Evolving compliance changes for multinationals – IPT

When talking about Insurance Premium Tax (IPT), let’s put things into perspective. Taxes due on insurance programmes are a consequence, not a driver, of any insurance placement, and form only one – albeit key – compliance consideration. However, understanding the different ways global risk is insured, and the subsequent compliance consequences, allows the risk manager and all involved in global placements to make informed decisions around programme structure, and fully understand compliance challenges.

The IPT tax landscape doesn’t move quickly – legislation in this area has often not been updated in many years – however, new products and coverage options come into play, increasing challenges arising from dated and often less than clear legislation.

What is IPT?

When we talk about IPT, we refer more broadly to all indirect and transactional taxes that arise on either an insurance premium or on the issuance of an insurance policy.

• In many jurisdictions this will be a specific IPT – in the UK, the current rate is 12% of premium. On £100 premium, 12% IPT is added, and the policyholder pays £112.
• Numerous other taxes work in a similar manner –fire brigade charges, motor insurance levies, and other parafiscal charges introduced to support and fund local services.
• Stamp duties are another type of tax often applied to insurance contracts. Issued on a per policy basis, some are calculated as percentages of premium, others are fixed flat fees and apply to the number of policies issued.
• Within the EEA, insurance is exempt from VAT, but outside of Europe, there is often a form of VAT or GST on insurance transactions.
• On cross border insurance or reinsurance, there can be withholding taxes on the premium paid out of a country.
• We should also mention some specific taxes in the USA: surplus lines taxes and self-procurement taxes are incurred where insurance is bought from outside of the state where the risk is located;
• Finally, it’s important to consider pool contributions and other additional premiums, such as Consorcio surcharges (a Spanish natural perils and terrorism pool). These are not technically taxes, but again parafiscal charges that increase the invoiced amount.

The overall cost of IPT is not insignificant. The average cost is going to be in the region of 10% to 15% of the gross premium. This, of course, depends entirely on where the risks are located. As an example, insuring a large exposure in Finland where the rate is 24%, the overall premium cost will push that total cost up compared to coverage of a similar exposure in Denmark, where the rate is typically 1.1%.

It’s also important to remember that although the tax is generally paid to the authorities by the insurer, it is ultimately a cost borne by the policyholder. Typically, the charge is added to the local invoice and is an additional charge to the premium. Where this isn’t the case, market practice shows that premiums charged to the policyholder are generally grossed up, to ensure taxes don’t erode technical underwriting premium.

Where a GST or VAT regime applies, that cost can be a bit misleading. In Singapore, GST on insurance is 8%, but where the policyholder is GST registered and the insurance is in relation to taxable supplies, the GST is likely recoverable.

One final point to note is that even within the EU, where there is talk of harmonisation, this isn’t the case with regards to IPT compliance. IPT laws can be implemented entirely differently across the member states. On a global scale, this lack of harmonisation and consistency requires knowledge and expertise of differing regimes.

Location of risk

The first and most important question to establish in calculating IPT liabilities on a global programme is which tax jurisdictions have a right to tax a premium or a contract. Where a UK insurer issues a policy to a UK policyholder covering their UK buildings, it is obvious the UK tax authorities will seek to tax that premium. But multinational programmes are not that simple.

In the EU, legislation assists in determining the location of risk and is defined in Article 13 (13) of the Solvency II directive. This is the one piece of harmonisation that we find in the EEA.

Generally, within the EU/EEA the rules fall into four categories:

• Property risk – located where the building is physically situated;
• Vehicles – where the vehicle is registered;
• Short-term travel – where the contract or policy is for a period of four months or less, the risk location is the jurisdiction where the policyholder took out the policy;
• The fourth category is the catch-all for everything else – where a risk doesn’t fall into any of the other three categories, it’s the habitual residence or establishment of the policyholder that determines the risk location.

When we move outside of the EEA, it is territory rather than region-dependent.

Swiss stamp duty applies when the main policyholder is Swiss. Double taxation can arise here – in Switzerland, the total global premium attracts Swiss Stamp Duty, even if part of it relates to risk in another EU member state.

Australia refers to “Property located”, or an “event that will occur” within the state as the determining factors.

In the US, home state rules allow commercial policyholders buying non-admitted insurance to be taxed in the state where they have their ‘principal place of business’. This avoids multiple states’ taxes being charged.

For withholding taxes, the location of a payment becomes important – often only triggered if there is a payment out of a territory, and even then, double tax treaties may reduce or remove the cost. Where the contract is executed can define the location of risk for stamp duty. For supervisory levies, it’s often the location where the insurer is authorised or licensed. Once again, the lesson here is that there is no consistency!

Coverage Mechanisms

Local admitted policies are issued in the territory where the risk is physically located, and domestic insurers will be familiar with local IPT or insurance-related taxes. They will be responsible for reporting and settling any liabilities to the local tax authority. In principle, this is probably the most compliant method of insuring risk – however, it is administratively burdensome, costly and not always providing consistency of coverage and terms.

In a global policy, the policyholder purchases insurance on a single policy, in the location of the parent. Most of us would agree this is not the most compliant way of insuring international risk, but it is still relatively common. At TMF Group, many enquiries we receive are from policyholders and insurers with global policies, who are looking for ways to ensure local compliance– which in practice is not often possible.

For policy administration and IPT, this is where challenges are created – IPT legislation is generally built to handle local admitted insurance. In the global policy, we are effectively considering widespread non-admitted insurance, creating compliance hurdles, in addition to any regulatory issues caused.

A master-controlled programme combines global coverage under the master policy issued in the jurisdiction of the parent, alongside local admitted underlying policies issued where required locally, in addition to the use of other coverages including DIC-DIL, Freedom of Services and financial interest clauses. This structure is less challenging in that compliance is achievable to a greater extent; however, the diversity of the different structures in place leads to the need to navigate the complexity of settling taxes, and the compliance consequences and responsibilities not only impact the insurer but can also create obligations on the broker and policyholder.

Freedom of services is unique to the EU/EEA and allows insurers domiciled in the union to insure risks on an ‘admitted basis’ in all other EU/EEA territories. Although this principle is straightforward, a European insurer issuing a FoS policy will need to calculate and apply the correct rates of tax, then facilitate the collection and settlement of all the relevant taxes with each individual EU tax regime.

Non-admitted insurance

Let’s consider non-admitted insurance. DIC-DIL, or Difference in Conditions/Difference in Limits cover, is effectively a type of non-admitted insurance, so for IPT purposes is treated the same. Tax legislation rarely considers non-admitted insurance, let alone the further nuances of DIC-DIL.

In some territories, additional taxes fall due on non-admitted insurance. In Australia, Federal Income Tax of 3% is applied. Where Australian risk and associated premium are sizeable, this additional tax can prove costly on non-admitted coverage versus a local admitted policy.

On some non-admitted insurance, the overseas insurer may be responsible for the taxes, albeit with the requirement to appoint a tax agent or representative. Tax representatives can be held jointly and severally liable for taxes due, and therefore may require higher fees or even a bond to cover this risk.

The presence of a local broker can also impact the cost of the tax, and in some instances assumes the responsibility for reporting and settlement.

Compliance obligations can also fall to the policyholder. In the US, a local insured is required to file and settle any self-procurement tax and may indeed need support in filing taxes that could be new and unknown to them.

Financial Interest Clauses

Financial interest clauses (FINC) continue to divide opinion, and within the market there are different views and approaches on their use, enabling a parent company to insure its financial interest in its subsidiary’s loss where no local policy is issued. Effectively, the loss suffered by the subsidiary causes a reduction in the value of the parent company’s financial interest in the subsidiary.

The most likely tax treatment is that the IPT regime in the parent’s domicile is applied. This location can have a big impact on the cost here – a Finnish parent company would see IPT of 24% applied, whereas a Luxembourg-based parent could see this drop to 4%.

We say ‘likely’ – from an IPT perspective this structure is not explicitly mentioned in any IPT legislation that we are aware of, nor does tax office guidance specifically address the scenario. We have seen very limited case law on the subject, but it is an area that tax officers are starting to consider.

Larger global programmes invariably involve reinsurance – whether this is a captive’s involvement, or a lead insurer issues local fronted policies on a 100% basis and reinsures back to other co-insurers. It’s therefore important to consider the costs and implications of reinsurance, which can attract additional taxes and levies when premium is ceded overseas.

It’s important to highlight the importance of building and maintaining knowledge in all aspects of compliance on global insurance programmes. Successful implementation relies on the knowledge and experience of all involved. Consideration should be given to the footprint of the insured and insurer, resource and appetite of the insured to handle compliance consequences of any non-admitted, DIC-DIL or FINC coverage and the need to engage specialists.

Contributed by Joseph Finbow, IPT assurance director, TMF Group, and Karen Jenner, IPT client engagement director, TMF Group