Tread carefully with IPT–Mike Stalley, FiscalReps

Understanding and keeping abreast of premium tax compliance requirements is a complex area requiring specialist knowledge and understanding. Global knowledge has to be continually refreshed; this can be costly in terms of both time and money, especially if the information is to be both reliable and specific.

But even when an insurer has access to the various applicable rates of premium taxes across territories, applying these to the various insurance products can create challenges. Although in the EU the First Non-Life Insurance Directive (73/239/EEC) provides for the 18 classes of insurance business, these are often not referred to in local IPT legislation.

One example is around class 7-Goods in Transit insurance. In Germany, Spain and the UK, goods transported internationally are exempt from premium tax although tax does apply to domestic transits. In Italy, the type of vehicle involved in transportation is crucial in defining the application of premium tax, whereas in the Netherlands all Goods in Transit risks are exempt. Outside of the EU there are further insurance classifications which equally do not necessarily match up to local premium tax legislation.

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Location of Risk rules, which are used to determine the territory that can levy the tax, continue to cause confusion. Within the EU, the 2nd Non-Life Insurance Directive defines Location of Risk rules to determine where premium tax liability arises. Rules differ however even in Europe-in Switzerland (technically outside of the EU), for example, Swiss stamp duty is only payable where the policyholder is located in Switzerland.

In the US Location of Risk rules differ again. For example since 2011, policyholders with a ‘home state’ of Texas, (i.e. where risks located in Texas attract the largest percentage of premium under the US insurance policies), that independently procure non-admitted insurance, are only subject to Texan tax law. This may not however be consistent with rulings in other states-one must then consider the legislation and requirements of the other states where risks are located to ensure duplication of premium taxes will not be due.

Once you have navigated the technical subtleties of the law and the numerous grey areas, an issue which still causes problems is the actual physical filing and settlement process required to pay the taxes identified in each territory. Recent expansion of the EU in Hungary, Croatia and Poland has often tested the knowledge and capacity of local tax authorities to handle the additional volume of pass-porting transactions.

Ascertaining the process of registering an insurer as a tax payer in a new jurisdiction is required in addition to understanding what tax points are to be applied, whether monthly, quarterly or annual returns are to be filed and the filing and payment deadlines to be met. A recent example is in Poland where the Insurance Ombudsman Charge has been extended to apply to EU insurers writing risks in Poland on a freedom of services basis. The charge is handled by the Ombudsman and not a tax authority, and although the amount and payment methods are known, the details of the process are still to be refined.

Insurers must decide whether waiting for full clarification is more important than avoiding any penalties that may be applied for late settlement of any taxes and charges. Even within the EU, requirements for a formal fiscal representative in the filing process must be determined and can differ, for example a fiscal representative is still required in Spain and Portugal.

But within this confusing legislation, opportunities do exist. Where regulations allow and where payment of premium taxes can be made by the policyholder, captive insurance companies can write directly in a compliant manner in some territories, using their own local insured and/or a fiscal agent in the process. Examples of this include Australia and New Zealand.

In Australia federal income tax is levied on premiums paid overseas to non-admitted insurers, but can be settled by the local policyholder as a ‘deemed agent’ of the foreign insurer for tax settlement. Captives should consider this additional 3% deducted from premiums paid overseas as an additional cost to writing direct into Australia on a non-admitted basis. Again the varying state taxes can be typically also settled by the local policyholder based on the location of risk, with additional taxes applying in some states to fund fire and emergency services. Multiple state locations will increase the complexity for the captive insurer and requirements of local policyholders in territory.

In New Zealand, again a foreign captive insurer can reduce fronting costs by writing on a direct basis and relying on the local insured as their ‘deemed agent’ for settlement of up to three potential separate taxes. Income tax again is an additional charge of currently 2.8% deducted from premiums transferred to overseas insurers. Additionally, earthquake levy and fire services levy could be payable, depending on the coverage provided.

Global compliance is not getting any easier; ultimately it is achieved through the shared communication, knowledge and responsibility of all involved in the process: insurer, insured, broker and captive manager, with the engagement of legal and tax specialists where required. Our advice: continue to tread carefully but apply the lessons learned from previous renewals and be prepared to regularly challenge the basis on which your tax and regulatory decisions are made.