For a global corporation, Insurance Premium Tax (IPT) compliance is the responsibility of the insurer, possibly broker or even the local in-territory policyholder for administration purposes, and is a consequence – not a driver – of their global insurance programme and policies. Ever-evolving compliance requirements in this area however, drive tax authority requests for increasing levels of detailed information of the buyer of insurance, and there are some key considerations at programme design that the buyer should be aware of, to ensure there are no consequences to their business of non-compliance further down the line.
Leaving the practicalities of the calculation, application, filing and settlement of IPT and other insurance-related taxes to the tax departments of insurers, brokers, or their third-party service providers, this article serves to highlight the implications of underwriting decisions made before the programme is even bound.
Location of risk rules
Brokers and underwriters work closely with their policyholders to understand the buyer’s group structure and identify what coverage is required and where risk is located. Location of risk rules determine the jurisdiction where IPT shall be settled. In more traditional lines of insurance, such as property, the location of risk is easily defined – with physical assets identifying locations to be insured. For programmes insuring less tangible risk, a considered, fair, documented and consistent approach to identifying risk locations is prudent for any questions from tax authorities.
Within the EU/EEA, legislation around the Solvency II directive, article 13(13), outlines location of risk rules to define where premium tax liability arises, though application of these rules may differ per territory and outside of Europe there is little guidance. Risk transfer pricing is also a consideration here – and one of much higher focus than IPT consequences – and will subsequently be a driving factor in programme structure and premium allocations.
How the risks are contractually covered will ultimately define who is responsible for IPT compliance and where liabilities are due. Programme design will depend not only upon the requirements of the corporate buyer, but also the structure of the insurer and broker, and their global footprint.
Within the EU/EEA, passporting rights permit a member state insurer to issue a single policy to cover all risks located in member territories. By default, responsibility for the compliance of IPT and other parafiscal charges related to insurance fall to the insurer, which may deal with this from its own tax departments, or more generally outsource to a specialist IPT service provider, leaving little concern for the buyer from a compliance perspective.
For other local admitted policies outside Europe, the IPT compliance responsibilities are dealt with in-territory, with responsibility most commonly falling to the insurer – once again leaving the corporate assured of compliance.
Discussions and debate around where and in what circumstances non-admitted insurance is permitted are not new to global insurance, and the existence of ambiguity continues in many territories where legislation is silent about the tax treatment of such insurances. For aviation and marine cargo risks, non-admitted insurance is more widely permitted due to the difficulty of defining location of risks for IPT purposes, and often there are wider exemptions for IPT for these lines of business. However, the insured should be mindful of the coverage within the specific polices – for example, aviation in France can be exempt from IPT, however if the policy covers any general liability insurance, this line of business requires a local admitted policy and IPT is due. Understanding these complexities is key to ensuring compliance.
When writing direct non-admitted business, compliance obligations more often fall to the local policyholder or insured entity. Many countries will tax insurance through a VAT or GST regime, and in the absence of a local supplier, the local policyholder may need to account for these through its broader VAT or GST declarations. This should not represent a significant burden to the local policyholder’s tax department, but it needs to be aware of its responsibilities dictated by the programme design. Alternatively, withholding taxes, in lieu of income tax being paid by a local insurer, may be deducted from the premium payment and settled locally.
In North America, the complexities of FET in both Canada and the US need to be considered. Canada also serves as a good example of the additional tax consequences of writing non-admitted insurance. Risks located in the state of Alberta attract potentially a charge of up to 50% of non-admitted premium, in contrast to the rate of 4% applicable to admitted insurance. These additional costs are ultimately borne by the corporate buyer.
In North America, as well as Australia and other parts of the world, insurance taxes are charged on a per-state basis, potentially providing more work around compliance for the local insured entities.
Financial Interest Clause (FINC)
Increasingly relied on, especially in the London market, FINC continues to be used to insure a parent company for its financial interests in its subsidiaries, rather than insuring the subsidiaries themselves. The most common practice for IPT compliance is for FINC to apply to the relevant whole premium in the domicile of the parent company. But as this type of arrangement has been tested very little, a tax office could take a different view, considering the substance of the arrangement is actually one of insurance in the jurisdiction of the subsidiary.
Another consideration for the insurance buyer of a multinational programme is the increasing demands of tax authorities globally for more granular, detailed reporting. In addition to renewal information required by the broker and insurer for underwriting purposes, tax authorities are collating more and more information about the IPT and insurance-related taxes being paid, and there is no consistency in the requirements of varying tax authorities. For the policy buyer, detailed information about the risk locations, values insured and often tax IDs of the local insured entities, places an onus on the buyer of insurance to provide such details to the insurer to ensure compliance.
In conclusion, IPT compliance is a complex consequence of global insurance, but knowledge within the insurance companies, brokers and support from specialist service providers ensures the application and practicalities of compliance are met. The buyer, however, should build some knowledge in this area as the consequences of non-compliance, whether they be a lack of coverage to the local insured entity in the event of a claim, tax authority challenges to the local insured entities for non-payment of taxes due, or reputational, will ultimately affect the global corporate purchasing the global insurance.
Contributed by Karen Jenner, portfolio director, business development, TMF Group