For anyone relatively new or unfamiliar with insurance premium tax (IPT), an understanding of each of the core components is key to ensuring compliance. They also sit in a logical sequence of five distinct areas.
- Location of risk
- Class of business
- Applicable taxes and tax rates
- Declaration and payment
- Additional reporting
1.Location of risk rules
This essentially is having a clear understanding of where the risk lies to determine in which jurisdiction the premium taxes should be declared. The rules can be complex and vary across different territories but having a clear process will help.
You’ll need to determine:
- Is the policy insurance or reinsurance?
- What is the nature of the risk?
- Who is insured and where are they located?
Next, check which rules apply. The EU’s four rules determine the correct jurisdiction depending on the nature of the risk:
- Location of property
- Registration of vehicles
- Country of residence in which you took out the travel policy
- Anything else that doesn’t fall into the above categories
Download our recent location of risk rules webinar to learn about the rules in more detail.
2.Class of business
A class of business is basically the category the risk falls under. Within the EU there are 18 classes of non-life business, ranging from accident and motor to miscellaneous financial loss and general liability.
The EU provides brief descriptions of each of these classes as well as some specific examples. The information is used by local tax authorities as guidance when implementing their own tax legislation.
Local rules vary so it’s important to understand your insurance policies to ensure the correct and relevant class of business is applied. Some policies may include more than one class of business which will affect the proportions of the premium that relate to each business class.
Our blog, Three Key Steps to Apply IPT on New Lines of Business is a useful resource.
Having determined the location of risk and the correct class of business the next step is to determine the taxes that apply and need settling.
Tax rates across the EU are fragmented and there are even more variations when you look at the varying tax rates within a jurisdiction. For example, in Spain you have an IPT rate applied at 6% yet you might also have some extraordinary risks surcharges calculated at 0.0003%.
Also consider who must carry the cost of these taxes. Is it the insured or the insurer? In most cases it’s the insurer’s responsibility, however it can fall to the policyholder.
- Insurer borne taxes generally can’t be shown to the policyholder and are therefore a cost to the insurer
- Taxes borne by the insured must be shown on policy documents, so the policyholder knows what taxes they are liable for.
Key to being able to determine which taxes and what rate to apply is having access to reliable software.
Download our ‘Back to basics’ webinar, to learn more about how to calculate taxes.
4.Declaration and payment
Here again the rules vary country by country around the frequency for declaring and settling liabilities. They can be monthly, quarterly, bi-annually and annually. Failure to declare within the deadline will result in penalties and/or interest so knowing the deadlines for each return and when payment must be made are crucial.
Some tax authorities have strict rules and are quick to enforce them. Others are more lenient dealing with penalties on a case by case basis, and some (such as the UK) take a behaviour led approach where full disclosure and cooperation could lead to a far reduced penalty.
5.Additional reporting – will IPT follow where VAT leads?
Tax authorities across the world are taking a more granular approach to tax reporting to prevent fraud and reduce the tax gap. With VAT mandates in place across Latin America and more recently spreading into Europe and Asia, the VAT gap is reducing. So as governments transition to digital tax compliance wanting more data and faster, you can expect IPT will in time follow. The Spanish authorities, for example, have already started on this journey with the introduction last year of new digital reporting requirements for Extraordinary Risk Surcharges.
To stay ahead of the curve, the more prepared you are today the easier it will be to face the challenges that lie ahead as the pace of change in digitising tax compliance increases.