$
Tax point and ďŹ ling deadlines ÂšJ^[jWnb_WX_b_jo_ijh_]][h[Zm^[dj^[fh[c_kc_ih[Y[_l[Z$ >em[l[hj^[8kdZ[ip[djhWbWcj\Â”hIj[k[hdcWo"kfedWffb_YWj_ed" permit the tax to be calculated not on actual receipts, but on the expected receipts in the reporting period. Âš?FJWdZ<8JckijX[Ă“b[ZedWcedj^boXWi_i$?j_ifeii_Xb[je h[ZkY[jegkWhj[hboehWddkWbĂ“b_d]i\ehicWbb[hjWnb_WX_b_j_[i$ Penalty regime and audit requirements ÂšBWj[ikXc_ii_ede\h[jkhdiYWd_dYkhWf[dWbjoe\kfje'&e\j^[ jWnZk[$F[dWbj_[iYWdX[c_j_]Wj[Zm^[h[j^[jWnfWo[hYWdfhel_Z[ Wh[WiedWXb[[nYki[$BWj[fWoc[dje\Wdo?FJeh<8JYWd_dYkh _dj[h[ijWj'f[hcedj^$ ÂšJ^[=[hcWdWkj^eh_j_[ie\j[dYedjWYjjWnfWo[hijeh[gk[iji feb_YoZ[jW_bi$J^_iYekbZX[\eh[_j^[hYbWh_\o_d]j^[h[Wied\ehW negative tax return submitted in order to refund this amount or ie#YWbb[ZXki_d[iiY^[Yai\ehWY[hjW_df[h_eZehWde\Ă“Y_WbWkZ_j YWhh_[ZekjXoj^[8kdZ[ip[djhWbWcj\Â”hIj[k[hd$ Statute of limitations Four years, but it can be extended to ten years, in cases of deliber# ate evasion
FRANCE Complexity of tax compliance France can be a complex country to remain compliant in, due to the variety of taxes and rates applicable, the speciďŹ city of the CatNat regime and the multiple registration and ďŹ ling procedures. Registration requirements Âš?dj^[eho"WjWne\Ă“Y[Z[Z_YWj[Zjeded#h[i_Z[djiYecfWd_[ii^ekbZ Z[Wbm_j^Wbbded#h[i_Z[dj_dikh[hi$?dfhWYj_Y["_jWff[Whij^Wj?FJ h_ijhWj_ed\ehded#h[i_Z[djYecfWd_[i_iij_bbZ[Wbjm_j^Xoi[l[hWb different tax ofďŹ ces. ÂšJ^[h[gk_h[c[dj\eh<EI_dikh[hijeWffe_djWĂ“iYWbh[fh[i[djW# j_l[_d<hWdY[mWih[cel[Z_d(&'&$>em[l[h"j^[h[gk_h[c[dj h[cW_di\ehded#;;7YecfWd_[i$ Tax rates and calculation of insurance taxes ÂšJ^[Ă‰Z[\WkbjĂŠ?FJhWj[_i/"XkjhWj[iYWdhWd][\hec-je)& Z[f[dZ_d]edj^[h_iaYel[h[ZXoj^[YedjhWYj$7Yb[WhkdZ[hijWdZ_d] e\j^[Yel[h_ih[gk_h[Z"Wied[fh[c_kccWoX[ikX`[Yjjei[l[hWb rates. ÂšJ^[h[Wh[Wjb[Wiji_nej^[hjWn[iWdZfWhWĂ“iYWbY^Wh][ij^Wj YekbZWffbojeWfh[c_kc"m_j^cejehWdZfhef[hjoh_iaih[gk_h#
ing complex calculations as they may fall under the CatNat regime, the compensation scheme for natural disasters, where additional premium and taxes apply. Tax point and ďŹ ling deadlines ÂšJ^[b_ibWj_edZ[Ă“d[ij^[jWnfe_djWij^[cWjkh_joZWj["_$[$j^[ contractual date the premium should be paid. ÂšJ^[Ă“b_d]Z[WZb_d[j[dZijeX[j^['+j^e\j^[cedj^\ebbem_d]j^[ jWnfe_dj"Xkjj^[h[fehj_d]f[h_eZYWdlWho\heccedj^bojegkWh# terly depending on the taxes concerned. Penalty regime and audit requirements ÂšF[dWbj_[iYWdhWd][\hec+je.&$M^[dWf[dWbjo_i_iik[Z"_j can be mitigated, though this can take a long time. Captives often face registration issues in France, writing insurance in France with# out a correct registration may be sanctioned by speciďŹ c penalties or imprisonment in the worst case scenario. Statute of limitations ÂšJ^h[[o[Whi"Xkj_jYWdX[[nj[dZ[Zjei_no[Whi"_dY[hjW_dY_hYkc# stances.
SPAIN Complexity of tax compliance J^[XWi_Y?FJh_c[_dIfW_d_iijhW_]^j\ehmWhZ$>em[l[h"j^[ Yecfb[n_jo_dYh[Wi[ii_]d_Ă“YWdjbom^[dj^[9ediehY_eikhY^Wh][i" m^_Y^Wh[Yecfkbieho\ehWbbXki_d[iimh_jj[d_dIfW_d"ehm^[d Z[Wb_d]m_j^Ă“h[Xh_]WZ[Y^Wh][i"m^_Y^Wh[Yecfkbieho\eh_dikh[hi Yel[h_d]Ă“h[h_iai"Wh[Yedi_Z[h[Z$ Registration requirements Âš7bb_dikhWdY[YecfWd_[ii[[a_d]jeef[hWj[_dIfW_dkdZ[hj^[<EI h_c[Wh[h[gk_h[Zjeh_ij[h\eh?FJWdZj^[ikhY^Wh][ifWoWXb[je j^[9ediehY_eZ[9ecf[diWY_edZ[Ikhei$ Âš?\j^[_dikhWdY[YecfWdoYel[hiĂ“h[h_iai"j^[ockijh_ij[hjefWo <_h[8h_]WZ[9^Wh]["WfheY[iij^WjYWdedboX[Yecfb[j[Zm_j^j^[ appropriate body once a year during June. Âš?dikh[hiWh[h[gk_h[ZXobWmje^Wl[WĂ“iYWbh[fh[i[djWj_l[$ Tax rates and calculation of insurance taxes Âš?FJWj,_iZk[edded#b_\[_dikhWdY[fh[c_kci"m_j^if[Y_Ă“Y [n[cfj_edi\ehY[hjW_dYel[hiikY^WiYheiiXehZ[hjhWdifehjWj_ed$ Âš9ediehY_e;njhWehZ_dWhoH_iaiikhY^Wh][iWh[YWbYkbWj[ZWiW f[hY[djW][e\j^[ikc_dikh[Z"m_j^j^[hWj[lWho_d]Z[f[dZ_d]ed j^[jof[e\h_iajeX[Yel[h[Z$J^[YWbYkbWj_ed_i\khj^[hYecfb_YWj[Z m^[h[if[Y_WbYbWki[iWh[fh[i[dj_dj^[YedjhWYj$?dWZZ_j_ed"ceij ded#b_\[fh[c_kciWh[ikX`[Yjje&$'+Y^Wh][edj^[fh[c_kc$ Âš<_h[8h_]WZ[9^Wh][<89_iZk[Wj+WdZ($+"edfkh[Ă“h[h_iai WdZckbj_h_iafeb_Y_[ih[if[Yj_l[bo$J^[Ă“dWbYeijcWoZ_\\[hWij^[
WZc_d_ij[h_d]XeZodej_Wj[m_j^j^[jh[WikhoZ[fWhjc[djie\el[h (&&ckd_Y_fWb_j_[iedj^[_dikh[hĂŠiX[^Wb\$ Tax point and ďŹ ling deadlines Âš<ehWdoed[fh[c_kc"j^[h[Wh[jmefej[dj_WbjWnfe_djiWdZ\ekh Z_\\[h[djĂ“b_d]Z[WZb_d[i$ Âš<eh?FJj^[jWnfe_dj_ij^[ZWj[j^[fh[c_kc_ih[Y[_l[ZXoj^[ _dikh[hWdZj^_ickijX[i[jjb[ZXoj^[(&j^e\j^[\ebbem_d]cedj^$ Âš?dh[if[Yje\j^[9ediehY_eĂŠiikhY^Wh][i"j^[jWnfe_dj_ij^[feb_Yo _dY[fj_edZWj[$Je[dikh[j^[feb_Yo^ebZ[h[d`eoi9ediehY_efhej[Yj_ed"j^[_dikh[hckijWZ^[h[jej^_iZ[WZb_d[$Je[dYekhW][j_c[bo i[jjb[c[dj"j^[9ediehY_ef[hc_jj^[_dikh[hjeh[jW_dW+Ă‡Yecc_ii_edĂˆedY[hjW_dikhY^Wh][iZk[$J^[Z[WZb_d[i\ehj^[ikhY^Wh][i Wh[j^[)&j^e\j^[cedj^WdZgkWhj[h\ebbem_d]j^[_dY[fj_ed$ ÂšJ^[fheY[iie\i[jjb_d]<89_iWbed]WdZYedlebkj[ZfheY[iijWa_d] \ekho[WhijeYecfb[j[j^[Ă“b_d]"fWoc[djWdZWZ`kijc[djiedWdo ed[o[WhĂŠimehj^e\fh[c_kci$ Penalty regime and audit requirements Âš?FJ#j^[f[dWbjohWj[ihWd][\hec+je(&Z[f[dZ_d]edj^[ Z[bWoe\j^[ikXc_ii_ed$?dj[h[ij\ehj^[Z[bWo_iWbieWffb_YWXb[$ Âš9ediehY_eIkhY^Wh][i#+edWdobWj[ikXc_ii_ed$ Statute of limitations <ekho[Whi"Xkj_jYWdX[[nj[dZ[Zje'&o[Whi_\j^[JWn7kj^eh_jo suspects deliberate non-compliance.
ITALY Complexity of tax compliance Italian tax compliance is considered to be very complex, especially for FOS companies, as a large amount of additional reporting is required for insurance companies. Registration requirements Âš?dikh[hief[hWj_d]_d?jWbockijX[Wkj^eh_i[ZXoj^[?jWb_Wd hkbWjehĂ…?IL7II$J^[oi^ekbZX[h_ij[h[Zm_j^j^[JWnE\Ă“Y[ _dHec[WdZm_j^j^[jWne\Ă“Y[beYWbjej^[_hh[fh[i[djWj_l[ehe\Ă“Y["m^_Y^_iik[ij^[cm_j^j^[_hh_ijhWj_eddkcX[h$ ÂšI_dY[(&&/"j^[eXb_]Wj_ed\eh<EI_dikh[hijeWffe_djWĂ“iYWb h[fh[i[djWj_l[^WiX[[dh[cel[Z$:k[jej^[Yecfb[n_joe\ef[hWj_d]_d?jWbo"cWdo<EI_dikh[hiki[j^[i[hl_Y[ie\WĂ“iYWbW][dj$ Tax rates and calculation of insurance taxes ?FJhWj[ihWd][\hec&$&+je('$(+e\j^[fh[c_kcWdZiec[ YedjhWYjicWoX[[n[cfj$?dWZZ_j_ed"ej^[hjWn[icWoWffboed _dikhWdY[YedjhWYji"ikY^Wij^['7d_jhWYa[j\kdZWdZif[Y_Ă“Y fWhWĂ“iYWbjWn[iikY^Wij^['&;c[h][dYo<kdZ$ ÂšJ^[_dYh[Wi[_dfhel_dY_Wb_icc[Wdij^Wj[WY^e\j^[el[h/& fhel_dY[iYWdlWhoj^[_h?FJhWj[edcejehYedjhWYji"YWki_d]Wd WZc_d_ijhWj_l[^[WZWY^[\eh_dikh[hi$
Tax point and ďŹ ling deadlines J^[jWnfe_dj\eh?FJ_ij^[ZWj[j^[fh[c_kc_ih[Y[_l[Z"m_j^ Ă“b_d]e\j^[h[jkhdWdZfWoc[dje\j^[jWnZk[Xoj^[[dZe\j^[ \ebbem_d]cedj^$ 7doh_ij[h[Z_dikh[h_ih[gk_h[ZjecWa[Wfh[fWoc[djjej^[Wkj^eh_j_[i[l[hoCWo"XWi[Zed*&e\j^[_dikh[hĂŠifh[l_ekio[WhĂŠi jejWb?FJWdZ7dj_hWYa[j<kdZfWoc[dji$J^_iYWddejX[e\\i[j W]W_dij\kjkh[jWnb_WX_b_j_[ikdj_b\ebbem_d]YWb[dZWho[Wh"YWki_d] YWi^Ă”em_iik[i\eh_dikh[hi$ J^[Wkj^eh_j_[ih[gk_h[ed[hekih[fehjijeX[Yecfb[j[ZWdZa[fj up to date by insurers. Penalty regime and audit requirements <hecfh[fWoc[djjecedj^bojWnĂ“b_d]"f[dWbj_[iWdZ_dj[h[ijiWffboWkjecWj_YWbboje_dikhWdY[YecfWd_[ij^WjWh[dej\kbboYecfb_Wdj$J^[f[dWbjoh_c[_iWbceijWiYecfb_YWj[ZWij^[jWn_ji[b\" m_j^j^[hWj[ilWho_d]edj^[Z[bWo_dĂ“b_d]WdZfWoc[dj$J^[ f[dWbjohWj[YWdX[WickY^Wi(&&$D[[Zb[iijeiWo"jWnYecfb_WdY[YWdjkhd_dje^[WZWY^[_\j^[Z[WZb_d[iWh[dejh[if[Yj[Z$ Statute of limitations <ekho[Whi"[nj[dZ[ZjeĂ“l[_\dejWnh[jkhd^WiX[[dikXc_jj[Z$
GLOBAL INDIRECT TAX REPORT 2013
The VAT exemption A complicated issue to many, Peter Hewitt examines the issue of VAT for captives and the exemptions available for captive management?
he VAT Directive 2006/112/EC – Article 135(1)(a) – provides exemption from VAT for insurancerelated services provided by insurance brokers and agents. The interpretation of this, and hence its implementation by the various member states of the EU, has varied widely and is being updated as part of a review of VAT exemption for ﬁnancial services more generally. The UK and Ireland have traditionally taken a broader view, applying exemption to claims handling and policy administration services in certain cases. In the UK, it is important that the supplier is acting in an intermediary capacity, and this has been supported by case law involving aggregators such as InsuranceWide or promoters such as Trader Media Group (Court of Appeal – 2010 EWCA Civ 422). In a European context, however, the application of the exemption is much narrower – as evidenced by the European Court of Justice ruling in Andersen (Case C-472/03) as far back as 2005. In Germany, for example, the exemption is limited to those acting as true brokers or agents, though it does include services such as claims handling provided by brokers or agents who introduced the business in the ﬁrst place. The European review appears to be favouring the German model at present, but there has not been a lot of discussion recently. The UK has not implemented the Andersen ruling yet, pending the outcome of the negotiations, but it appears more and more likely that the UK and Irish exemptions (and perhaps some others such as Malta) will be curtailed in due course. This means that services
IF EXEMPTION AS AN INSURANCERELATED SERVICE IS NOT POSSIBLE, CAPTIVE MANAGERS MIGHT CONSIDER THE RECENTLY INTRODUCED (IN THE UK AT LEAST) COST SHARING EXEMPTION”
of claims handling, and perhaps certain other outsourced services including management, are likely to become taxable if they are provided to a captive in those countries. Although the UK has not implemented the Andersen judgment, it has been forced by the European Commission (the Commission) recently to reconsider the UK exemption in two particular areas. These are (1) pensions and endowment policy mis-selling reviews and (2) helplines advising policyholders on the making of insurance claims. While these may not have any direct impact on captives, the Commission at the same time asked HMRC for justiﬁcation in relation to the UK exemption for management of P&I clubs. HMRC managed to convince the Commission that the P&I club exemption is appropriate, and the management of captives may be seen as similar in nature, therefore qualifying for the exemption. To gain exemption, captive managers still need to provide services that have a close connection with the insurance services themselves, rather than back ofﬁce services such as secretarial or computer services. It is also important that the services relate to the insurance and not to the deductible – this can be critical if the services comprise claims handling, for example. If exemption as an insurance-related service is not possible, captive managers might consider the recently introduced (in the UK at least) cost sharing exemption. This allows exempt business or non-business groups to acquire labour-intensive services free of VAT, to the extent of the labour element at least, if they set up a ‘cost sharing group’. HMRC have issued guidance – see VAT Information Sheet 07/12 – on the UK application of this exemption, and have said that whilst the path to implementation of the exemption is not straightforward, they are committed to working towards “effective implementation”. Other EU countries have operated the cost sharing exemption for some years. Captive managers would need to set up a new entity jointly owned by the captives or their parent companies. This may be particularly attractive if captives are established in different EU countries as it can apply across borders. The problem is that such cost sharing groups can make no proﬁt, and so the captive manager would need to make a charge for its proﬁt element (plus VAT) reducing the beneﬁt and potentially revealing its proﬁt margin to its clients. This may also be attacked by HMRC as contrary to the rules of cost sharing groups, although it may be acceptable to the tax authorities in some other EU countries.
GLOBAL INDIRECT TAX REPORT 2013
VAT for captives To help you understand the elements of VAT relevant to captives, Peter Hewitt examines the jurisdiction of Gibraltar as a case study
captive insurer based in Gibraltar, for example, may be involved in a wide variety of self-insurance business. It may cover property risks in the UK, professional indemnity throughout the world, and a wide variety of other risks. First off, it must be remembered that Gibraltar is a non-EU country for VAT, but is part of the UK for insurance regulatory purposes. UK VAT may be incurred on goods or services which are connected to the insurance of risks, such as claims fulﬁlment and property repair costs. It is simply not true to say that an insurer based outside the UK should not be charged VAT. It is critical to consider whether there is a supply to the insurer or to the insured. This has a bearing on the place of supply for VAT purposes, but also on whether the recipient of a VAT charge can recover the VAT as input tax. For example, suppose a reception desk is covered under UK property insurance and is damaged beyond repair. The supply of goods (the new desk) to fulﬁl the claim will be subject to UK VAT if the goods do not leave the UK. If the recipient of the supply is the insurance company then VAT charged cannot be recovered, and this will be the case if the contract of insurance states that the insurance company has to make good the damage. However, if the insured party is entitled to compensation under the contract of insurance and replaces the desk itself, the supplier is making the supply of the desk to the insured and if that insured is a UK business it may be entitled to recover the VAT incurred. The cost to the captive is less in the second scenario – being the VAT-exclusive cost of the desk. The same is true of property repair services. Any work on property is deemed to be subject to VAT where the property is situated, so again the supply is subject to VAT whether the insured or the insurer is the recipient. However, if the insured
is able to claim the VAT (or a proportion of it), the claim cost is that much less. To recover VAT, the insured will need to be in possession of a tax invoice, and this can be a problem where the repair is actually arranged through an agent – a UK broker/claims handler or a representative of the insurer for example. The other main point to bear in mind is that no VAT may be payable on certain costs. This can be for a variety of reasons, rather than simply because the insurer is in Gibraltar. Claims handling is generally exempt in the UK, though having said that the place of supply is unlikely to be the UK as it is more likely to be an insurer cost. However, if there is a signiﬁcant deductible, it may be that the parent incurs the claims handling cost in some cases. Legal services are generally deemed to be supplied where received, and in this case it is therefore an advantage for the recipient of the legal service to be the insurer. However, in practice it may be difﬁcult to achieve this as lawyers must represent their client and the matter may well be one for the insured rather than the insurer. That said, HMRC has been successful in arguing that medico-legal services in relation to negligence claims were received not by the doctor but by the insurer, where the boot was on the other foot and the insurer was in the UK. The lesson to learn from this is that a captive structure, and the insurance contract, must be set up with the VAT in mind. The points set out above are relevant in some other EU countries, as well as the UK, although there are variations in the treatment of the recipient and the availability of the exemption for insurance related services. Particularly for fully taxable businesses in the UK, the availability of VAT recovery is critical to managing the costs of maintaining a captive structure.
GLOBAL INDIRECT TAX REPORT 2013
Ten years in the making... Even though we have discussed many aspects of FiscalReps’ setup and expertise within this report, no singular aspect of the company says more than its age. In 2013 we’re happy to say we will be celebrating our 10 year anniversary which is quite a landmark. Humbly beginning with three clients back in 2003, we have grown to the point where we have over 30 employees and will soon have a presence in New York. But how did this all come about? Below is a rundown of some key developments and dates in FiscalReps’ history. JUN 2009 – Launched taxbox and taxDNA software solutions to clients
JUN 2008 – taxbox implemented within FiscalReps
JAN 2008 – Reached 100 clients
JUL 2006 – Reached 25 clients
DEC 2008 – 15 employees at year end
JUN 2006 – Started development of taxbox
FEB 2007 – Moved to new offices at Shoelands Farm
JAN 2005 – First panEuropean IPT Outsourcing client
NOV 2006 – First Annual IPT Forum in London
APR 2005 – Moved to ﬁrst offices in Farnham
OCT 2004 – Opened up ﬁrst overseas FiscalReps offices in France, Spain & Portugal
DEC 2003 – Company established with 3 initial clients
JAN 2013 – Opened FiscalReps America in New York
AUG 2012 – Obtained second USA patent for taxbox FEB 2012 – Obtained ﬁrst
AUG 2012 –
USA patent for taxbox
Established VAT practice
DEC 2012 – 33 employees at year end
APR 2011 – Established
NOV 2012 –
IPT consulting practice
MAR 2010 – Presented at RIMS conference in US
DEC 2011 – Settled £100m
DEC 2012 – Settled £125m in
in client taxes in calendar year
client taxes in calendar year
JAN 2013 – Launched FiscalReps
NOV 2010 –
Australia & NZ premium tax services
Reached 200 clients
OCT 2010 – Delivered ﬁrst IPT training course
NOV 2009 – Obtained Irish patent for taxbox
AUG 2012 – Moved to larger offices in Farnborough
GLOBAL INDIRECT TAX REPORT 2013
A small world after all
risk managers’ most signiﬁcant challenges in structuring and managing their global casualty programmes were compliance with local tax laws and legal and regulatory compliance with local insurance requirements. Risk managers surveyed during a global insurance management workshop run by Airmic and brokers Jardine Lloyd Thompson (JLT) in 2010 showed 67% felt compliance and policy coverage were their key buying priorities. Interestingly, of this group, 60% had never commissioned an independent audit of their global insurance programmes, and only 30% had commissioned such an audit in the past three years.
Alongside these beneﬁts, managers still face the complex challenges of multiple tax regimes, crossborder payments and regulatory demands peculiar to each jurisdiction. With corporate governance remaining high on people’s agendas, it’s no surprise that compliance is regarded as the over-riding challenge. In 2011, a study by Airmic – the members’ association for risk and insurance managers representing more than 450 companies – reported
Compliance concerns Regulatory First of the three main compliance concerns is whether non-admitted, freedom of services (FOS) or difference in conditions/difference in limits (DIC-DIL) coverage is legally allowed in individual territories. This is often a grey area, particularly outside the core property and casualty (P&C) covers. Axco and Lloyds’ Crystal continue to be considered the ‘go to’ experts, with the larger global carriers relying on their locally owned and partner networks for up-todate, accurate information. Recent discussions, forums and workshops at industry events have shifted focus to the DIC-DIL and catastrophe coverage element of globals. Additionally, the relatively recent trend for admitted directors and ofﬁcers (D&O) programmes has highlighted the lack of clarity in some jurisdictions around non-admitted coverage, especially in less mature economies, where less than a decade ago there was often little familiarity with D&O coverage detail. The cost of getting this process wrong can vary considerably and have implications for all involved. From the insurer’s perspective, the beneﬁt of investing to get this process right is obvious, as noncompliance puts licences to operate at risk. Those insurers working with friendly fronts or partner insurance companies may or may not be so cautious. For direct writing captives, reliance falls on brokers and captive managers to advise where local policies are required. All parties will be impacted in the event of a claim, where non-admitted coverage has been written illegally – even if done so unwittingly. In such instances, a large income tax bill may become due when the parent company, to whom the insurer would contractually pay the claim, tries to remit monies to the local insured in territory. Double
With global insurance programmes still facing fresh hurdles, Karen Jenner discusses the issues insurers need to keep in mind when becoming involved in such complex structures
espite having existed in some form for more than 60 years, global insurance programmes (globals) continue to face new challenges and evolve to meet market innovations. Recent challenges have included the opening up of Europe, advances in communication technology and the growth of the internet. However, the list of challenges continues to be dominated by the ongoing focus on compliance. Globals entail, in the words of the International Risk Management Institute (IRMI), “a coverage territory encompassing the entire world, including the country in which the insured is domiciled, that is arranged for a multinational business”. Global master policies – issued in the domicile of the parent – with local admitted underlying policies, are now standard market practice across all general insurance lines, with the continued exception (to a point) of aviation and marine cargo business. Historically, ‘non-admitted’ programmes were common, with a single master policy issued in the domicile of the parent and no local paper. The pressure on risk managers to ensure their programmes are consistent, certain and compliant, in addition to being competitively priced is ongoing. To this end, the continued beneﬁts globals provide include: consistency and certainty of cover in all jurisdictions central control with local delivery compliance with local regulations and market practice economies of scale, affording cost-effectiveness and reduced administration for the insured.
BOTH INSUREDS AND INSURERS MAY HAVE CONCERNS ABOUT HISTORIC LIABILITIES, WHEN NON-ADMITTED PROGRAMMES WERE IN PLACE” taxation may even apply if tax is also suffered by the ultimate parent on such claims. For example, in Russia, DIC-DIL claims covered under a master policy are viewed as illegal non-admitted insurance, attracting corporation tax charges of more than 20% when funds are transferred internally from parent to local entity. In such territories the insured, broker and insurer must work together to make certain that a local admitted policy is as close to the master policy wording as possible. This process is labour intensive as a manuscript policy form may need to be ﬁled with the regulator and the policy must be in local language, diluting the reduced administration advantage globals offer. Premium tax The second compliance concern is premium tax. Neither brokers nor insurers are able to provide tax advice, as risk managers will often see in caveats to any marketing literature. The current economic client is driving initiatives across the EU to review and in many cases increase premium tax rates, the cost of which is ultimately borne by the policy holder. In each territory, premium tax can be payable by either the insured, insurer or in some territories both. In some instances a broker holds responsibility. Where the local insured is a joint venture or afﬁliate, it is not always clear which entity is responsible for premium tax payment. In the US, rates vary by state; in all territories they can vary by line of business; and in Canada, for example, rates differ for admitted and non-admitted policies. Both insureds and insurers may have concerns about historic liabilities, when non-admitted programmes were in place. For direct writing captives without the same resources as the large global insurers, the challenge is the calculation and understanding of taxes as well as their payment. This challenge has led to the emergence of specialist ﬁscal representatives, who can offer premium tax advice alongside other services. Reinsurance captives rely on the fronting insurer to handle taxes. For these captives, to whom much or all of the risk is ceded, the cost of premium taxes impacts the bottom line, and being owned by the same ultimate parent, they are also concerned about the impact non-compliance may have on the local insured or the parent.
Transfer pricing The ﬁnal compliance challenge is transfer pricing. Not only is it imperative that global programme premium allocations are adequate and fair, but the model must also provide for DIC-DIL, nonadmitted or FOS premiums paid by the parent company for its subsidiaries and afﬁliates. This requirement in turn introduces potentially complex inter-company allocation issues. It’s essential that any inter-company transactions are priced reasonably and at arm’s length. These issues are not limited to premiums and must be considered for inter-company payments linked to loss recoveries. These concerns are more prevalent for direct writing captives than the large global insurers who have their own allocation models. The former frequently work with specialists to assist in premium allocation models. On large programmes, allocations are jointly agreed between insured, broker and insurer. In a paper about structuring multinational insurance programmes, jointly written in February 2011, accountants KPMG and global insurers ACE recommended “risk managers and buyers of multinational insurance programmes should work with a global insurer, and an independent ﬁnancial and tax advisor” to assist in ensuring compliance and that the programme “ultimately satisﬁes the collective objectives of the client, broker and insurance carrier”. Looking forward While insurers and brokers continue to develop their products to address ongoing challenges, the UK industry has recently conceded that sophisticated in-house databases give no competitive advantage in the London market, and that a greater understanding is required by all of the intricacies and compliance of globals. This recognition has led to the current ongoing project to develop a single source of data, populated by specialists and used by the market. Airmic is driving what is now Phase II of the request for proposal (RFP) for the Database of International Insurance Requirements (DIIR) supported by Aon, Marsh and Willis, along with other member and partner companies sourcing information providers for the database. Implementation of the ﬁnal product is anticipated to be December 2014. Globals will continue to present many challenges around regulatory and tax compliance. With signiﬁcant levels of premiums attaching to these programmes, increased premium tax rates and increased corporate governance requirements, the need to evidence regulatory and tax compliance effectively and clearly has never been so vital. A basic knowledge of your organisation’s compliance requirements, coupled with up-to-date regulatory information and access to independent professional advice, is a major step towards achieving global compliance.
GLOBAL INDIRECT TAX REPORT 2013
A year in the life of a direct writing captive A week is a long time in politics, and a year is an exceptionally long time in the life of a direct writing captive. Karen Jenner examines the ongoing processes involved within 365 days of such a captive structure
ith generally one or two renewal dates, and being owned by the same ultimate parent as its insured, one would assume that compliance work for a captive would be simpliﬁed and less intensive than it would be for the large corporate insurance companies. Growing regulatory requirements and corporate governance, however (mixed with lesser resources and to an extent less experience and local speciﬁc territory compliance knowledge than the corporates), mean that the workload continues throughout the insurance policy cycle. Within the jurisdiction of the captive, aside from ongoing capital and solvency requirements, any changes to business plans must be agreed with the regulator. Requirements of individual regulators can also vary, along with reporting requirements to the parent company. Direct writing captives will often be involved in the collection of renewal data, surveys and valuation exercises, obtaining declarations from insureds’ and ﬁnancial data including net sales, gross proﬁt and number of employees. The length of this process will vary depending on the resources of the captive and the size, territorial spread and structure of the group. Captives generally do not underwrite the risks themselves but rather follow market terms or have their pricing established by commercial insurers in order to comply with OECD transfer pricing guidelines. At this point in the cycle, captives will be obtaining market quotes to establish reinsurance costs, terms and conditions prior to ﬁnalising any programme structure for their group companies. When assessing its ability to write direct policies outside of its jurisdiction, the captive must assess its ability to ﬁle premium taxes. For instance, can this be done in-house or is a ﬁscal representative required? This assessment also involves the ability to issue manuscript policy form, any additional costs or implications of writing policies on a direct basis before then engaging with a fronting insurer. Also, can the captive write on a Freedom of Services basis? Are they able to write any locations on a non-
admitted basis or provide Difference in Conditions – Difference in Limits (DIC-DIL) coverage in all territories where their insured are based? This is where the resources of the captive are challenged, and support and advice is usually provided from brokers, fronting partners and captive managers. Larger independent captives may seek local legal opinion. Where fronting is required, after identifying territories in scope and gathering the information required by the fronter, legal and ﬁnancial input is required to agree and ﬁnalise reinsurance documentation and put in place any collateral requirements. Finalising premium allocations provides one of the biggest challenges. Aside from transfer pricing issues, compulsory local retentions and mandatory cessions eroding underwriting premium must be considered. Who will bear the cost of these and also applicable insurance premium taxes? Rates of exchange, depending on the size of premium and location of risk, will impact premium received. Again the captives will seek support from their insurance partners with more detailed knowledge. Once the allocation is ﬁnalised, the labour intensive invoicing and policy issuance process begins. This includes any required certiﬁcate issuance along with setting premium payment terms for the insured. Cashﬂow is key to meeting premium payment terms on outgoing reinsurance placements. Any premium taxes due at inception must also be settled at this point – for example Consorcio in Spain. Tracking policy issuance and premium invoicing for the direct policies, and dealing with any queries via a fronter, will continue over many weeks (if not months) until all premiums have been paid. Rates of exchange and restrictions on moving currency out of territories such as Venezuela will increase paperwork and delay premium receipt. Reconciliation of assumed reinsurance premiums from the fronter, along with settlement of reinsurance premiums and any premium taxes due on the direct placement, all fall to the captive or their captive manager. Outside of the renewal process, claims management responsibilities can be ongoing – depending on the lines of business written and loss experience. Aside from dealing with the claim itself, the captive may have to manage challenges in the territory of the loss, with cut-through clauses and any potential corporation tax charges if claims are paid via the parent company on a DIC-DIL or non-admitted basis. Such challenges only help to reﬁne the programme’s structure.
GLOBAL INDIRECT TAX REPORT 2013
The art of outsourcing As the trend of delegating non-core business activities continues to gather momentum, Mike Stalley examines the merits of outsourcing out·source [out-sawrs, -sohrs] Show IPA verb, out·sourced, out·sourc·ing. verb (used with object) 1. (of a company or organisation) to purchase (goods) or subcontract (services) from an outside supplier or source. 2. to contract out (jobs, services, etc.): a small business that outsources bookkeeping to an accounting ﬁrm. verb (used without object) 3. to obtain goods or services from an outside source: US companies who outsource from China.
utsourcing has become a staple element of many corporate business strategies in recent years. The ability to pay a third-party supplier for the delivery of a service that would ordinarily have to be performed in-house is often seen as advantageous. This is especially the case where speciﬁc knowledge and expertise is required to perform the tasks and those skills are not readily available internally. Global premium tax compliance is an area in which FiscalReps has achieved success by delivering such an outsourced solution. The nature of the task, requiring detailed tax knowledge in a niche area of taxation, together with local language skills and the ability to process large amounts of data and money within tight time constraints, lends itself to the development of a specialist business processing model. Customers then have the opportunity to purchase these services on a ﬂexible, on-demand basis. Increasingly labour is being viewed as more of a ﬁxed cost than a variable. High recruitment costs, inﬂexible labour laws and the need to identify and retain people with very speciﬁc skills and knowl-
edge (who are not always readily available in the market place), makes for a compelling argument to favour outsourcing. Combined with the need to gather, interpret and apply vast amounts of tax information in a coordinated and coherent fashion only increase the internal challenges further. In these niche and technically complex areas, the concept of knowledge process outsourcing (KPO) has evolved, which offers outsourcing solutions where specialist knowledge is required, there is a shortage of available qualiﬁed labour and an opportunity to create efficiency savings. Increasing regulation within the insurance industry, including Solvency II and equivalence, has meant that many regulated entities now have to consider their outsourcing arrangements and assess whether their suppliers meet the ‘ﬁt and proper’ criteria. In the area of KPO it is essential that any outsourcing partner has the appropriate qualiﬁcations, experience and will be able to deliver in full the services contracted to perform over the period of the agreement. The outsourcing of global premium tax compliance and the maintenance of global tax rate databases is now a common feature in the operations of many insurers and captives, delivering the gains identiﬁed above while also reducing the risks of compliance failures which can lead to reputational and ﬁnancial losses. However there are other areas where a strategy of outsourcing could generate business efficiencies. Start-up insurers, newly formed captive operations and organisations which are spread over a wide geographic base could all beneﬁt from an effectively co-ordinated outsourced solution. In many cases the investment in back office systems, accounting staff and local office space are substantial up-front capital costs; a spend which should be focussed on the development and growth of the business rather than being soaked up by items which although absolutely necessary are ﬁxed in nature and not always drivers of business growth. The ability to purchase services such as accounting, treasury management, ﬁnancial reporting & tax compliance services on a ﬂexible, on-demand basis from a credible, professional, ﬁt-for-purpose organisation would probably be compelling from a cost perspective alone, but even more compelling when you take into account the immediate impact gained from the release of management time and resources to allow a greater focus on the key business growth objectives. Today’s instant global connectivity that it brings are quickly turning these embryonic ideas into viable business solutions.
GLOBAL INDIRECT TAX REPORT 2013
Across the pond For insurance specialists faced with US or Canadian taxes for the ﬁrst time, the task can appear daunting. Although the approaches to legislation, application and collection vary greatly, a number of overriding themes can be identiﬁed which will help managers deal with tax compliance effectively as Mike Stalley and Asher Harris explain
United States Made up of 50 states, each with their own systems of insurance regulation and taxation, the US would appear to be an administrative nightmare for payers of premium taxes. Self-procured insurance has come under much recent scrutiny, especially in relation to insurance purchased from captives. Edwards Wildman deﬁnes this activity as being “when an insured elects to go out of the state and purchase the desired insurance from an unauthorised carrier either directly with the company or through a broker or agent not licensed by the jurisdiction in which the risk is located”. These insurance premiums are subject to taxation in most US states, and in a majority of
Taxing issues: differences across the Atlantic
cases the tax liability rests with the local insured. Rates of tax vary, but they are normally within the range of 3-6%, which is substantially lower than many European rates of premium tax. Recent federal legislation has clariﬁed some of the uncertainty regarding the ability of states to tax companies that are headquartered elsewhere, although the details of this legislation have yet to be ﬁlled in. Taxes on self-procured or self-placement insurance purchased from captive insurers typically only apply if the captive is located out of state in question. This has led to the suggestion that redomiciling captives to the same state as the insured party would avoid this taxation. That argument would appear to hold true, although there are many other tax and regulatory issues to consider before commencing a redomiciliation of your captive, merely to reduce what is a relatively small tax charge in the scheme of things. Sitting above the 50 states is the federal tax system, administered by the IRS, which applies equally across all states and continues to present opportunities and problems to the captive industry. For example, the proliferation of 831(b) ‘micro-captives’ as a consequence of favourable income tax treatment seems set to continue, although it would appear that the IRS is looking more closely at this area in order to limit any abuse of these favourable tax treatments. Federal Excise Tax (FET) and especially the position of the IRS regarding cascading excise tax, which applies to the reinsurance of US risks by reinsurers without treaty exemptions, will continue to challenge offshore captives who are domiciled in countries without applicable double tax treaties with the US. Canada Canada operates in a similar fashion to the US to the extent that each province and territory has the right to tax insurance premi-
KEYS TO SUCCESS WHEN DEALING WITH US & CANADIAN TAX KEYS TO SUCCESS Location of risk
Identify state, province or territory where risk is situated
Is the insurer/captive licensed or non-admitted?
Class of business
Determine the class to identify tax rate or exemption
Availability of cover
Are declinations available to gain Canadian FET exemption?
Who is required to make the tax ﬁlings locally?
Have there been any recent changes in legislation?
Ensure that all tax ﬁlings and payments are always on time
Seek a full settlement of any outstanding taxes promptly
COMPARISON OF EUROPEAN AND US & CANADIAN REGIMES US & CANADA
Largely still regulated at state or provincial level
Harmonised across EU through the EU nonlife directives
Freedom of services
No equivalent legislation. US terminology often refers to: • Domestic insurers • Foreign insurers • Alien insurers
Ability to trade across borders without further regulation via “passporting” regime
Location of risk
Deﬁned at state/provincial level, generally similar but must not assume this in all cases
Clearly deﬁned under EU legislation and applied consistently
No equivalent legislation
Still required in some EU countries but slowly being relaxed
Often the local insured, especially where insurance is ‘non-admitted’
Generally the insurer
18 non-life classes
No equivalent legislation. Local tax law often refers to: • Property & Casualty • Marine • Life
Clearly deﬁned under EU legislation and often referred to in country tax legislation
Number of territories
50 states in US 13 provinces in Canada Plus: Federal regulations in both
27 full EU members 3 EEA members Plus: Gibraltar
Rates of IPT
Not harmonised US ‘cascading’ FET may result in taxation of reinsurance of US risks
Not harmonised IPT imposed on direct insurance, reinsurance generally exempt
ums within its boundaries, with an additional tax potentially levied at the federal level. FET is levied at the rate of 10% on insurance purchased from unlicensed foreign insurers or via foreign brokers or agents. There are some exemptions available for certain personal lines, nuclear risks and for risks that can’t be insured domestically. Taxes are paid annually by the local insured, although brokers have reporting requirements under the legislation. At the provincial level the amount of premium taxes really begins to proliferate. This is before any
FET which may also be due. Again, in most cases these taxes will be payable by the local insured. In July 2012, Manitoba introduced a premium tax at a rate of 7% on certain insurance contracts. Although exemptions do exist, most of the standard P&C type coverage schemes are likely to be taxable. In conclusion, as with all premium taxes, the devil is in the detail. However, having a premium tax specialist within your team who can make sense of the detail and assist you to make prudent decisions regarding premium tax compliance would appear a sensible ﬁrst step.
FiscalReps Training Courses 2013 As the only company focused speciﬁcally on this niche market of international tax compliance, FiscalReps has established a reputation as the leading experts in this ﬁeld.
Following a highly successful set of fully booked Insurance Premium Tax (IPT) courses in 2012, further sets of industry leading IPT training courses will be held in 2013 along with the addition of three levels of VAT training courses. These one day training courses will give all attendees ample practical and technical knowledge of IPT and VAT to make an immediate and positive impact within their organisation. All participants will receive a comprehensive Learning Pack and a FiscalReps certiﬁcation on successful completion of the course.
The Basic course covers how VAT works across the EU. It also considers regional differences and the basic responsibilities such as registration and submission of returns.
Worked examples are used to demonstrate the inputs and outputs of VAT. The different VAT liabilities are introduced, with particular emphasis on exemptions and the effect on recovery of input tax. The basic principles of partial exemption are also introduced at a high level. Place of supply and time of supply (tax points) are introduced. International aspects are discussed, as they apply to insurance business.
VAT Intermediate Building on the knowledge gained on the Basics course, this course considers more detailed VAT issues that arise for insurance businesses in the UK and across the EU. The consequences of writing business in EU and non-EU countries are also considered. The Intermediate course also covers time and place of supply issues in more detail. Partial exemption methods are dealt with in depth, considering those which are acceptable in the UK in particular. Various other aspects of VAT are dealt with, such as bad debt relief and recovery of foreign VAT. Penalties and interest for compliance failures are considered, using the UK as an example.
In an ever increasing compliance driven environment, training staff in the area of Insurance Premium Tax (IPT) and VAT compliance can have a direct ﬁnancial beneﬁt by mitigating the risk of premium tax non-compliance.
VAT Trainin : 3 1 gC 0 2 R ou O rs F es W E
Fisca Trai Cou 20 VAT Advanced
The Advanced course considers international issues in detail, as they apply to insurance groups. VAT grouping is explained, together with anti-avoidance provisions and interpretations of the tax authorities. There is a special emphasis on VAT planning, including what is likely to be acceptable to the tax authorities and what is likely to be challenged. Court cases relevant to the insurance industry are dealt with and the views of the tax authorities in various EU countries are considered. The course also covers the cost sharing exemption recently introduced in the UK but available widely throughout the EU.
"Very useful course, reinforced but also added to my IPT knowledge and will help me in my day to day tax dealings." Senior Business Analyst, Captive & Insurance Management
In su e nc ra
The Basic course gives attendees entry point information on the regulations and laws governing premium taxes across the EU, considering the regional differences and highlighting the sources of information available in order to collect reliable and accurate tax rate information.
Finally, delegates are given an introduction into premium tax compliance, highlighting the multitude of regular compliance requirements for taxpayers and what can happen if compliance failures occur.
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Building on the knowledge gained on the Basics course, Intermediate focusses on detailed premium tax issues that relate to speciﬁc classes of insurance business. The Intermediate course also expands the area of premium allocation, identifying the criteria used to determine the appropriate allocation methodology and demonstrating calculations through worked examples.
The Advanced course details the systems, processing and accounting requirements for accurate premium tax reporting.
Covering accounting requirements and ﬁnancial implications of tax errors, the Advanced course provides delegates with guidance when dealing with tax ofﬁce inspections or audits and ﬁnally considers at a high level how to translate the corporate governance of an organisation into a robust and effective premium tax compliance system.
Finally the Intermediate course considers the premium tax implications for policyholders, brokers and insurers when writing global programs either on a non-admitted basis or in co-insurance arrangements.
IPT Training Courses IPT Basics
4th March & 7th October
5th March & 8th October
7th March & 10th October
Course Fees per attendee IPT Basics IPT Intermediate IPT Advanced
Ta x ( I P T ) T mium r a i n Pre i n g
After introducing the concepts of location of risk and class of business and how they impact the calculation of premium taxes, worked examples are used to demonstrate how premium and other paraﬁscal taxes are calculated.
Training Calendar 2013
£395 & VAT £395 & VAT £395 & VAT
Attendees wishing to sign up more than one course can avail of the following discounts: 1 Course 2 Courses 3 Courses
£395 & VAT £710 & VAT £1,000 & VAT
VAT Training Courses VAT Basics
Course Fees per attendee VAT Basics VAT Intermediate VAT Advanced
£495 & VAT £495 & VAT £495 & VAT
Attendees wishing to sign up more than one course can avail of the following discounts: 1 Course 2 Courses 3 Courses
£495 & VAT £810 & VAT £1,100 & VAT
Bespoke and In-house Training FiscalReps can also deliver bespoke courses tailored to cover premium taxes that are speciﬁc to the business your company is writing.
Also, FiscalReps' training team can deliver courses in-house at your ofﬁces. Price available on request.
GLOBAL INDIRECT TAX REPORT 2013
Insurance considerations down under With FiscalReps’ comprehensive global reach, Mike Stalley examines the speciﬁc considerations of premium tax compliance that need to be understood in Australia and New Zealand
itting at my desk at 10am on a Monday morning tasked with writing this article, I thought that a good ﬁrst step would be to call the tax office in Australia to gather some information on premium tax legislation. Unfortunately that would mean the time in Sydney would be 9pm (GMT +11 hrs) and 11pm in Auckland (GMT +13 hrs) thus making it equally difficult to speak to the correct person. It appears that geography and time differences can play a signiﬁcant part in tax compliance. As we have experienced in Europe and North America, the ability to build professional relationships with tax officials via calls or face-to-face meetings can really improve the business of tax compliance. Faced with the challenge of developing a premium tax compliance solution for our clients in both Australia and New Zealand, FiscalReps have applied the same basic principles but in a slightly different manner to achieve success. Essentially more emphasis is placed on detailed research together with an acceptance that building long-term business relationships over such distances will take longer. Because the ability to simply pick up the phone or arrange a meeting is much reduced, it is essential that any correspondence is considered, appropriate and based around speciﬁc business issues rather than generic questions designed to gather information. We have learned that by engaging with tax officials in relation to speciﬁc tax challenges, a strong trust-based relationship can be built, even across many miles and time zones.
Australia The Commonwealth of Australia is a federation of six states and two territories. From a taxation perspective it is not dissimilar to the US or Canada. Whilst some taxation is levied at the federal level each state/territory has the autonomy to levy its own taxes locally. The lack of premium tax har-
monisation remains a key issue in Australia as the taxes levied by each state/territory does vary and is very much driven by local political demands. Australian insurance regulations have for a time allowed certain risks to be insured by nonauthorised insurance companies. These risks are generally deﬁned as atypical in nature, insurance for high valued insureds or for risks that can’t be insured through local authorised insurers. Such risks can be insured by Unauthorised Foreign Insurers (UFIs), as deﬁned within the Insurance Amendment Regulations 2008 (No. 1). As captives are often used as vehicles to insure large, atypical risks of high value corporates it would seem likely that many captives owned by parents with Australian business interests may be providing this kind of coverage. Insurance premiums in Australia are taxed in a number of different ways both at the federal and state level so it is important to have a full and detailed understanding of the tax permutations that may exist. At the federal level, insurance premiums paid to UFIs are subject to an income tax charge. This income tax is calculated as a 30% charge on the taxable income derived by the UFI from the insurance sold. This taxable income is deemed by the
INSURANCE SCENARIOS THAT MAY BE SUBJECT TO AUSTRALIAN INCOME TAX Insured property in Australia
Insured is resident in Australia
Insured event can only occur in Australia
Australian Tax Office (ATO) to be 10% of the premiums paid, creating an effective tax rate of 3% of premiums paid to the UFI. Insurance premiums paid to a UFI covering the following scenarios may be subject to an income tax charge (see diagram); ƀǇ Insured property is based in Australia ƀǇ Insured event can only occur in Australia ƀǇ Insured party is resident in Australia When premiums are paid to a UFI, the insured is considered to be the ‘deemed agent’ of the UFI and is responsible for withholding this tax amount from the premium paid to the insurer and for the ﬁling and payment of this tax return with the ATO. In this situation therefore an insured paying premiums to a group captive in respect of Australian risks would be liable for the settlement of any income tax relating to that transaction. Then at state/territory level there is generally an insurance duty levied on insurance premiums. For instance, in Victoria a duty is payable on general insurance contracts. General insurance contracts are those which insure either property located in Victoria or a risk, contingency or event which could occur fully or partly in Victoria. Normally the local insurer would be responsible for the collection and settlement of this duty with the local tax authority. However in the case of international insurance, especially when the insurer is non-resident the liability for settlement of the duty would rest with the local insured. In recent years most states have changed the method by which the activities of the ﬁre services are funded. Previously many states adopted a premium tax approach, levying a charge on all relevant insurance premiums. For a variety of reasons however, this is largely being replaced by a levy-based on property values which is collected by local councils. In New South Wales there was one additional local insurance tax which was introduced as a result of the collapse of HIH Insurance. However this was abolished in July 2011, so unless any outstanding tax liabilities have been identiﬁed this tax can be ignored. New Zealand Just across the Tasman Sea from the east coast of Australia lies New Zealand. The Reserve Bank of New Zealand (RBNZ) regulates the insurance industry and requires that any entity carrying on insurance business in New Zealand obtain a licence. Clause 9 of the Insurance (Prudential Supervision) Act 2010 states the RBNZ can grant exemption from the requirement to obtain a licence under certain limited circumstances including when “requiring the person to obtain a licence would, in the circumstances, be unduly onerous or burdensome”. This may apply to captives who are insuring limited risks in New Zealand by virtue of their parent’s business activities.
The taxation of insurance premiums in New Zealand is relatively similar to that in Australia. An income tax charge operates when insurance or reinsurance premiums are paid to non-resident insurers. Operating in the same manner as Australia, under these circumstances the local insured becomes the ‘assumed agent’ of the non-resident insurer and must ﬁle and pay the appropriate income taxes. There is both a ﬁre service levy and an earthquake ‘ECQ’ levy collected by charges on insurance premiums. The ﬁre service levy is designed to fund the activities of local emergency services and the ECQ levy provides disaster coverage to homeowners in the event of earthquakes. Generally, in both cases the local insurer is liable for the collection and settlement of these levies, however different rules do apply when the insurer is non-resident, often leading to liability resting with the local insured.
THE TAXATION OF INSURANCE PREMIUMS IN NEW ZEALAND IS RELATIVELY SIMILAR TO THAT IN AUSTRALIA” Goods & Services Tax (GST) Both Australia at a federal level and New Zealand nationally have implemented GST regimes, which to a certain extent replicate VAT legislation common within Europe. A Bermuda captive, for example, insuring risks in both Australia and New Zealand would have no requirement to account for GST in either country. However the local insured, if GST registered, would have to account for GST on a ‘reverse charge’ basis within its own tax ﬁlings. Captives insuring Australian & New Zealand risks In the situation where a non-resident captive is insuring risks both in Australia and New Zealand it would appear that much of the burden of premium tax compliance falls onto the shoulders of the local insured. Therefore as part of the insurance process it is essential to make certain that the local insured has the appropriate level of knowledge and resources to manage these additional compliance requirements internally. Where the local insured is merely a representative office or a smaller entity with few staff it may be preferable to engage with external specialists who can assist in these niche areas of taxation. As I write this, the time is now 3pm in London. Neither Sydney nor Auckland is open for business yet and that important tax question now needs an answer before I go home tonight. Having access to a global premium tax specialist who works your hours is probably a good idea.
FiscalReps Down Under Premium Taxes For all your compliance needs in Australia call FiscalReps on +44 (0)20 7036 8070 t Registration t Filing & Settling of Premium Taxes t State & Federal Premium Tax Rates t Representations to the Tax OfďŹ ces t Consulting t Tax Database