Location of Risk: Goods in Transit Insurance Premium Tax

Russell Brown
October 1, 2021

Goods in transit insurance is defined in the Solvency II Directive 2009/138/EC (25 November 2009) within Annex I Classes of Non-Life Insurance under class 7. It includes merchandise, baggage, and all other goods and the insurance relates to all damage to or loss of goods in transit or baggage, irrespective of the form of transport.

This is quite a wide definition and covers transit over land either by road or rail, or by air or sea, where in the latter cases these coverages are called aviation or marine cargo.

Location of risk for goods in transit

In most cases, the location of risk for insurance premium tax (IPT) purposes will be where the goods are situated, but in the European Economic Area (EEA) this is not the case.

Article 157 Taxes on premiums of the Solvency II Directive makes it clear that moveable property contained in a building situated within the territory of a Member State shall be considered as a risk situated in that Member State, even where the building and its contents are not covered by the same insurance policy, unless the moveable property relates to goods in commercial transit.

In these scenarios, the location of risk defaults back to the general location of risk rules outlined in Article 13 (13) d) of the Solvency II Directive and is taxed in the Member State where the policyholder is resident. This will mean that if the policyholder is a legal person, then this will be where they have their establishment and where the location of risk from both a tax and regulatory position are aligned.

This is the case irrespective of whether the goods are in domestic or international transit. Goods are considered to be in international transit when their movement begins or ends outside of the territory. It can be necessary to apportion premiums in some cases if a policy covers both goods in domestic and international transit, as international transit cover is commonly exempt from IPT in many territories, whilst the domestic element is subject to IPT.

However, it can also be the case that in some non-EEA countries, it’s possible that the location of the policyholder’s establishment or habitual residence can create a location of risk irrespective of where the goods are physically located. Therefore, if the moveable property is in a different territory from the policyholder’s establishment or habitual residence, then it is possible that there may be two locations of risk for regulatory or tax purposes.

Storage insurance location of risk considerations

Determining location of risk can be difficult if it is unclear how long the moveable property will be kept in a territory.

It’s very common for storage insurance covering all physical damage to moveable property to be included with goods in transit insurance. This will usually become effective when it is in storage for more than 60 days. This time limit is the market practice for determining that it is no longer a goods in transit risk and has become a property risk under regulatory classes 8 (fire and natural forces) and 9 (other damage to property) instead.

Within the EEA, this can lead to variations in the location of risk. From a regulatory perspective the location of risk remains where the policyholder has their establishment or habitual residence whereas from a tax perspective the location of risk has now become where the moveable property is located as per Article 157 of the Solvency II Directive.

In effect, this means that when an insurer is arranging a policy containing goods in transit and storage cover they need to know where the moveable property is being stored, including if this is at third party warehouses, and ideally how long it will be there to ensure that they tax the policy correctly with regards to IPT.

In cases where the period of storage is uncertain in a country, then the default tax position used by insurers is to fall back on where the policyholder has their establishment or habitual residence. If it subsequently becomes clear that the moveable property has been in storage for more than 60 days in a territory, then a mid-term adjustment should be made to ensure that IPT is paid correctly in the territories concerned.

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Russell Brown

As senior consulting manager, Russell joined Sovos in 2021. A career spent in insurance premium taxes on global insurance programmes has given him many years of experience in handling compliance and advisory challenges from location of risk and IPT liability to co-insurance and financial interest clause cover. He has worked for financial service providers EY and TMF and more recently as head of indirect taxes at Tokio Marine HCC. He has been a member of both the ABI and IUA Indirect Tax Working Groups as well as being an active participant in regular Lloyd’s Indirect Tax Forums.
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