Tax legislation is sometimes structured, or worded, ambiguously. This leaves scope for a number of different interpretations for the treatment of tax on insurance policies, some leading to a lower tax liability than others.
This can often be seen when different insurance premium tax (IPT) rates apply to specific sub-classes of the same business or when the policy covers particular risks that may trigger the application of parafiscal charges – such as motor levies, fire brigade charges, and contributions on terrorism risks. The challenge in identifying the correct tax treatment can also sometimes lie in the complexity of non-IPT related legislation governing which type of cover is to be provided.
Even across the “harmonised” member states of the European Union, IPT treatments are fragmented and diverse. The rates in themselves vary greatly and an exemption applicable in one territory does not necessarily apply in another. These points alone add to the complexity and challenges when interpreting local tax laws.
A further challenge concerns language. The technicalities of both tax and insurance terminology can be a minefield for translations. For example, the difference between insurance, warranties, guarantees and sureties can be subtle, but getting the translation wrong can be the difference between a product being taxed or not.
In the world of IPT, where the rates and charges applied have a direct or indirect impact on the premium charged to the client, choosing one interpretation over another may affect the insurer’s competitiveness in the marketplace. As pressures mount to protect profit margins, applying the right rates of IPT can have a significant impact on the business.
Common practices have developed within the insurance industry to provide more clarity and official interpretations over grey areas concerning the application of IPT across the EU. An insurer may decide to follow an approach that is more compliant than market practice but that could result in a greater tax liability. As a result, the premiums in this scenario are likely to be higher than its competitors. This will therefore have a negative impact on the business with clients moving to what may appear to be a cheaper policy.
If the market interpretation is followed, there is however a risk that the tax authorities disagree with it during an audit and consider it to be non-compliant. In some countries, it is possible for the taxpayer to seek an official interpretation over the tax treatment of a specific transaction directly from the tax authorities. However, in some cases, clarifications must be sought in advance of offering the insurance product and the delay in obtaining the answer could result in a loss of revenue for the insurer. It may also be the case that the interpretation provided by the authorities is binding only for the taxpayer requesting it. This leaves the insurer with the burden of informing the market in order to preserve its competitiveness.
The world of IPT compliance is complex and the consequences of incorrectly interpreting the legislation can be far reaching. Local knowledge and experience are key.