Daniela Dinkova, compliance services supervisor and leader of the captives practice, Sovos
There is very little consistency between countries when it comes to insurance tax reporting, and captives managers need to stay across the nuances to avoid trouble. Daniela Dinkova of Sovos explores some of the differences.
Just like traditional insurers, captives face the perpetual headache of Insurance Premium Tax (IPT) reporting standards.
“Using a native speaker to assist with tax filing is crucial to avoid errors.”
Different territories have different tax points: for example, the tax point in the majority of territories is the premium received date, but some territories require declaration of the liabilities on invoice date, booked date or inception date.
Ensuring compliance with all these standards can feel overwhelming for even the most seasoned of captive insurance managers, especially if IPT reporting is undertaken only once a year. When reporting season comes around, new tax rates, classifications, and good old-fashioned forgetfulness, can rear their heads.
Furthermore, depending on the size of the business and scale of risk, one mistake could not only cost a captive and its insured organisation significant money and shareholder value, but negatively affect brand reputation in the long run—with both the tax authority and the market.
When IPT can be as little as 2 percent (Bulgaria) and as high as 24 percent (Finland), it’s important that captives keep abreast of every country’s specific reporting standards to avoid over- or under-reporting.
Below are some of the more unusual reporting standards set by EU countries that demonstrate the lack of consistency across the world.
Italy has many unique reporting standards and is known for its bureaucracy across the international business community. The Codice Fiscale, a unique fiscal code given to natural and legal persons, is a central part of Italian finance.
The country has an annual submission system with tax settlements submitted every month alongside an annual tax declaration.
Where Italy’s annual reporting is different is in the level of detail required. The claims and the contract and premiums reports require an in-depth list of policies and details such as inception and expiry dates, cash received dates, policyholders’ names and addresses, and premium and tax values. This makes the annual reporting a significant undertaking.
Prepayment of taxes is a requirement and it’s calculated as a percentage of the liability for the year before. Credit premiums relating to policy cancellations are not permitted and cannot be reclaimed from the Italian tax authorities.
Although Italy might have the most detailed annual reporting process, it’s certainly not the only country with specific requirements.
Elsewhere in Europe
In Germany, the UK, Denmark, Finland and Austria, nil returns must be submitted regardless of whether business is currently being written or not. The tax authorities require the submission as formal proof that the company has no liabilities to declare; failure to file can incur penalties.
Germany is the only territory that adjusts to the activity of the insurance company and an annual return must be filed even if there are no liabilities to declare.
As of 2019, Greece’s annual reporting requirements are applied retroactively, an uncommon approach to be aware of.
Portugal is in the process of introducing its own filing process in 2021.
Speaking IPT’s language
Many countries ask that returns are submitted in the native language of the country. For captives working across multiple territories, this can be a significant undertaking and could cause inaccuracies if an experienced translator cannot be found.
Using a native speaker to assist with tax filing is crucial to avoid errors, especially in countries that require taxes to be filed by a resident of the nation.
As well as a potential language barrier, the exchange rate can cause complications. The tax amount is payable in the respective currency and every country has specific requirements about the source and application of the exchange rate—some at tax point, some at the end of month, others at monthly average.
How can captives ensure tax compliance?
There are many inconsistencies in tax reporting and filing. Failure to comply with current tax legislation could result in unwelcome audits, penalties, interest, and damage to a captive’s reputation.
As many captives write annual programmes, reporting cancellations, offsetting and reclaiming insurance premium taxes can prove difficult. This makes ensuring filing is correct first time even more important. Add to this the potential of penalties, interest and damage to a brand if an error is made, and it can feel like an impossible task to file IPT correctly across all nations.
As a cross-border captive, one way to ensure taxes are filed to the latest standards is to obtain an up-to-date tax rate database for territories. It’s important to ensure it is regularly updated, especially before filing, to prevent taxing on old rates.
Many captives choose to outsource filing to a service provider or seek consultancies to offer expertise in cross-border IPT compliance. This eases the burden as well as ensuring that taxes are filed and settled correctly and compliantly, and adhere to the latest rules and regulations for each country.
Once a clear process has been implemented and taxes have been filed, it’s much easier to replicate the following year as it’s then just a case of ensuring all tax rates have been updated. As with most tax tasks, organisation and process are key to a compliant and accurate filing.
What are the next reporting complexities for captives in the EU?
EU jurisdictions are implementing legislation to make e-invoicing compulsory. So far, it has not affected insurance companies too much.
E-invoicing is set to begin in Greece from October this year and this will bring changes to the filing process. Many other countries including Spain and Italy have successfully moved to digital e-invoicing filing and the trend looks to continue over the coming years across Europe for other indirect taxes such as VAT.
The question is whether the e-invoicing obligations will apply to IPT in the near or far future.
Daniela Dinkova is the compliance services supervisor and leader of the captives practice at Sovos. She can be contacted at: email@example.com
Sovos, Captives, Insurance, Premium Tax, Daniela Dinkova, North America