There are many taxes (IPT) and parafiscal charges levied on insurance premiums throughout Europe. As a consequence of the lack of tax harmonisation, no general rules can be applied to establish which taxes exist in which countries and how to calculate the correct IPT amounts.
Some insurers do not have a dedicated IPT team; this is usually the case with smaller insurers. This could lead to IPT miscalculation and can trigger penalties. Without the proper and up-to-date knowledge, it is easy to be lost in the rules and regulations.
The following blog gives an overview of the tax calculation methods highlighting some unique elements of the IPT calculation.
Tax calculations methods
There are two basic tax calculation methods in the European IPT world
Percentage of the premium
In the first instance, there is a tax rate. For example in Bulgaria (2%) businesses can easily determine the tax amount by multiplying the taxable basis with this tax rate. Fortunately, several IPT calculations are based on this so-called basic rate model.
While in the second case, the local regulations determine the tax amount which needs to be settled on the insurance policies. Irish Stamp Duty can be mentioned as an example.
One can say that this is not rocket science. Furthermore, it is easy. These calculation models are just the basics. IPT regulations are built on these basic models adding several specific rules making the IPT calculations fairly complex. Here are some examples of these specific rules:
Sliding scale rate model: This method is a variation of the “Percentage of the Premium” basic calculation model. The difficulties arise when the premium exceeds a specific limit, which will lead to a different tax rate being applied. Usually, a higher tax rate is applicable for the premium exceeding the threshold. Further variation can be that the taxable premium is not determined at the policy level but as an aggregated premium amount collected by the insurer in the reporting period. The most notable sliding scale model is applied in the Hungarian IPT calculation.
Tax rates vary by class of businesses. Various tax rates are applied for business classes in certain countries such as Italy or France.To determine the IPT for a policy, first, the risks covered by that policy need to be clarified. Once the class of business has been determined, businesses should use the appropriate rate for that class of business during the IPT calculation.
Additional parafiscal charges. It is not enough to know the IPT rate(s), but it is crucial to understand whether further parafiscal charges are applicable. If this is the case, then at what rate. The IPT rates and parafiscal charges rates can vary.
The taxable basis can also vary. The taxable basis used by countries to calculate IPT and parafiscal charges can vary. It can be the net premium, the premium plus some charges such as broker commission and administrative costs or the sum insured amount. Though there are others, these are the main ones. It can also be the case that a different taxable basis is applied for IPT and parafiscal charges on the same insurance policy.
The sliding scale fixed amount model. The fixed tax amount can vary depending on the taxable basis level. A good example of this model is Malta which levies stamp duty instead of IPT on insurance premiums. The calculation is even trickier for Malta as it mixes the sliding scale rate and the sliding scale fixed amount calculation models.
Rounding in tax calculation. In the case of certain countries, such as Hungary, the Netherlands,or France, there are specific rules to round the tax amount declared on the tax return.
Exemptions. There can be exemptions where businesses shall not pay the tax for specific risks or below a certain taxable premium or tax amount. Examples are the Irish Stamp Duty and the Polish Ombudsman Levy.
Reverse tax calculation
To add further colour to this topic, we can mention that reversing a policy line in the calculation does not always result in the same tax amount in a negative position. The best example is Malta, where the same amount of Stamp Duty is not refunded when the policy is cancelled after the cooling-off period. Instead of getting back the same stamp duty paid, an additional EUR 2.33 Stamp duty is triggered if certain conditions are met.
Although this is a unique regulation this highlights that when it comes to reversing a policy line, it is strongly recommended to check the rules beforehand and clarify whether or not the negative IPT can be offset or reclaimed and adjust the calculation method accordingly.
IPT calculation requires detailed knowledge of the rules and regulations. Sovos has a dedicated team of compliance experts to walk you through even the most challenging calculations. Contact our team today.