Frequently Asked Questions: Calculating Insurance Premium Tax Liabilities

Elliot Shulver
September 8, 2020

Accurately calculating Insurance Premium Taxes (IPT) across Europe can be a challenge, especially when there are inconsistent methods of calculations and a vast array of taxes to understand.

Our recent webinar How to accurately calculate IPT liabilities sheds light on the challenges insurers face in ensuring accurate calculations, the various calculation methods different territories use for IPT and examples of the more complex calculations that insurers face daily.

We’ve rounded up our five most frequently asked questions relating to complex tax calculations.

Is IPT always an additional cost for the policyholder?

IPT can be either borne by the policyholder as an additional cost, or it can be paid indirectly by building the tax cost into the premium cost.

In the first case, the insurer usually discloses IPT to the policyholder in the insurance contract and/or the invoice. In the second case, the premium is inclusive of tax and is effectively a deduction from the premium.

Are there any other methods of calculation you’re aware of?

As far as we are aware there are no other IPT calculation methods used by countries within Europe other than the following:

  • Taxable Premium x Tax Rate
  • Number of Policies x Fixed Fee
  • Sum Insured x Tax Rate
  • Sliding Scales
  • On request application

As mentioned in the webinar some countries combine methods either within one tax (e.g. Malta – Stamp Duty) or within taxes that apply to one class of business (e.g. France – Property Damage).

What are the consequences of an incorrect calculation?

If a tax return with an incorrect calculation has been submitted, depending on the country and tax office there are ways to correct it. For example, in Germany, if it’s realised a mistake has been made, a corrective return needs to be issued alongside a covering letter explaining the error for tax authorities to review. It works in the same way when tax authorities discover a mistake. They would inform the taxpayer in a letter about actions or steps needed to rectify the mistake. In the UK it’s possible to correct an error in the next quarterly submission. The most important thing is to react accordingly, otherwise fines might be imposed and a taxpayer could be audited or there might be even more severe consequences.

Where would the location of risk for goods in transit be if you are moving your goods internationally (UK to German)?

Solvency II Directive (2019/138/EC) of 15 November 2009, Article 13 (13) and Article 157, determines in which territory risks are deemed to be located. Goods in transit are not explicitly covered by points a) b) or c) of Article 13 (13) therefore paragraph (d) of Article 13 shall apply. As a result, the location of risk rules shall be determined by the:
(i) habitual residence of the policyholder or
(ii) if the policyholder is a legal person, that policyholder’s establishment to which the contract relates.

Who is liable to justify the allocation method to the tax office?

In the allocation there are three different parties involved: brokers, policyholders and insurers. They all have an interest in providing the correct allocation method. The insurer however is the one automatically liable, and if the allocation isn’t correct, then they will be the one likely to face penalties.

In most countries there is no clear definition, or even guidance, as to the method a taxpayer should adopt. The current position seems to favour a self-determination approach to premium allocations, putting the onus on the taxpayer to devise a method which is fair and justifiable to tax authority.

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Author

Elliot Shulver

Manager, IPT compliance for indirect taxes at Sovos. With 6 years’ experience of indirect tax, including IPT, VAT and Gambling Duties and part qualified chartered accountant, Elliot is responsible for our Consultancy practice, as well as providing regulatory updates for our global compliance solution suite.
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