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 toa 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.

What information should be kept for a tax authority audit?

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.

The consequences of noncompliance

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.

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Get in touch with Sovos today about the benefits a managed service provider can offer to ease the burden of IPT compliance.

Insurance Tax Act reforms in Germany, effective from 10 December 2020, continue to cause uncertainty in the insurance market.

The main area of concern relates to the location of risk for Insurance Premium Tax (IPT) purposes. The reform can impact a policy taken out with either an EEA or non-EEA insurer where the policyholder is established in Germany, i.e. a German enterprise, permanent establishment, or corresponding institution, or an individual habitually resident in Germany, where the policy covers non-EEA risks.

These changes affect all classes of business and are irrespective of the physical location of any insured risk.

Double taxation with policies written by EEA insurers

If a policy for the German policyholder includes non-EEA countries, then German IPT is due not only on the premium allocated to Germany, but also to premiums allocated to the non-EEA countries as well. This could be in addition to any applicable premium taxes due in the non-EEA countries.

Therefore, double taxation is a possibility. However, if the policy includes other EEA countries, then German IPT cannot be charged on premiums allocated in these EEA countries.

Double taxation with policies written by non-EEA insurers

If a policy for the German policyholder includes both other EEA and non-EEA countries, then German IPT is due not only on the premium allocated to Germany, but also to 100% of the premiums allocated to all the other countries as well. This could be in addition to any applicable premium taxes due in all these countries. Therefore, again, double taxation is a possibility.

What is a ‘permanent establishment’ or ‘corresponding institution’ for German IPT purposes?

The law reforms did not clarify what is deemed to be a ‘permanent establishment’ or ‘corresponding institution’ that would bring a non-EEA risk to be within the scope of German IPT.

Guidance from the Federal Ministry of Finance (BMF) published on 4 March 2021 did confirm that a non-EEA branch of a German policyholder would be deemed to create a permanent establishment. But it was silent on whether the same applied for a non-EEA subsidiary.

Several scenarios were also included in this guidance to aid insurers and brokers with taxing policies correctly, but unfortunately there wasn’t one for this subsidiary scenario. The BMF issued a new version of their general leaflet on insurance tax and fire protection tax for EU/EEA insurers on 20 July 2021. This included a flowchart showing the changes in taxability of policies as a result of IPT law reforms, but the non-EEA subsidiary question is not specifically answered here.

The German Insurance Association (GDV) issued a Frequently Asked Questions (FAQs) document dated 28 April 2021 to help insurers understand the reforms in several areas, which included answering some questions around the treatment of non-EEA subsidiaries.

Whilst the answers appear to provide hope that these subsidiaries do not constitute a permanent establishment, there is a caveat at the beginning of the FAQs document: it says it is non-binding, and that every insurer can interpret and apply the statutory provisions (and the associated BMF letter from 4 March 2021) at their own discretion.

This means that if insurers don’t tax non-EEA subsidiaries based solely on this guidance, they could be left open to tax assessments later, where German IPT has not been charged. The FAQs document will continue to be updated, so it will be interesting to see if there is further clarity on this point in the future.

Ongoing uncertainty around double taxation

With this ongoing uncertainty, we understand that insurers have approached the tax authorities to obtain clarity. Responses indicate that non-EEA subsidiaries are not within the scope of the reforms, so double taxation should not occur.

Any such direct confirmation from the tax authorities on this matter will protect these insurers from future assessments. It also offers the possibility for IPT refunds to be claimed where it was charged on policies that should not have been taxed in the first place.

However, until this matter is publicly clarified, which includes further communication from the BMF, the likely position is that insurers and brokers will continue to use the current, prudent approach and charge German IPT in this scenario. This means that double taxation of policies will still occur.

Take Action

Need to ensure compliance with the latest IPT regulations? A managed service provider can help. Get in touch with our tax experts today.

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.

 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:

Next, check which rules apply. The EU’s four rules determine the correct jurisdiction depending on the nature of the risk:

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.

3.Calculating taxes

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.

Key to being able to determine which taxes and what rate to apply is having access to reliable software.

Register for our upcoming ‘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.

Take Action

Keep up to date with ever changing rules by subscribing to our blogs and following us on LinkedIn and Twitter. We also host regular webinars with our in-house specialists who are on hand to help.

Meet the Expert is our series of blogs where we share more about the team behind our innovative software and managed services.

As a global organisation with indirect tax experts across all regions, our dedicated team are often the first to know about new regulatory changes, ensuring you stay compliant.

We spoke to Wendy Gilby, technical product manager at Sovos, to find out more about her role developing Sovos’ Insurance Premium Tax (IPT) software to help customers meet the demands of a constantly changing regulatory environment.

How did you come to work at Sovos?

Prior to joining Sovos I worked at an investment bank in London, working my way up from trainee programmer to programmer, analyst, business analyst, systems analyst, project manager, global production support manager and eventually vice president.

Due to personal circumstances, I started working part time and was even briefly a rowing coach before heading back to university to complete a Computing and IT degree.

I was looking for another role in IT and originally worked for FiscalReps (now part of Sovos) on a short-term contract in 2016 or 2017. This is the product that we now know as Sovos IPT which needed testing to ensure it was fit for purpose.

After completing the project, I came back on a six month contract, which became a full-time permanent position and I’m still here today!

What is your role and what does it involve?

My role is to work out how to implement any modifications to the Sovos IPT system. We agree with the wider Sovos IPT team what new functionality or changes they want and work closely with the development team to convert the ideas into the solutions that our customers use.

I’ve recently been looking at the Sovos VAT solution to try and see the synergies between VAT and IPT in terms of user set up, user roles, uploading data, and initial validation on the files that we get from clients to improve the overall user experience for our IPT solutions.

What’s your team responsible for and how do they help customers?

We’re always trying to make the whole process of filing taxes more efficient, and a lot smoother for customers, whichever country they file their taxes in.

We’ve spent a lot of time refining the IPT Portal to make the process of filing and reporting IPT easier but also more compliant. We’re trying to eliminate as many of the manual steps involved in filing taxes as possible to reduce errors.

Sovos is a blend of technology and human expertise so we work closely with the compliance team who ensure reporting is accurate and compliant across all the tax authorities our customers file IPT in.

Our aim is to automate and integrate as much of the filing process as possible from data submission to receiving funds and submitting to the tax authorities to ensure we don’t miss any tax return dates and avoid late fees.

How are you using the latest technology to improve Sovos customers’ experience?

This probably ties into the work we’re doing on the IPT Portal. We’re trying to make everything more transparent so customers can see everything in one place including the status of their tax returns.

We’ve also introduced APIs as well, so customers can send us a file straight from their system, it’s a lot less hassle for them. We’re always focused on making it easier for customers to send us their data and providing as many options as possible to do this.

How have you seen the technology change since you joined Sovos? What has had the biggest impact?

I think the biggest impact has been the IPT Portal. When I started, much of the reporting processes were still paper based which meant a lot of sifting through paper tax return documents for the compliance team ahead of filing.

So having the IPT portal with all the documents that used to be printed out in one place, where clients can view everything online, has been the biggest change and one that our customers and our compliance team value, especially over the past year when companies have had to adapt to working remotely and not having as easy access to resources in the office.

What particularly excites you about future tax technology?

I think it’s the move towards a more connected reporting processes, joining all these disparate elements of tax returns to make the IPT reporting and filing process even easier and far less error-prone. As certain elements still require some manual input there’s still opportunities for mistakes so eliminating this concern altogether and making it a simple process from initial upload to submission to the tax authorities is really exciting.

Automated returns are becoming more prevalent and we’re in the process of working on these for Germany, France and Hungary so when I say future it’s actually already happening which is very exciting.

Take Action

Get in touch about the benefits a managed service provider can offer to ease your IPT compliance burden.

The introduction of the new Portuguese Stamp Duty system has arguably been one of the most extensive changes within IPT reporting in 2021 even though the latest reporting system wasn’t accompanied by any changes to the tax rate structure.

The new reporting requirements were initially scheduled to start with January 2020 returns. However this was postponed until April 2020 and once again until January 2021 due to the COVID-19 pandemic.

How does this affect reporting?

In addition to the information currently requested, mandatory information required for successful submission of the returns now includes:

Lessons learned and how Sovos helps you adapt

Our reporting systems have evolved to help customers meet these new requirements.

For example, our technical department have built a formula that confirms a valid ID to ease data validation and reporting. Consequently, a sense check was built within our systems to determine whether an ID is valid.

With the recent change in the treatment of negative Stamp Duty lines, we’ve also changed our calculations to account for two contrasting methods of treating negatives within our systems.

Previously, both the Portuguese Stamp Duty and parafiscal authorities held identical requirements for the submission of negative lines. However, the introduction of the more complex Stamp Duty reporting system called for amendments to the initial declaration of the policy.

Understandably, this new requirement is a more judicious approach towards tax reporting and will likely be introduced within more tax systems in the future.

Looking ahead

As with any new reporting system, changes within your monthly procedures are necessary. Our IPT compliance processes and software are updated as and when regulatory changes occur providing peace of mind for our customers.

And with each new reporting system, we learn more and more about how tax authorities around the world are trying to enter the digital age with more streamlined practices, knowledge and insight to increase efficiency and close the tax gap.

Take Action

Contact our experts for help with your Portugal Stamp Duty reporting requirements.

As our webinar explored in depth, location of risk rules are complex and constantly evolving.

The Sovos compliance team covered many topics on the session, such as sources for identification of the location of risk and location of risk vs location of the policyholder.

Despite this deep dive, there were plenty of questions that we didn’t have time to answer. As was the case with our IPT Changes in Europe 2021: Your Questions Answered blog, we’ve provided answers to these questions in this blog.

General Liability policies

Is there a case for a General Liability policy where the activity is held in Spain and the policyholder is in France?

Where the coverage doesn’t relate to property, vehicles or travel risks then it will be dealt with by the “catch-all” provision in article (13)(13)(d). As a result, assuming that the policyholder is a legal person in this scenario, it will be the policyholder’s establishment that determines the contract. Based on the limited information provided with this question, it seems that the policyholder’s only establishment here is in France, in which case the location of risk would be in France.

UK and Brexit

If you have a risk located in EU with a local EU policy, can the premium be paid by the entity of the company in UK?

The entity within a policyholder’s group that pays the premium to the insurer doesn’t have a bearing on the location of risk for IPT purposes.

Do the location of risk rules in the UK still follow those used in the EU following Brexit, and could a UK-based policyholder declare the tax instead of the insurer?

The location of risk rules haven’t changed in the UK following Brexit and, as such, the rules remain the same as is seen in Solvency II with each of the different four categories of risk.

For declarations made by UK-based policyholders, although there are provisions in the UK legislation allowing for the tax authority to pursue policyholders in certain circumstances, these are intended as a last resort when they’ve been unable to recover IPT from an insurer and there are no relevant agreements between the UK and the insurer’s country of establishment that enable the issue to be resolved.

The general rule remains therefore that the insurer should declare the tax, assuming they’re still authorised in the territory.

Germany

Could there be double taxation caused by the new approach in Germany towards group contracts?

Based on the natural interpretation of the new German legislation and, specifically, the Ordinance for its implementation, we see there is the potential for double taxation.

In particular, if there is the potential for double taxation within the EU then this would make it considerably more controversial. We could see this in the case of a policyholder based in a Member State other than Germany and an insured person based in Germany.

Double taxation across EU Member States would be inconsistent with EU law. As mentioned, we’ll closely monitor developments to see how group contracts are treated in practice and whether the position in the new legislation is challenged at EU level in the future.

I understand the German authorities may be issuing further guidance on whether non-EEA subsidiaries of a German policyholder do create an establishment for IPT purposes if a policy written by an EEA insurer covers them alongside the German policyholder, as the amended law from December last year only mentions that non-EEA branches would be caught in the net and subject to double taxation. Up to now, the guidance seems to have been that the answer is yes, but that the Ministry of Finance may be rethinking this. Have you heard anything on this point?

We’re continuing to monitor developments in this area. Most recently, the issue is considered in the guidance issued by the Ministry of Finance on 4 March 2021, as mentioned in our webinar. As is always the case, we’ll ensure that our customers are informed of any updates as they happen.

Malta

If vehicles in Malta only include motor vehicles, how do you determine the location of risk for ships and aeroplanes?

This would be another example of when article 13(13)(d) can be used. As a result, it would be either the policyholder’s establishment to which the contract relates (assuming it’s being insured by a legal person) or the habitual residence of the policyholder (if it’s being insured by an individual). This could be the same country as where it’s registered but it may not be.

Take Action

Still have questions about IPT? Watch our recent webinar, IPT regulation changes in Europe.