Insurance Premium Tax (IPT) in Luxembourg moved to online filing from the first quarter 2021 submission. Alongside this, they also changed the authority deadline to the 15th of the month following the quarter. This change caused some upheaval as many insurance companies were already pulling data from the underwriting systems, reviewing the information (sometimes manually), and ensuring the declarations would be correct for other territories also due by the 15th.
Luxembourg wasn’t the first or last territory to move to an online platform. Germany and Ireland followed within a year of Luxembourg’s implementation. In contrast, French authorities have delayed implementing their online filing process until 2023. Additionally, more tax authorities require accounts for Direct Debit set up rather than the usual SEPA or priority payments being made with specific references.
It’s clear why tax authorities are moving to online platforms. Having a digital filing process is an easier and more efficient process for what could be thousands of declarations being submitted by various sources. Plus, online filing gives tax authorities greater visibility, meaning they have more opportunities for analysis. What puzzles us, is why so many tax authorities choose to have their deadlines on or around the 15th? This deadline only provides a short timeframe for insurance companies to close the month, pull the data and make the declarations.
Apart from these updates, Luxembourg hasn’t implemented many changes in the past, regarding IPT. The most recent that we can recall is the introduction of the Tax for Rescue Services on Motor Class 10 policies, which came into effect on 1 October 2016. As the tax rates are relatively low compared to other territories, it’s entirely plausible that we could see a future increase.
IPT is a niche tax that isn’t always at the forefront of the business radar. It wasn’t until we began to look at the actual process of filing the online declarations did we realize that the process is an adaption of what is used for VAT and other taxes or designed around domestic insurers rather than freedom of services. At least that’s what it seems for Luxembourg.
Over the past year, we have found that the online filing system has become quicker and easier to navigate, with the delays between authentication of a declaration taking seconds rather than minutes. The declaration is still similar to what was submitted on the paper form, breaking down the liabilities per class of business, entering the premiums and then an automatic application of the percentage rate.
Is this the end of territories moving to an online filing solution? Probably not. Will there be more digitization from tax authorities to bring IPT in line with most other tax reporting? We think so.
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In Insurance Premium Tax (IPT) compliance, the Aviation Hull and Aviation Liability policy is defined under Annex 1, Classes of Non-Life Insurance, as described in DIRECTIVE 138/2009/EC (SOLVENCY II DIRECTIVE).
But there are variations and identifying which class the policy is covering can be a challenge.
This article will cover what insurers need to know about Aviation Hull and Aviation Liability policy and what IPT rate to apply.
Aviation can fall under Class 5, Class 11 or General Liability.
There are five different variations of an Aviation policy, either taken out individually or in combination. Although the descriptions vary, the most referred to are:
Class 5 Aviation policies are focused on the hull and physical aspect of the aircraft, whereas Class 11 Aviation Liability mainly covers the public and passengers or damage to property owned by third parties.
Defining between Aviation Liability Class 5 and 11 can be a headache. As aviation policies can include a combination of liabilities, it can be difficult to know the correct classification to apply.
Some tax authorities have recognised this and applied similar rates for both, but there are exceptions.
For example, in Hungary Class 5 is considered CASCO , which stands for Casualty and Collision (automobile insurance). So, it has a higher IPT rate of 15% whereas IPT for Class 11 on Aviation Liability is 10%.
There are also parafiscal taxes to consider. These mainly come into effect when the policy includes a fire element. But as always there are exceptions – in Greece both classes are exempt from IPT, but TEAEAPAE (or Pension Fund) can be due on Class 5 Aviation when cover includes the maintenance of the aircraft.
Once the correct class of insurance has been applied to the policy, an additional reference to an AVN clause is made.
AVN clauses are additional to the main risk and more specific than some of the other coverages, which are also included in aviation contracts. There are over 214 AVN clauses and most fall under Class 13 General Liability.
The last piece of the puzzle is how to report a policy document that could have up to three different classes.
The territory could have apportionment rules, meaning an insurer could benefit from some of those exemptions. Some insurers choose to take the prudent approach and apply the highest rate from the three classes to avoid noncompliance or penalties.
For most insurers, classification of an aviation policy is only the beginning of the journey. There are other considerations such as location of risk rules outside of Europe, which can mean double taxation, or exemptions depending on the use of the aircraft.
To ease the burden on compliance, many insurers work with a managed service provider with IPT expertise.
Get in touch with Sovos about the benefits a managed service provider can offer.
It’s difficult to pinpoint exactly when new taxes or tax rate increases will happen. Covid-19 has impacted almost everything, including a massive deficit in the economy. Many banks have applied negative interest and governments have put funding in place to aid recovery. It’s highly likely that tax authorities will be looking at ways to bring in additional funding, including Insurance Premium Tax (IPT) rate increases.
Some of the steepest increases across Europe can be recognised not as an instant from one rate to another but a gradual incline.
The Dutch IPT regime is one of the highest rates across Europe, currently at 21%. Until 2008, the IPT rate was 7% and raised in various stages, finally settling at 21% in 2013. An increase of 14% in a five-year period!
Why the sudden rate increase? Was it because the Dutch tax authorities realised theirs was one of the lowest rates in Europe? Was it due to the economic climate at the time to gain extra revenue? Or was it because tax authorities were beginning to realise IPT was becoming a more recognised tax?
The Netherland’s isn’t the only country to have experienced a dramatic IPT rate increase over a short period of time.
HMRC, the UK tax authority, has also taken the opportunity to implement more rigorous increases, especially with their standard rate. In 2011, the rate increased to 6%, increasing at various intervals until stabilising at 12% in 2017. The rate doubled in a five-year period!
The similarity between the two territories and the way they have increased their rates is uncanny. The five-year structure of rate changes either by 1 or 2%, ultimately reaching much higher rates than initially expected in the market. Looking back at the economy during the time of the increase, Europe was beginning to recover from a recession that hit most territories hard with rising interest rates on loans and mortgages and increased unemployment.
There are changes in the market now that could influence IPT rates. Many insurance companies have increased the scope of insurances offered. Classes of business are more varied and premiums quoted are higher. Emphasis is on ensuring the invoicing is correct with the insurer versus carefully considering insured taxes.
Many territories now require more granular detail for submissions. Will this trigger more audits? Will it cause more tax authorities to analyse this information to enforce their penalty regimes? Or will there be a number of rate increases across the board? Increases could begin at 1 or 2% and follow the trend of five years as set out above. Either way, there is a financial gap which will need to be filled.
We’ll be keeping a close eye on the latest Insurance Premium Tax rate updates to see how tax authorities respond to this current economic climate.
Get in touch about the benefits a managed service provider can offer to ease your IPT compliance burden.