Knowing how to calculate IPT and the corresponding parafiscal surcharges (hereinafter collectively referred to as IPT) is an art. Rules differ by national jurisdiction so ensuring compliance with IPT obligations is not just a regulatory requirement for insurers – it’s essential to avoid financial penalties and reputational risk.
That’s why it’s critical to have a clear understanding of which tax rules apply to the insurance products underwritten, and to stay informed about the specific requirements in each relevant jurisdiction.
This blog will provide an overview of IPT calculations, explaining how to calculate IPT, the different methods of calculation, IPT rates and exemptions, and more. If you’ve found yourself asking, “How is IPT calculated?” then read on, because this page is for you.
- There are two primary methods of calculating Insurance Premium Tax: a percentage of the premium and fixed amounts
- Using the percentage method, simply multiply the insurance premium by the appropriate tax rate to calculate the IPT amount. If using the fixed amount method, multiply the number of the policies/insured by the fixed amount
- In the EU, only Hungary uses the so-called sliding scale model to determine the IPT amount. This method is commonly used in personal income tax calculation, whereby different tax rates are dedicated to certain levels of premium amounts collected during a period (i.e. a month) and the tax rate changes/increases once the collected insurance premium amounts exceed a threshold in the reporting period. Malta could also be considered to use a similar model.
- Common IPT calculation mistakes include failing to determine the correct location of risk, misinterpreting the risk(s) covered, using the incorrect tax rate, miscalculating the premium value or the sum insured amount, and not considering the applicable exemptions.
- Generally, in the EU, Insurance Premium Tax does not apply to reinsurance and in most EU countries the long-term insurance policies were exempted.
How to Calculate IPT: Two Main Methods
There are two basic methods for calculating the tax on insurance premiums in Europe:
- Percentage of the Premium/sum insured
- Fixed amounts per policy/insured
These calculation models are just the basics; IPT regulations are built upon these models, adding several specific rules, which can make an IPT calculation fairly complex.
Percentage of Model
For the first calculation method, the Percentage model, one or multiple tax rates apply depending on the risks covered.
For example, businesses in Bulgaria can easily determine the tax amount by multiplying the taxable basis by the country’s 2% tax rate. This rate applies to all classes of businesses. However, in Italy or France, the applicable tax rate depends on the risks covered.
Several IPT calculations are based on this basic rate model but there are some models where the tax rate applies on the sum insured value and not on the premium amount.
Fixed Amount Model
In the second calculation method, the Fixed Amount Model, local regulations determine the tax amount that needs to be multiplied – usually per policy, but sometimes per insured person.
Irish Stamp Duty and Danish Guarantee Fund contribution are examples of this calculation method in practice.
Key Variables That Impact IPT Amount Calculation
While many factors can ultimately impact the IPT amount calculation, there are certainly some primary factors that many calculations will need to get right.
- The risk covered: It is vital to understand what type of coverage is included in the insurance policy. Risks are grouped based on Annex of the Solvency II EU Directive. There are 18 non-life classes of businesses and 9 life classes. There are multiple sub-group variations under each class.
- The taxable premium amount: The definition of the taxable premium amount is not harmonised in the EU. In some countries it includes commission or other related fees or taxes, while in other countries the IPT is calculated on the amount included in the policy documentation i.e. the net premium.
- The tax rate model: Each country and each parafiscal charge has its own standard IPT rate model. Understanding each of these is required to calculate the IPT amount correctly.
- Exemptions: Although there are some similarities in the exempted risks per country, there are specialities as well. Again, the lack of harmonisation means countries provide IPT exemptions at their own discretion.
Step-by-Step Example: How to Calculate IPT
While each IPT calculation will vary based on the factors at play, we can provide a sample calculation to illustrate how the process can work.
Identify Risk Class
The first step is to identify the risk category the policy falls under, as this will dictate the location of risk.
Determine the Location of Risk
Determining the location of the risk(s) will determine the country of which the IPT calculation rules apply. Most European countries include a section in IPT regulations to determine the location of risk, citing the Solvency II EU Directive location of risks (LoR) rules.
Determine the Reporting Currency and the Exchange Rate
The reporting currency is the currency in which the tax should be settled to the local tax office. If the premium amount in the policy is determined in a currency other than the reporting currency, then it is important to use the correct exchange rate. Exchange rate rules are not harmonised in the EU. It can be the national bank average monthly/quarterly rate, or rate on the last day of the reporting period.
Calculate the Taxable Basis
The taxable basis is vital for determining the compliant IPT and parafiscal amounts. Look for the local legislation for the definition of the taxable basis. Taxable basis can be the net premium, the sum insured, the value as per the land registry, or net premium plus fees, commissions or even taxes.
Choose Applicable Rate or Fixed Amount
Knowing the correct tax rate/fixed amount is vital. Search for the local IPT legislation, review the risk covered and determine the correct tax rate.
Apply Any Parafiscal Charges
Depending on the risks covered, some countries also levy parafiscal charges on insurance premiums, impacting the total IPT amount to be paid. France is an example of a country that levies various surcharges on the premium amounts depending on the risk(s) covered.
Search for the Exemptions
It is also vital to determine which insurance premiums fall into an exempt class. Usually, risks covering international or exports class of businesses are exempt, such as export credit, or international goods in transit. Some of the EU countries exempt sickness policies too.
Verify Rounding Rules
Lastly, it is essential to follow rounding rules when calculating the total IPT amount to be settled towards the local tax offices, because the settlement of the IPT amount can be rounded. In France, for example, you are required to round to the nearest whole EUR. In Hungary, IPT is declared in thousands HUF.
What are some common mistakes in IPT calculations?
With IPT often being complicated to calculate, especially if you don’t know the nuances of the country where the location of risk sits, mistakes can be common.
There are simple mistakes like determining the wrong location of risk or using the incorrect or out-of-date IPT rates (e.g. incorrectly interpreted transitional rules), and misunderstanding exemptions.
More errors come from miscalculating the value of the premium or the sum insured or incorrectly applying surcharges.
Rules for IPT amount calculation
There are rules taxpayers must abide by to comply with IPT regulations. Here is a selection of IPT rules for amount calculation.
Here are some examples of these specific rules:
- IPT rates vary by class of business: Various IPT rates are applied for business classes in certain countries, such as Italy or France. To determine the IPT amount for a policy, the risks covered by that policy must first be clarified. Once the class of business has been determined, insurers should use the appropriate IPT rate for that class of business during the IPT calculation.
- Additional parafiscal charges: It is not enough to know the IPT rate(s); it is also crucial to understand whether further parafiscal charges are applicable. If this is the case, then at what rate? The 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. It is also possible that a different taxable basis is applied for IPT and parafiscal charges on the same insurance policy.
- Sliding scale rate model: This method is a variation of the “Percentage of the Premium” basic calculation model. The difficulties arise when the premium collected in the reporting period exceeds a specific limit, which will lead to a different tax rate being applied for the exceeding part of the premium.
- 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. This model mixes the sliding scale rate and the 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 for rounding the tax amount declared on the tax return.
- Exemptions: There can be exemptions where businesses are not required to pay the tax for specific risks or for a taxable premium or tax amount below a certain threshold. Examples are the Irish Stamp Duty and the Polish Ombudsman Levy.
Conclusion
As you can tell, IPT calculations can be complex—but they don’t need to be. If you are aware of the common pitfalls and the key considerations in these calculations, you can work out the amount payable with accuracy and confidence.
Knowing the rules and requirements of the country you are operating in is key, from the tax rate to how they require insurers to calculate Insurance Premium Tax. Non-compliance can be costly, both financially and reputationally, so be sure to put your best foot forward by knowing how to calculate IPT correctly.
FAQ
What countries use a sliding scale for IPT?
Hungary is the only country that utilises a ‘pure’ sliding scale rate model to calculate its Insurance Premium Tax. The sliding scale model is a method of calculating IPT where the tax rate changes once the insurance premium exceeds a threshold. Malta, on the other hand, applies a mixture of fixed amount and sliding scale model.
Can IPT be refunded if a policy is cancelled?
Yes, there is generally a chance that Insurance Premium Tax (IPT) can be refunded on a cancelled policy. Refunds are done pro rata on policies that have been active for longer than the mandatory 14-day cooling-off period. There are exemptions from this general rule, with the best example being Italy.
Does IPT apply to reinsurance?
While countries have their own nuances regarding IPT, the general rule of thumb in countries like the UK is that Insurance Premium Tax does not apply to reinsurance.
This is because countries like the UK want to avoid double taxation, as the original direct insurance policy is already subject to IPT.
Is IPT calculation harmonised in the EU?
No, IPT is not harmonised in the EU. Although the Solvency II EU directive provides some basic rules which are mandatory for EU countries to follow, the specifics of the IPT calculation, such as the rates and taxable basis are not harmonised.
What is the highest and lowest IPT rate in the EU?
Currently, the highest IPT rate in the EU is 30%, applying to certain policies in France. The highest generic IPT rate of 25.5% applies in Finland. The lowest IPT rate, not mentioning the exemptions, is the 1.4% IPT rate applied for certain specific policies in Belgium. The lowest generic IPT rate is 2% in Bulgaria.
How do you calculate IPT?
Put simply, Insurance Premium Tax (IPT) is calculated as a percentage of the insurance premium. The percentage, also known as the IPT rate, depends on the type of insurance policy and the rates of the country to which the policy applies.
To calculate the IPT amount, you multiply the insurance premium by the appropriate tax rate. The insurer then adds the cost to the figure paid by the policyholder.
This calculation is the simplest, but it’s worth mentioning that there are various calculation methods e.g. fixed amount method, sliding scale methods.
What factors influence IPT calculation?
There are various factors that need to be considered to compliantly calculate IPT. These factors include, but are not limited to, location of risk, the risk covered, the exchange rate, the definition of the taxable premium, the IPT and parafiscal tax rates and the exemptions.
