Insurance premium tax compliance considerations
Article 8 minute read

Insurance premium tax compliance considerations

03 August 2020

Compliance is a key priority in the establishment of any company. Although IPT is a consequence of the insurance transaction, understanding registration requirements, the process and ongoing compliance obligations is key to both business planning and determining underwriting strategy.

To ensure the captive remains compliant from the outset, the following questions will assist and drive the steps to be taken before underwriting commences.

What drives the captive’s compliance obligations?

The insurance premium tax (IPT) obligations arising for a captive are driven by three variables: where the insured risks are located, the type of risk covered, and the structure of the insurance programme, ie. how the risk is insured.

Location of risk

The jurisdictions in which risks will be underwritten is key to understanding where IPT liabilities for reporting and settlement will arise. A captive intent on insuring only the domestic operations of its UK parent will most likely only need to be concerned with the UK IPT regime. However, where the policy covers risks in more than one territory on a cross border basis, each jurisdiction in turn will need to be considered. IPT compliance obligations vary significantly between countries, even where those multiple countries are within one region, such as the EU/EEA.

Coverage considerations

The type of risk insured is equally important in ascertaining compliance requirements. For example, a property programme covering risks in Austria, Belgium, Finland, Luxembourg and the UK could be subject to 10 separate taxes whereas an export credit programme in the same countries could potentially only incur one.

Programme structure

How the programme is going to be structured is also important in identifying where the captive will have future IPT liabilities, and in some cases where the responsibility for filing insurance premium related taxes may fall to the local policyholder or insured business entity.

An EU/EEA based captive insurer will be liable for reporting and settling any IPT and parafiscals for business underwritten on a direct Freedom of Services (FoS) basis with passporting rights.

Conversely, for reinsurance captives, many responsibilities will fall to the fronting insurer.

Direct captives writing non admitted business across borders may find the local laws dictate that premium tax responsibilities fall on the local policyholder or insured, or in some instances a local broker or a formal tax representative may be required.

Once the insurance programme structures are identified the following considerations are key to ensure compliance by the captive in all jurisdictions covered.

How to set up a captive tax registration

Having considered risk location, coverage and programme structures, the captive can identify on a per-territory basis the premium taxes and parafiscal charges in scope, and the tax authorities where the captive will need to register as a taxpayer.

The captive - regulatory authorisations and tax authority registrations

Unlike VAT, there tends to be no registration thresholds for premium taxes, resulting in potentially very small amounts of tax demanding a registration and settlement. So it’s important that registration occurs in all territories where risks will be insured by the captive, regardless of the size of potential IPT liabilities.

At setup, the captive will work closely with its home state regulator on many issues, including obtaining insurance authorisations for those territories where they are able to write cross-border business on a direct basis. Even within the EU/EEA, passporting insurers must be approved by the local regulator before any FoS business is underwritten. These authorisations are facilitated by the home state regulator of the insurer, and it is key in this process that the captive is aware of any key authorisation dates in each territory to enable both compliant business planning and driving underwriting strategy.

For example, in Spain, the tax regulator provides a fixed window for an insurer to register with both the IPT authorities and the Consorcio de Compensación de Seguros (CCS) following authorisation.

In comparison, HMRC in the UK require application for a tax ID to file and settle IPT within 30 days of forming the intention of receiving premiums.

The registration process itself varies in both bureaucracy and timeframes. In the UK, a formal letter to HMRC generates a tax identification number within a couple of weeks. In other territories documentation requirements are more onerous. Notarisation and apostilling of signed documents and certified copies of supporting documentation can be a pre-requisite. In Hungary, copies of director’s passports are also required. Timeframes for obtaining a tax ID in the more bureaucratic territories can take several weeks, so these need to be factored into planning to ensure all is in place before liabilities are due.

The policyholder – new or existing taxes? 

Where the policyholder takes responsibility for the settlement of charges, it is key to consider any requirements to register with the various authorities. It would be in the direct writing captive’s interest to ensure the policyholder is fully cognisant of their obligations and responsibilities in this area.

The premium transaction could create an increased liability for a tax the policyholder already manages such as GST, VAT or withholding tax. A cross border premium payment for insurance may simply be treated by the local entity as any other payment for services delivered by a non-resident supplier.

Alternatively, the policyholder or local insured entity may have completely new tax obligations that they never had to deal with before. Self-procurement taxes in the US are a prime example. These are taxes that are only ever due on non-admitted insurance, and the policyholder will need to register for and declare at a state level. However identification of the home state for the purpose of filing self-procurement taxes may reduce the administrative burden of registering to pay multi-state taxes in the US. 

Outsourced solutions

This captive will need to decide how they want to conduct their relationship with the tax authorities. In some jurisdictions this will be dictated to them: the mandatory appointment of a tax representative or requirement for a local insured entity to file taxes cannot always be avoided. However in some jurisdictions the captive may have a degree of flexibility and be able to choose whether to appoint a tax agent or deal with the tax authorities directly. 

The obvious benefit of outsourcing is access to the global and local tax expertise of the provider, but this comes at a cost. In some territories where low premium volumes apply, this compliance cost could prove to be higher than the tax itself. For example, a €1 million premium allocated to Poland may only generate a €200 tax bill, but navigating the registration and declaration process can be a minefield without local knowledge and language. The Cypriot Stamp Duty regime will require the appointment of a local tax representative, even though the tax is only €2 per policy, regardless of the size of the premium.

Compliance process

As well as the obligation for filing premium taxes falling to both the captive and local policyholder, the calculation and invoicing is equally the responsibility of the captive. Support from other parties will assist. The broker, a captive manager, fronting insurer and other third-party service providers are likely to be involved in premium and risk allocations, but in most cases the captive is ultimately responsible to the tax authorities for reporting and settling its liabilities.

During the premium pricing and allocation process, the relevant IPT rates should be identified, calculated and applied accordingly. This requires specialist expertise, and changes in local rates and regulations need to be monitored. With well over 100 different tax parafiscal charge regimes applying to insurance across the EEA alone, this requires a vast amount of local technical knowledge, and the ability to subsequently apply them to the captive’s insurance programme.

Reporting and settlements

Post-inception and premium invoicing, robust processes will need to be in place that can track the contract and premium collection according to the relevant tax points, per jurisdiction, triggering reporting and settling requirements.

Taxes on insurance most commonly need to be reported monthly, but the trigger to account for the tax, ie. the tax point, varies.

Taxes may need to be accounted for at policy inception, on invoice issuance, on the booking of the premium or upon premium payment.

The simplicity of only a handful of premiums and policies per year – a trait attributable to many captives – differs hugely to the IPT filing characteristics for a global insurer writing hundreds of policies a year, or domestic personal lines insurers issuing thousands of policies a month.  However, captives lack the large tax departments and resources available to their larger counterparts, and so the controls and process need to be carefully designed to deal with this.

Defined process

There should be clear designation of responsibility for IPT within the captive. Processes need to be clearly documented, regardless of whether the numerous tasks associated with IPT will be completed by a mixture of the broker, captive manager, and/or third-party tax service providers.  Robust processes and the clear documentation of these processes can not only ensure the highest level of compliance is achieved on an on-going basis, but can prove useful in the event of a tax office audit, demonstrating the appropriate level of due care.

With responsibility as both an insurer for the tax liabilities where due and as a group company of the policyholders, the captive has a wider interest in tax compliance than insurers writing third-party business. Strong partnerships with industry brokers, fronting partners and captive managers as well as third party specialists can support the captive in ensuring adequate and documented processes for IPT compliance.

Need more information? Get in touch with our IPT experts.

This article was originally published by Captive Review.

Written by

Joseph Finbow

IPT Assurance Director Accounting & Tax

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