As some countries either introduce or consider introducing mandatory natural catastrophe insurance (e.g., Italy this year), France is ahead of the curve.
This is because France already has a specific compensation scheme in place for coverage of property against natural disasters, and has had one since 1982. The importance of the scheme is clear, as it is based on a statement in the preamble to the 1946 Constitution that French citizens are united and equal in bearing the burden of natural disasters. It is often referred to as the CATNAT or NATCAT regime.
Unlike in some countries where mandatory natural catastrophe insurance may be limited to insurance of buildings, various types of insurance are within the remit of the CATNAT regime in France.
First and foremost, damage to property coverage (both fire damage and any other damage to property) triggers the insured’s entitlement to cover against the effects of natural disasters. This is extended to damage to motor vehicles and, separately, also operating losses caused by damage to property.
It is worth highlighting that insurers providing these types of insurance must include a clause in their contracts outlining their coverage of natural disasters. Any provision to the contrary is invalid.
Insurers collect an additional premium (the so-called CATNAT premium) representing the coverage of natural disasters at a rate set in law and based on the type of insurance, subject to exemptions. Following a change in January 2025 due to increased costs caused by climate change, the premium rate for property damage is now 20%, whilst there are rates of 9% and 0.75% in the case of motor coverage.
Insurers have a choice on what to do with this premium amount. They can choose to retain it themselves, in which case they are responsible for compensating policyholders for damage caused by natural disasters. Alternatively, they may opt to utilise the private reinsurance market. Finally, and most significantly, there is also the option for insurers to reinsure the premium with the state-backed reinsurance body, Caisse Centrale de Réassurance (CCR).
CCR only provides cover in the event of genuine natural disasters, as defined by their exceptional intensity. Floods and earthquakes typically satisfy this, whereas storms and hail do not as the insurance market can cover them as normal. Where CCR does provide compensation, it offers unlimited reinsurance coverage.
The CATNAT premium is subject to premium tax treatment, meaning that it also attracts IPT. Additionally, an additional insurer-borne levy due on property risks is calculated as 12% of the CATNAT premium. These are the contributions to the Major Risk Prevention Fund (or Fonds Barnier), which are included on the IPT return.
Sovos is well placed to assist both in identifying whether a particular policy is within the scope of the CATNAT regime and with the ultimate declaration and settlement of the taxes due on the CATNAT premium.
France is one of the most challenging countries in Europe when it comes to the premium tax treatment of motor insurance policies. This is mainly due to the variety of taxes and charges that can apply and the differing treatment of different vehicle types.
This blog provides all the information you need to know about the correct treatment in France.
As with our dedicated overviews of the taxation of motor insurance policies in Spain, Norway, Italy and Austria, this blog will focus on the specifics in France. We also have a blog covering the taxation of motor insurance policies across Europe.
First and foremost, Insurance Premium Tax (IPT) applies to motor insurance provided in France. The rate can vary (rates correct as of December 2024):
Class 3 motor cover is treated as a form of property coverage within the scope of contributions to the EUR 6.50 Common Fund for Victims of Terrorism when located in France. There is also a requirement to collect a CATNAT premium (with specific rates for motor coverage which are increasing from January 2025). IPT and contributions to the Major Risk Prevention Fund are due on this premium.
Compulsory class 10 cover triggers National Guarantee Fund contributions. This currently results in three separate rates applicable to premiums, set at 1.2%, 0.8% and 0.58%, respectively.
Finally, it is worth noting that class 3 or 10 coverage of vehicles used for agricultural operations may be excluded from the scope of contributions to the Major Risk Prevention Fund. They do, however, result in separate contributions of 11% due to the National Agricultural Risk Management Fund.
The majority of taxes and charges on motor insurance policies in France are calculated as a percentage of the taxable premium and are directly charged to the insured. There are some exceptions, though.
Where applicable, the 0.58% National Guarantee Fund contribution and contributions to the Major Risk Prevention Fund are both insurer-borne so do not result in direct additions to the premiums charged to the insured.
The EUR 6.50 contributions to the Common Fund for Victims of Terrorism are a fixed fee and apply to each insurance contract per annum – regardless of the premium value.
It should also be noted that the IPT treatment of motor insurance can be extended to include ancillary coverage, such as passenger accident cover. This is because the IPT treatment applies to risks of any nature relating to land motor vehicles. It is important to assess each risk to determine whether it is considered a risk related to land motor vehicles as this can be a contentious area in French law.
Electric vehicles are subject to an IPT exemption, albeit this was amended from January 2024 so that 75% of the premium was treated as exempt (with the remaining 25% being taxable as normal).
A 75% exemption applies to insurance incepting in 2024 for vehicles registered in 2024, but only in relation to the first insurance contract following the vehicle’s registration up to a maximum of 24 months. There is no law currently in effect extending this treatment for vehicles registered in 2025, so such vehicles will not benefit from the 75% exemption as it stands.
Coverage of any nature relating to commercial agricultural vehicles and commercial vehicles greater than 3.5 tonnes benefits from a full IPT exemption, except compulsory class 10 coverage. However, this does not provide an exemption from the applicability of the parafiscal charges mentioned above.
If you still have questions about the taxation of motor insurance policies or IPT in France, speak to our experts.
On 21 May 2024, the Italian tax authority published a ruling (No. 110/2024) on the IPT treatment of warranty services provided in relation to the sale of used vehicles.
The ruling dealt with a scenario in which a company (the ‘Applicant’) provided warranty services to dealers within the same company group, with the latter offering these warranties to the purchasers of the vehicles. The Applicant also separately entered into insurance contracts with an insurance company to obtain coverage for the costs it incurred in repairing the vehicles sold when required under the terms of the warranty.
The insurance contract concluded between the Applicant and the insurance company would only be subject to IPT in Italy if the policyholder’s relevant establishment was located in Italy, in line with the location of risk rules.
More significantly, however, the ruling also addressed the warranty services provided by the Applicant to the dealers. For these, the ruling assessed that guarantees such as these do not satisfy the requirements of an insurance contract with an insurance company as the contracting party. The VAT treatment of this arrangement was outside the scope of the ruling, but it was conclusive in outlining that IPT does not apply to such an arrangement.
Comparing this ruling to the position in Germany highlights the possibility of a lack of harmonisation in this area without an EU-wide position.
Read our blog on general matters of IPT in Italy for additional information.
Following the publication of various circulars by the Federal Ministry of Finance in Germany in 2021, rules on the taxation of guarantee commitments were made effective 1 January 2023. This blog explains how this affects insurers and other suppliers.
The Ministry of Finance published its initial circular in May 2021. This was in response to a Federal Fiscal Court judgment. It concerned a seller of motor vehicles providing a guarantee to buyers beyond the vehicle’s warranty.
In these circumstances, the circular confirmed that the guarantee is not an ancillary service to vehicle delivery but is deemed to be an insurance benefit. As such, it would attract IPT instead of VAT – unless the guarantee is considered a full maintenance contract.
The circular did not prompt immediate concern within the insurance sector. Markets outside the motor vehicle industry weren’t concerned either. The presumption was that it was limited to the specific context of the motor vehicle industry.
Matters changed the following month. The Ministry of Finance clarified that the tax principles it outlined in fact applied to all industries. As a result, the scope of these rules became potentially limitless in Germany. All guarantees provided as additional products to goods or services sold are now within the scope of the application of IPT.
The clarification could impact industries like those organisations selling electrical items and household appliances.
The effect on traditional insurance companies should be relatively limited as they do not usually provide guarantees as part of the sales of goods and services. There could arguably be a significant impact on other suppliers that do provide such guarantees.
First and foremost, there is a potential increase in the cost of providing the guarantees caused by the application of IPT. Unlike input VAT, a supplier cannot deduct IPT from its taxable income – it must either increase prices to compensate or accept a less favourable profit margin.
Any companies that purchase the guarantees cannot reclaim the IPT either, as they can do with VAT. The standard IPT rate of 19% in Germany is high compared to most European countries. This exacerbates these issues.
There are also practical considerations to bear in mind for suppliers obliged to settle IPT with the tax authority. They are presumably required to be registered for IPT purposes like insurers, although the Ministry of Finance has not formally confirmed this.
Perhaps more difficult is the issue of licensing. The Ministry of Finance circulars focus on taxation, leaving it unclear whether other suppliers are now required to obtain a license to write insurance under German regulatory law.
Looking for more information on general IPT matters in Germany? Our German IPT page can help.
There is a wide variety of indirect taxes and parafiscal charges that apply to the different elements of coverage that can be included under a motor insurance policy in Spain. You can read our blog to learn more about taxation of motor insurance policies in Europe, this blog focuses on some of the specifics to consider in Spain.
The application of Insurance Premium Tax (IPT) and a surcharge to finance winding-up activity are common across all classes of insurance typically found in a motor insurance policy, with the latter being declared to Consorcio de Compensación de Seguros (“Consorcio”). For coverage such as roadside assistance and legal protection, this is likely to be the extent of the taxes due.
Additional Consorcio surcharges are due on other elements of the cover. For example:
Most motor insurance taxes and parafiscal charges are calculated as a percentage of the taxable premium. These taxes are then added to the premium and charged directly to the insured.
There are some exceptions including direct damages surcharge and fixed fees. The direct damages surcharge applicable to accident coverage is a percentage that applies to the sum insured rather than the taxable premium.
Additionally, there are fixed fees due to Consorcio on motor damage and motor third-party liability coverage that vary based on the type of vehicle. Categories with their own fixed fee include mopeds, passenger cars, and industrial vehicles, amongst many others.
The fixed fee for the Green Card should be treated as insurer-borne and is therefore not a cost directly passed onto the insured.
Spain has a fairly narrow scope for any IPT exemption under a motor insurance policy in comparison to other European jurisdictions.
As a rule, there are currently no exemptions that apply to particular categories of vehicle but there is an exemption for certain international coverage. In the case of any goods in transit insurance relating to cross-border transport that is included under a motor policy, that portion can be treated as exempt from IPT. The Consorcio Surcharge to Finance Winding-up Activity would remain applicable in these circumstances though.
Still have questions about taxation of motor insurance policies or IPT in Spain? Speak to our experts.
Much of the discussion on the Location of Risk triggering a country’s entitlement to levy insurance premium tax (IPT) and parafiscal charges focuses on the rules for different types of insurance. European Union (EU) Directive 2009/138/EC (Solvency II) set out these rules. However, a related topic of growing importance in this area concerns territoriality, i.e. the geographical scope of taxing policies and the different approaches taken by countries in Europe.
It is important to note that this topic should not lead to double taxation for policies involving EU insurers and EU risks becoming an issue as this would be in contravention of Solvency II. It is more that a lack of consistency of geographical scope application across Europe could lead to cases of insurers being unsure of whether some policies should be taxed and where this should be.
There are several fixed energy installations that are commonly situated offshore from a given country. Examples of these are oil rigs, gas platforms and wind farms. The current push towards renewable energy sources could see countries increase their use of wind power in particular. This could lead to an increase in fixed energy installations in future.
These types of offshore installations are expensive forms of property and there is a need for insurance to provide coverage for any damage suffered. Coverage would also typically include associated liability, business interruption, and other financial loss coverage.
Based on the rules at EU level, insurance relating to offshore installations is generally interpreted as taxable in the country the property is situated. This is because they fall within the definition of being a building if they’re fixed to the seabed. This raises the question of when to consider an offshore installation as situated in a country.
In some European countries, the position is fairly clear. For example, for IPT purposes the territorial scope of the United Kingdom (UK) consists of Great Britain, Northern Ireland, and waters within 12 nautical miles of their coastline (its territorial sea). As such, insurance for installations within this territorial scope is taxable in the UK, whereas anything beyond the 12 nautical miles is not.
Some countries like Germany refer in their IPT law to the country’s exclusive economic zone (EEZ). The United Nations Convention on the Law of the Sea establishes this zone, mandating it can be no more than 200 nautical miles from a country’s coastline. Again, the taxability in these countries is simple based on an application of the limit in place.
There has been a lack of clarity in those countries where the IPT legislation does not make reference to any geographical scope. In the past insurers may have interpreted this as a country’s decision not to tax offshore risks. There are obvious concerns with this presumption if the tax authority becomes aware of insurance provided within its territorial sea or EEZ but without any tax payment. The waters are further muddied if legislation for other taxes (like VAT) refer to one of these limits as there is an argument that this limit could be extended to apply to IPT as well.
We are aware of an ongoing court case within an EU jurisdiction on the applicability of IPT to policies covering offshore installations. It may be several years before the outcome of the case is known if it goes through the appeals procedure, potentially up to the European Court of Justice. In the meantime, insurers may consider taxing offshore policies even where the geographical limit of a country is not defined in its IPT law. This is with a view to avoiding any such dispute themselves.
Need to discuss IPT and territoriality further? Sign up for our webinar IPT: Location of Risk and Territoriality in the EU on 8 June 2023.
Drone usage has increased significantly in recent decades, far beyond their initial use in the military.
They can be expensive themselves and, equally, can also cause damage to other parties or property, which is why many people and companies choose to insure them. This blog considers the insurance premium tax (IPT) and parafiscal charge treatment of drone insurance.
Sometimes called an unmanned aerial vehicle or UAV, a drone is an aircraft without any human pilot, crew or passengers on board. People can use drones for either commercial or recreational purposes.
Drone insurance is an example of packaged insurance and can include coverage under many regulatory non-life insurance classes.
Although not an exhaustive list, some of the classes of insurance set at the European Union (EU) level that we may see in such insurance are:
As an example of a packaged insurance policy, drone insurance is taxed based on each element of cover. Insurers should therefore apportion their premiums and tax each element accordingly, potentially resulting in many different tax rates in a given country.
First and foremost, it is essential to determine the registered territory of the drone – if it has one. If registered, the location of risk is reasonably straightforward under EU rules. Any IPT or parafiscal charges due will be in the Member State of the registration of the drone because it is considered a type of vehicle, namely an aircraft.
The issue is more complicated when a business or individual has not registered a drone in any country. This is the case with most drones used for commercial purposes if they are under a specific weight threshold. Parallels can be drawn with space insurance here, as the policy can have different risk locations for different coverages.
Any liability or miscellaneous financial loss coverage is taxed where the policyholder has their habitual residence or in the case of legal persons where they have their establishment.
Property coverage, including the storage of a drone in a building for more than the market practice of 60 days, is taxed where the property is situated.
Any coverage relating to the transportation of a drone to and from different locations is a goods in transit risk. The location of risk depends on whether a business or individual is using the drone for commercial or recreational purposes.
If used for commercial purposes, the location of risk should be where the policyholder has their habitual residence or establishment. If used for recreational purposes, then – under EU location of risk rules – the drone should theoretically be treated as movable property taxable in the Member State where it is situated – if it is contained in a building there.
Looking for more information on drone insurance? Speak to our expert team.
Following the publication of various circulars by the Federal Ministry of Finance in Germany in 2021, rules on the taxation of guarantee commitments were made effective 1 January 2023. This blog explains how this affects insurers and other suppliers.
The Ministry of Finance published its initial circular in May 2021. This was in response to a Federal Fiscal Court judgment. It concerned a seller of motor vehicles providing a guarantee to buyers beyond the vehicle’s warranty.
In these circumstances, the circular confirmed that the guarantee is not an ancillary service to vehicle delivery but is deemed to be an insurance benefit. As such, it would attract IPT instead of VAT – unless the guarantee is considered a full maintenance contract.
The circular did not prompt immediate concern within the insurance sector. Markets outside the motor vehicle industry weren’t concerned either. The presumption was that it was limited to the specific context of the motor vehicle industry.
Matters changed the following month. The Ministry of Finance clarified that the tax principles it outlined in fact applied to all industries. As a result, the scope of these rules became potentially limitless in Germany. All guarantees provided as additional products to goods or services sold are now within the scope of the application of IPT.
The clarification could impact industries like those organisations selling electrical items and household appliances.
The effect on traditional insurance companies should be relatively limited as they do not usually provide guarantees as part of the sales of goods and services. There could arguably be a significant impact on other suppliers that do provide such guarantees.
First and foremost, there is a potential increase in the cost of providing the guarantees caused by the application of IPT. Unlike input VAT, a supplier cannot deduct IPT from its taxable income – it must either increase prices to compensate or accept a less favourable profit margin.
Any companies that purchase the guarantees cannot reclaim the IPT either, as they can do with VAT. The standard IPT rate of 19% in Germany is high compared to most European countries. This exacerbates these issues.
There are also practical considerations to bear in mind for suppliers obliged to settle IPT with the tax authority. They are presumably required to be registered for IPT purposes like insurers, although the Ministry of Finance has not formally confirmed this.
Perhaps more difficult is the issue of licensing. The Ministry of Finance circulars focus on taxation, leaving it unclear whether other suppliers are now required to obtain a license to write insurance under German regulatory law.
Looking for more information on general IPT matters in Germany? Speak to our expert team. For more information about IPT in general read our guide for insurance premium tax.
The Dutch government issued an updated Policy Statement for Insurance Premium Tax (IPT) on 12 May 2022. The first of its kind since February 2017, the update is intended to replace the 2017 version in full. While the majority of the content remained consistent, there were notable details pertaining to Netherlands storage insurance and ‘own transport’ insurance. These changes will be effective from 13 May 2023.
The change extends the scope of storage insurance that can still be regarded as goods in transit insurance, increasing from storage of up to one month to three months. It may even be possible to show goods in transit insurance applies for storage greater than three months, but the onus is on the insurer to prove an absolutely necessary connection between storage and transport.
It’s general market practice in the EU to consider storage of up to 60 days as being part of the goods in transit coverage, making the Dutch approach more flexible in this regard. Any goods stored beyond the 60 days are treated as a property risk, taxable where the goods are located and not where the policyholder has their establishment.
It’s useful to consider this change from the perspective of both IPT rate application and location of risk. In terms of the former, the IPT exemption applicable to all goods in transit insurance in the Netherlands widens this exemption to policies involving longer periods of storage.
Regarding location of risk, the relevant provisions in EU Directive 2009/138/EC determine that in the case of goods in commercial transit risks, the risk location (and therefore the country entitled to levy IPT and/or associated levies) is the policyholder’s establishment to which the contract relates. Where storage insurance does not constitute goods in commercial transit, the risk location is the location of the property itself.
As a result, goods stored in the Netherlands for more than three months as part of a transport policy will generally be taxable there, even where the policyholder’s establishment is elsewhere. Whereas goods stored in the Netherlands for less than three months will not be taxable in the country (unless the policyholder’s establishment is also in the Netherlands).
The other key takeaway from the Policy Statement was on the subject of ‘own transport’. This is defined as transport ‘where no transport company is contracted, but commercial transport is involved’, confirming the exemption for transport insurance is equally applicable to scenarios where companies arrange for the transportation of commercial goods for their own benefit. As such, the exemption is not restricted to third-party contractors utilised for the transport.
The Policy Statement also states the exemption applies to:
However, the exemption does not apply to insurance of own goods which, although transported are not for the sole purpose of transferring it to another place of destination. This could include the tools of a contractor that are stored in his delivery van.
The changes outlined above are relatively minor given they relate solely to goods in transit business. One more fundamental change that had been mooted as a possibility was for the Netherlands to introduce stricter rules on the application of IPT to non-EEA risks, as we saw in Germany at the end of 2020.
The scope of the changes in Germany caused considerable confusion in the market at the time so it’s possible the Dutch government has put any potential plans on hold for now. This will be an interesting issue to monitor as countries seek out alternative ways to generate tax income.
Want to understand more about how these changes affect your business? Get in touch with our team of experts to see how Sovos can help ease your IPT compliance burden.
Identifying the location of risk for Insurance Premium Tax (IPT) purposes is the first step to ensuring IPT compliance in a given territory. This area perhaps isn’t as straightforward as it first seems for marine insurance.
As with the location of risk rules for all classes of insurance in Europe, the starting point for marine insurance is the Solvency II Directive (2009/138/EC), in particular Article 13(13). Article 13(13)(b) refers to ‘vehicles of any type’, which is generally understood to include not just motor vehicles but also ships, yachts and aircraft within its scope. Based on this, the location of risk for marine insurance is identified by the ‘Member State of registration’. As this phrase is not defined in the Directive, there has been some confusion about what ‘registration’ refers to in this context. This is illustrated nicely by a case heard in the European Court of Justice (ECJ) in April last year.
This case involved insurance contracts with companies established in Germany and entered into the register of companies held by the District Court in Hamburg. The owners entered the vessels into the shipping register maintained by the same court in Germany. The case arose because the vessels were temporarily authorised to fly the national flags of Malta and Liberia. The German tax authority argued that German IPT was due on these contracts because the vessels remained on the German shipping register throughout the flagging out period.
In contrast, the insurer contested that the risk location should be determined by the Member State that certified that the ship is fit for use and whose flag the ship flies. Malta treats marine insurance as exempt from its Stamp Duty regime, so if the insurer was successful with its argument, then no taxes on its insurance premiums would be due in the European Union.
The ECJ held that the location of risk was in Germany despite the temporary flagging out of the vessels. This decision was because the vessels remained on the Hamburg District Court’s register, which had the primary function of proving ownership. As the owner has the primary interest in insuring the vessel to protect their financial interest in it, the register evidencing ownership was key.
It is worth highlighting that it is unclear how much weight should be placed on this case. This is for a couple of reasons. Firstly, the Ordinance for the implementation of the relevant German legislation refers specifically to ‘shipping registers kept by the local courts’ as being determinative, which differs from the position of other territories. Additionally, a significant issue not addressed by the case is what happens when a Member State doesn’t have a shipping register.
We at Sovos haven’t seen a major shift in the approach taken by insurers since the judgment, meaning in many instances that the ship’s flag is continuing to be seen as pertinent by the market. It will be interesting how the ECJ deals with similar future cases.
We’re happy to help any insurers writing business in Europe that have questions about the location of risk rules, whether concerning marine insurance or any other insurance to ensure taxes are correctly declared.
Contact Sovos’ team of experts for help complying with marine location of risk rules or download our Location of Risk Rules for IPT eBook for more information.
Identifying the Location of Risk in the case of health insurance can be a tricky subject, but it’s also crucial to get it right. A failure to do so could lead to under-declared tax liabilities in a particular territory and the potential for penalties to be applied once these deficits are identified and belatedly settled. We examine the situation from a European perspective.
The starting point in this area is the Solvency II Directive (Directive 138/2009/EC). Notably, Article 13(13) outlines the different categories of insurance risks that are used to determine risk locations. As health insurance doesn’t fall within the specific provisions for property, vehicles and travel risks, it is dealt with by the catch-all provision in Article 13(13)(d).
This Article refers to the ‘habitual residence of the policyholder’ or, where the policyholder is a legal person, ‘that policyholder’s establishment to which the contract relates’. We will consider these scenarios separately, given the distinction between individuals and legal persons.
For natural persons, the situation is generally straightforward. Based on the above, the key factor is the habitual residence of the policyholder. The permanent home of the policyholder tends to be relatively easy to confirm.
More challenging cases can arise where someone moves from one risk location to another. For example, when an individual purchases insurance in a particular country, having lived there for a significant period before moving to another country soon afterwards, the Location of Risk will be the original country. As EU legislation does not go into detail on the point, examples of no apparent habitual residence will be dealt with on a case-by-case basis.
In this scenario, we have to consider the ‘policyholder’s establishment to which the contract relates’ in the first instance. The establishment is treated quite broadly, as evidenced by the European Court of Justice case of Kvaerner plc v Staatssecretaris van Financiën (C-191/99), which pre-dates Solvency II.
Notwithstanding the above, the habitual residence of the insured should be used to identify the risk location even where the policyholder is a legal person in certain circumstances. This will occur when the insured is independently a party to an insurance contract, giving them a right to make a claim themselves rather than through the corporate policyholder.
This logic can also potentially be extended to dependents of the insured person added to the policy and who can also separately claim under the contract. They will also create a risk location, although this will often be in the same country as the insured person. Ultimately, the compliant approach will be dictated by the overall set-up of the policy.
If any insurers writing business in Europe have any questions on the location of risk rules, whether concerning health insurance or any other insurance, then Sovos is best placed to provide advice to ensure taxes are being correctly declared.
Contact us for help with complying with health insurance location of risk rules or download our Location of Risk Rules for IPT e-book for more information.
A tax authority audit can come in various forms, whether it be directly to the insurer itself or indirectly through a policyholder or broker.
It can be targeted, for example, where an insurer has been specifically identified to be investigated due to a discrepancy on a tax return, or it can be indiscriminate in its nature as part of a wider exercise being carried out by an authority.
Whatever form the audit takes, the key to responding is in the preparation beforehand.
First and foremost, insurers should ensure they are retaining copies of evidence that can be used to justify the tax amounts declared and settled. This may include the insurance contracts themselves, the invoices issued to policyholders and a record of their data that comprises the declarations that have been made.
It’s worth noting that in Italy there is a formal requirement to maintain IPT books which detail each of the premiums received during each annual period. Although this is not necessarily a specific requirement in other countries, applying this approach to all premiums received will put an insurer in a strong position if an audit is carried out.
Further documentation demonstrating compliance is also useful. If external advice has been sought, e.g., to determine the appropriate class of business for a policy and the consequent tax application, then retaining a record of this advice is advised in case this is required later.
There may be cases where a tax authority’s advice has specifically been sought and such correspondence will inevitably hold considerable weight if tax treatment is queried during a subsequent audit. Documentation of any processes in place to ensure compliance is also valuable.
As statutory limitation periods vary across jurisdictions, evidence should be kept as long as is practicable (subject to relevant data protection laws where applicable) so that it can be produced if an audit takes place.
In the digital age, this practice should hopefully not seem overly burdensome. It’s worth referring to the penalty regimes in place in some countries to put the potential repercussions of an unsatisfactory audit into context.
The UK is an example of where a behaviour-based approach to determining penalties is used, with the highest level of penalties reserved for cases of deliberate and concealed undeclared tax where the authority itself has prompted the declaration.
Lower penalties (or indeed no penalties at all) will be levied where reasonable care is taken, and reasonable care will be far more likely to be considered to have been taken where records are kept in the ways described.
Audits can happen at any time so it’s important insurers have taken the necessary steps to ensure information and data to demonstrate compliance is available to the tax authority when requested.
Ensuring the accurate and timely submission of tax returns is likely to reduce the possibility of a targeted audit. The IPT managed services team at Sovos has a huge amount of experience with tax filings in the UK and across Europe and has assisted many insurers with unexpected audits.
Get in touch with Sovos today about the benefits a managed service provider can offer to ease the burden of IPT compliance.