Tax rules have broad implications for global insurance programmes

The Criminal Finances Act 2017, which came into effect in the UK at the end of September this year, introduces a new corporate offence of failing to prevent the facilitation of tax evasion by an ‘associated person’, either in the UK or abroad. Andrew Gitsham, global head of international product underwriting, Zurich Commercial Insurance, explains why companies with global insurance programmes need to be aware of these changes.

The legislation is far reaching and defines tax broadly to include VAT, indirect taxes, insurance premium tax (IPT), and foreign taxes. It is not just about facilitating tax avoidance but, more importantly, the failure to prevent that facilitation. The law criminalises corporations that fail to have controls to prevent associated persons – employees, agents, or any other people acting on behalf of the company – who facilitate the evasion of UK or foreign tax. Importantly in the context of global programmes, it also applies to UK-connected entities (ie subsidiaries) that facilitate tax evasion in another country.

Ramifications for multinationals
This has particular implications for the insurance industry and for large corporations in the purchase of a global risk transfer programme, including the use of captives. Indeed, the facilitation of a construct, which does not have the correct allocation of premium and taxes, would be considered an offence under the act. This not only applies to the UK but also to UK-domiciled multinationals with a foreign subsidiary, that fail to fulfil their legal tax obligations.

The Act specifically refers to associated persons providing services. So, for example, if a broker knowingly facilitated the placing of an international insurance programme in such a way that the company could avoid paying IPT, then they would be seen as a facilitator to a transaction where there is tax avoidance.

A clear rationale
What this means is that insurers and their customers need to demonstrate that they have the controls in place to ensure that they do not facilitate tax avoidance. The important elements to consider are transparency, the location of the risk, and measures to ensure that the allocation of premiums reflect the characteristic of the exposure, with the appropriate taxes calculated and dispersed.

Global insurers need to work with their customers and brokers to understand what is important to the customer, for example their requirements relating to claims payments, as this will influence the structure of the programme or the applicability of IPT. It is important for insurers to engage with all parties in the value chain and to be able to clearly articulate the rationale behind the programme and ensure that it is clear and transparent. That requires investment by insurers, and Zurich has already made significant investment and has a high level of confidence in its procedures.

There has been some debate about approaches taken by carriers with regard to the applicability of IPT, and the revenue authorities are now focusing on IPT and increasingly carrying out audits into insurance transactions.

As Adrian Halter, executive director, financial services, tax, Ernst & Young Switzerland, explains: “We see an increased interest in the market/number of engagements by large, multinational non-insurance groups concerned about both their reputation and their potential liability with regards to IPT and similar taxes. Typically, the engagements involve a review of the corporate’s global insurance programmes with respect to premium apportionment [and] risk location, as well as accuracy of the taxes charged.”

Indeed, Zurich was recently audited by the UK tax authorities in the area of IPT and was given a high level of assurance over its overall IPT procedures and IPT returns.

Following suit?
It would not be surprising if other countries followed the UK’s example, as insurance is increasingly being seen as an easy way to raise revenue. IPT rates have already begun rising in Europe and other jurisdictions, or are being imposed for the first time in many countries (in 2013, the Netherlands increased IPT from 9.7% to 21%).

Laws and regulations are wide-ranging, but in the context of global insurance programmes, they make it essential for insurers, brokers and their multinational customers, to ensure transparency in their insurance transactions, with a clear rationale as to the solution design, and an ability to articulate the associated premiums and taxes that are allocated and charged.

Contributed by Andrew Gitsham, global head of international product underwriting, Zurich Commercial Insurance