Some insurance premium tax regimes operate a kind of prepayment mechanism, whereby insurers are required to pay an amount to the tax authorities in anticipation of future tax liabilities. This credit is then drawn down on or adjusted as and when actual tax liabilities crystallise. Prepayment should not, therefore, represent an additional cost to insurance transactions, but they can pose some cash flow considerations for insurers. In some cases, insurers can be required to hand over significant amounts of money to the tax office who will hold those amounts, in some cases for several years.
Of the half dozen or so prepayment mechanisms across Europe, no two are the same in their process or impact. Perhaps the most prominent of these is that of the Italian IPT prepayment; prominent because not only does it apply to all insurers writing non-life insurance risks in Italy, but also because of its size. Whilst the current rate set last year is 58% of the previous year’s total IPT and anti-racket contributions, it will increase to 100% in a few years’ time, meaning that in November 2021, insurers will need to pay the total of their 2020 tax bill to the Italian tax office again. Throughout the following year, the insurer draws down on this prepayment so they do not need to make additional payments to the tax office until the prepaid amount is exhausted.
The impact that the Brexit vote has had on the London market has brought the Italian prepayment in to sharp focus for many UK insurers, as they wind down their Italian exposures and start underwriting Italian risks through EU based subsidiaries.
Where insurance companies have merged, the credit with the tax authorities is transferred to the resulting company together with all the assets and liabilities. Transferring the prepayment to the transferee in the case of a portfolio transfer is still however a grey area. If the consulting department of the Italian tax authorities have agreed in principle with the prepayment transfer, then an official ruling must be submitted to obtain an interpretation which is binding for the tax authorities. Even though this would provide some clarity, it may still take months for the ruling to be drawn and published, and there is always the risk of an adverse outcome. In the meantime, the transferring company is out of pocket. Even if the transfer of the prepayment credit is allowed, the receiving company needs to agree to reimburse the IPT prepayments.
If the prepayment is not transferred together with the portfolio, it could still be reclaimed from the Italian authorities. This would only apply if the insurer has withdrawn its passport thereby ensuring that the credit will not be used in the future. This is not a quick process though, with reimbursements often being released over a year after the reclaim submission.
But the problems caused by the prepayment will affect any insurer exiting the Italian market or even just reducing their Italian business.
For any tax registrations not cancelled prior to the next deadline in November 2019, the insurer must pay the prepayment for 2020 which equates to 85% of their 2018 IPT and anti-racket contribution liabilities. A ruling made years ago by the Italian tax authorities has clarified that the prepayment is due on an historic basis and cannot be settled based on an estimate of future tax liabilities. So, if premiums were collected in 2018, resulting in IPT and anti-racket contributions being due, then the tax authorities will expect a prepayment for tax year 2020.
When an insurer is exiting Italy, be it due to Brexit or any other reason, clearly being aware of your current and ongoing prepayment obligations is key to minimising unnecessary pain in the future.