Tax authorities are turning their attention to global insurance programmes – Richard Asquith, TMF Group

In broad terms, European countries take the view that if an insurance contract covers a risk within their territory then there is a tax liability. This location of risk fiscal rule was established by a European Court of Justice ruling, Kvaerner, in 2002. In this case, a London-originated global programme covered risks in multiple countries, including the Netherlands. The Dutch tax authorities raised and won its case that Dutch taxes were due on the Dutch assets covered by the programme.

For most of Europe this means the premiums paid are liable to the countries’ Insurance Premium Taxes (IPT). This is a type of turnover tax, ranging from 3% to over 21% depending on the country and business line.

Beyond the EU and EFTA countries the picture is less clear. Most countries abide with the same location of risk, but many are prone to tax the whole premium (e.g. Switzerland, China and Russia.) which can create double taxation. Most countries around the world charge some form of IPT or VAT on insurance premiums.

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Raising tax rates on global premiums

Ministries of Finance across Europe and globally have been under intense pressure to prop up flagging tax revenues pushing many of them into substantial hikes in their premium taxes. Insurance taxes are seen as a soft target since they receive limited coverage in the media. Following the UK’s 2011 lead of raising IPT by 1% to 6%, other countries’ have followed suit.

These include:

• Finland raising its IPT in two stages to 25% by 2013;
• The Netherlands quadrupling its headline premium tax rate to 21% at the start of this year;
• France raising its IPT rate on many polices from 7% to 9%;
• Denmark introduced a new premium tax on non-life policies at the start of 2013, which included potential elements of double taxation on global programmes;
• Hungary also introduced IPT for the first time, but levied it on the insurer in an unusual twist compared to its European neighbours who charge the insured.

Increase in tax inspections and fines

Many countries are now actively targeting the insurance arrangements of local companies. There is clear evidence of standard tax inspections now including questions about global programmes. For example, German tax inspectors are now trained to question the insurance cover of companies under review, and will demand proof of German IPT payments where the insurer is foreign. If nothing is forthcoming, they will refer the case to the Federal tax office to pursue.

One of the few growth employment areas in Europe has been at the local tax office. Country after country has announced expansions in their annual in-take of inspectors, which reflects the ambitions of countries to step-up the number of tax-raising inspections. For example, Belgium doubled the number of staff it has assigned to IPT in the past year. Many of these new staff are targeted with identifying Belgian companies with cover from outside of Belgium as part of global programmes. This can help them spot non-compliance on tax liabilities, but also help them raise punitive fines and overdue interest charges.

The non-admitted tax question

Whilst global carriers are making improved efforts to provide local regulatory-approved contracts, including DIC/DIL, there still remains a large volume of programmes written on a non-admitted basis. This would in turn mean no obvious tax liability despite the potential illegality of the contract.

However, this is changing fast in Europe. Many tax offices are willing to overlook regulatory infringements if it means gaining much-needed tax revenues. Examples in 2013 include Portugal setting up an amnesty on overdue or undeclared premium taxes which includes a facility for non-admitted insurers to pay implied taxes for the first time. Similarly, Germany created a facility and requirement for non-admitted carriers to declare and pay taxes on any German risks covered in the policies.