VAT & IPT: Joined Up Thinking Peter Hewitt FTII Head of European Tax Practice, FiscalReps

Agenda Compliance Consulting IPT Changes VAT Changes Skandia America Corporation (trailer)

VAT and IPT Compliance IPT Compliance – realm of finance? VAT Compliance – realm of tax? Both are transactional taxes, and both are international in focus Some are recognising the value of combining responsibility, and this means the tax department is more and more taking over the IPT role To go along with responsibility for Foreign Account Tax Compliance Act (FATCA)! VAT is due on insurance premiums in many countries outside Europe, so the dividing line is blurred

VAT and IPT Consulting Plenty of VAT specialists, but where are the IPT specialists? Mostly in the room? VAT and IPT consultancy are combined at FiscalReps Distinction is by country not by tax Outsourcing consultancy work is virtually essential for most insurance groups, even the biggest, where the level of business in a country is small We are seeking to provide consultancy services in all countries of the world, using local associates where necessary SAO reviews

IPT Changes – San Marino IPT Book 4% rate WEF 1 st December 2013 Compliance nightmare Draconian penalties

IPT Changes - Croatia Strictly a clarification, not a change Applies to FoS insurers from 1 st July 2013 Two taxes: o Motor cover - 10% Own Damage, 15% TPL o Fire risks 5% Separate authorities

IPT Changes - Poland Insurance Ombudsman Charge 0.01% More expensive to pay than the tax itself!

IPT Changes - Greece Changes to TEO and TEA EAPAE TEO = National Road Construction Fund TEO organisation abolished 26 th March 2014, but a 0.6% charge is still made Instead of TEO it is now paid to MGF (Motor Guarantee Fund) Still described as TEO on invoice!

IPT Changes - Greece TEA EAPAE = Occupational Insurance Fund of Insurers and Personnel of Insurance Companies Pension Fund organisation TEA EAPAE may be abolished, from 2015 Contribution (1% or 2%) almost certainly will be

IPT Changes – Czech Republic Nothing happened!!

VAT Changes - Japan VAT rate increase from 1 st April % standard rate increased to 8% Serious consequences for the Japanese economy – bulk buying by consumers at old rate and then very low retail sales in Q2! Another increase from 8% to 10% from 1 st October 2015 still planned

VAT Changes - Bahamas VAT from 1 st January % rate Life Assurance exempt General Insurance exempt until 1 st July 2015 Reverse charge VAT on insurance bought in from non- Bahamas insurer Even for private individuals!

Mapfre Warranty SpA French CJEU referral Case C-584/13 Where an economic operator which is independent of a second-hand motor vehicle dealer provides, in return for payment of a lump sum, a warranty covering mechanical breakdowns which may affect certain parts of the second-hand vehicle fall within: o The category of insurance transactions exempt from value added tax or, o On the contrary, does such a supply fall within the category of ‘supply of services’?

Westinsure - UK First Tier Tribunal decision 2013 Upper Tribunal heard argument early in 2014 – judgment still awaited Broker Network – were membership and commission charges exempt? Insurance intermediary services BUT Westinsure is not in the “chain of intermediation” The judgment could change HMRC policy again

EU VAT Groups VAT is a tax on supplies FCE Bank Case C-210/04 – no supply between Head Office (HO) and branch, nor branch to branch Within same entity, so same taxable person, so cannot be a supply to yourself for VAT purposes In September 2014, Skandia America Corporation Case C-7/13 suggests there CAN be a supply between HO and branch, or branch to branch, where one or both are in a VAT group Major issue – ramifications will be felt for years to come

Skandia America Corporation Case C-7/13 The most important case in VAT for 10 years? Certainly for the insurance industry Several effects…

The SAC Structure Common structure in UK We await HMRC’s substantive response Other EU countries? SAC US (HO) (US) SAC US (HO) (US) SAC Swedish Establishment (Branch) SAC Swedish Establishment (Branch) Services, no VAT EUR 100 VAT Group Services, no VAT? EUR 105 Third Party Supplier (US) Third Party Supplier (US) Skandia Insurance (Swedish insurer) Skandia Insurance (Swedish insurer) Services, no VAT EUR 110

SAC Impact The real problem for everyday business arises when there is a charge from a company in a VAT group to its branches around Europe Insurance Service Company Insurance Service Company Insurance Company (Branch) Insurance Company (Branch) VAT Group Services, no VAT? EUR 105 Insurance Company (HO) Insurance Company (HO) Services, no VAT EUR 100

VAT Group to Branch – Input Tax If the services are bought in from outside the VAT group, VAT will usually be chargeable This will normally be recovered (today) at the residual rate applied in the HO country Insurance Company (HO) (UK) Insurance Company (HO) (UK) Insurance Co (Branch) Insurance Co (Branch) Services, + VAT GBP GBP 20 VAT Group Services, no VAT? GBP 100 plus VAT? Third Party Supplier (UK) Third Party Supplier (UK) Group Company

Head Office Recharges to Branches In practice, costs are recharged/shared around a network of branches so things become a lot more complex Every EU country where there is a branch will be involved – depending on the reaction of the tax authorities Partial Exemption Methodology needs to be looked at again, at least in the country of the HO

Head Office Recharges to Branches Two Questions: 1.Will the VAT group country admit there is a supply, and so allow VAT recovery (unless it is an exempt intermediary service)? 2.Will the branch country insist on collecting reverse charge VAT? If the answers are Yes/Yes, there is an output tax liability for the branch If the answers are No/No, there is an input tax cost for the HO (as now) If the answers are Yes/No, there is no taxation If the answers are No/Yes, there is double taxation Timing of policy changes?

Other Ramifications Partial Exemption Methods will need amending to take into account recharges if they are supplies EC sales lists will need to be completed The cost sharing exemption may become more attractive However, structuring a cost sharing group using a VAT group may be counter-productive in some countries as: o The VAT Group may be seen as making the supplies rather than the EEIG (CSG) within the VAT group o Also if EEIG members are in a VAT group perhaps they will lose their identity as members In Germany VAT grouping is mandatory, so costs will increase more in Frankfurt and Munich than in London!