Accurately calculating insurance premium tax (IPT) for reporting can be complex. And the ramifications of getting it wrong can be far reaching from impacting profit margins to unwelcome audits, fines and damage to your company’s reputation in the market and with customers.
Calculation methods
When I speak to customers about how they calculate insurance premium tax (IPT) and relevant parafiscal taxes, they often mention they use different percentage rates. This method is not always used though, and a more complex calculation could be adopted. Typically, tax authorities chose to apply the percentage on premium calculation but there are others – sum insured, fixed fees, and then threshold calculations. There is a minefield of different rules. Do you round up? Do you pay to the nearest currency unit? Can you apportion the IPT based on your share of the premium? What exchange rate should you use? The list is endless and illustrates how complicated getting it right can be.
Completing the declaration
So, you’ve completed your tax calculation, and you think you know how much tax there is to be paid. You’ve done the hard part, right? Surely, now it’s just a case of moving the numbers onto the declaration.
It may sound simple, but when you also consider that many tax authorities use the domestic taxes declaration as a template then adjust it to Freedom of Services business, there are bound to be questions.
Many declarations include just a summary of information from the calculation – the premium, tax rate, tax applied, class of business for example. There are then the annual reports which need more information. For example, in Italy, insurers are required to submit the contract and premium reports which are an in-depth list of policies. This includes inception and expiry dates, cash received dates, policyholders’ names and addresses, premium and tax values plus the parafiscal should there be any. Then the ultimate, fiscal code, which is specific to an Italian insured.
The move to online reporting
With other territories moving to more of an online system, including Spain and Portugal, the emphasis has shifted away from the calculation and declaration to ensuring brokers, underwriters and intermediaries are capturing the correct policy information at the time of booking. Without this, the calculation systems will not accept the information, resulting in late reporting, penalties, and interests.
Until now missing information was hardly visible by the tax authorities. This is set to change as more tax authorities see the benefits of having access to more granular detail, and follow suit. This will only add to the complexity and challenges for insurers when complying with the fragmented rules across Europe and the world.
The future of IPT reporting
So, what lies ahead? At Sovos, we have extensive experience of indirect taxes other than IPT and have seen the journey tax authorities globally have taken to reduce fraud and increase tax efficiencies. For IPT, whilst a slower journey, it will be the same with more information needing to be captured at the point of sale across all territories (just in case of retrospective submission as we have seen in Greece recently). And, perhaps, more visibility by the tax authorities will lead to more audits.
For now, we are in uncertain times, both economically and from a reporting perspective. But uncertainty can be viewed as an opportunity especially for those companies that are starting to think about the future landscape for IPT reporting and of what improvements they can make. Preparing now for the inevitable is a sound strategic move.
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