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.
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.
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.
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.
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.
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.
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.
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.
In addition to the information currently requested, mandatory information required for successful submission of the returns now includes:
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.
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.
Contact our experts for help with your Portugal Stamp Duty reporting requirements.