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Know Your Tax Points
Insurers writing cross-border business in multiple jurisdictions within the EEA can face myriad unforeseen challenges if tax point filings get out of sync. Our IPT expert looks at the challenges of IPT in the EEA.
For an insurer writing cross-border business in multiple jurisdictions within the EEA there are many important compliance factors to consider. One such consideration is the differing tax points that are used when settling premium taxes and associated charges. Accounting methods, and the correct application thereof, are more crucial than you may think.
The basis for settlement of Insurance Premium Tax (IPT) and other premium-based charges tends to vary on a country-by country basis. There are also examples where it varies within a territory depending on the type of tax(es) that apply to a policy. Inevitably, the legislation or guidance from the tax authorities varies from territory to territory; we will examine the main methods that are used.
“Premium received” is a common tax point and is used by territories such as Italy and the UK. This means that the date that premium income is received by an insurer determines which reporting period the tax due falls into. Similarly, several territories, including France and the Netherlands, use “Date of Maturity” or “Premium Due Date”, which is the date(s) shown in the accounts that premium income is due on a policy. “Invoice Date” (Denmark) is fairly self-explanatory. These tax points all tend to complement the approach of paying the tax as it is received (the majority of IPT and equivalent regimes are a tax on the insured). “Policy Inception Date”, the tax point for certain parafiscal charges, including the Extraordinary Risks Consorcio charge in Spain, presents a more challenging position; tax being due at inception of an annual (or longer) policy, but the premium may be received in various instalments.
The UK, unlike many EEA jurisdictions, allows a certain degree of choice, helping insurers who have a business structure that makes IPT compliance challenging. The default tax point is Premium (Cash) Received; however insurers can apply to HMRC to operate the Special Accounting Scheme. Under the special accounting scheme the ‘written premium’ date can be used, which is the date that the accounts show the premium due to you. Under this scheme you can also adopt the date that the premium is inputted into your accounts. In the IPT1 notice, HMRC also states that if an insurer finds accounting for tax challenging they can discuss an alternative tax point with them, however they warn that whatever method is agreed must be applied consistently and that there should not be any evidence of manipulation.
A brief example of a challenging tax point scenario arises in Spain. Accounting for IPT is on a cash received basis, but the Consorcio Extraordinary Risks surcharge should be filed in the period in which the contract incepts. As both are filed monthly, a difference of a few days between policy inception and receipt of premium means that they could fall in different reporting periods. The consequences of filing the Extraordinary Risks surcharge in the incorrect period are potentially disastrous for an insured, and consequently in all likelihood an insurer. Consorcio offers additional cover in respect to property damage and business interruption policies for a range of natural disasters, terrorism and rioting, among other things. These events are typically not covered in the majority of insurance policies. If the surcharge has not been filed correctly (for example in the wrong period), there is no guarantee that this cover will be honoured by Consorcio. This would leave an insured that would otherwise have been compensated for any loss without cover, which would inevitably have consequences for an insurer.
The variation in tax points presents a challenge for insurers who may be writing multinational insurance programs, and accounting for them all centrally. TMF Group has built a database of compliance information to help insurers meet the requirements of tax authorities in different jurisdiction. The challenge of knowing where, when and which taxes need to be paid are part of why many insurers choose to outsource their IPT compliance, alongside the other regulatory hurdles and hoops some jurisdictions employ.