Global insurance premium tax newsletter

Issue No. 2, 2016 Global insurance premium tax newsletter Welcome to the latest issue Last year alone, various European countries such as France, Malta, Portugal, Slovenia, Italy, Spain and the United Kingdom, have increased their premium tax rates. Outside of Europe, insurers are looking with interest at the introduction of goods and services tax (GST) in India and value-added tax (VAT) in China; updates on these two new taxes applicable on insurance premiums are covered in this issue. The need for multinational groups to risk on insurance premium tax (IPT) has never been greater, given farreaching discussions on tax compliance, transparency, CRS (Common Reporting Standard) and BEPS (Base Erosion from various sectors are concerned about their IPT exposure. Usually, the brokers/insurers are responsible for the calculation and settlement of taxes at a local level. However, if the insurer does not have a license in a country, IPT may still be applicable but needs to be settled by the policyholder. This can trigger a compliance issue for the multinational company, and many of them are now addressing this exposure. If you have any questions please get in touch. For more information on our IPT services offering please visit our IPT microsite at ey.com/ipt. Please contact us if you would like to for 10 March 2017. David Bearman Partner Tom Hilverkus Senior Manager

Overview Luxembourg New insurance tax introduced United Kingdom IPT standard rate increased Canada Newfoundland and Labrador Tax rate changes announced in budget Canada Quebec Compensation tax reduction France National Agricultural Catastrophe Fund reduced Ecuador VAT increase announced Latvia Financial and Capital Market Commission (FCMC) levy increased Pakistan Sales tax reduction in Sindh province India Update on GST situation Krishi Kalyan Cess (KKC) introduced on insurance policies China VAT update Australia Australian Capital Territory Insurance duty abolished Spain National Guarantee Fund on motor insurance reduced Consorcio Extraordinary Risks on motor insurance reduced Poland Contribution to Polish Insurance Association reduced Contribution to Insurance Ombudsman increased Greece Motor Insurance Bureau levy decreased Tanzania VAT exemption introduced Mauritius motor insurance New Zealand GST changes for nonresident suppliers Proposed changes to Earthquake Commission levy and Fire Service levy Fiji VAT decreased Nauru Nonresident withholding tax introduced Sri Lanka VAT developments 2 Global insurance premium tax (IPT) newsletter Issue No. 2, 2016

Australia Australian Capital Territory (ACT) Insurance duty abolished Insurance duties have been completely abolished from 1 July 2016, making the ACT the only Australian state or territory to have abolished this tax. Canada Newfoundland and Labrador Tax rate changes announced in budget The province has passed in its budget an increase in premium tax from 4% to 5% on all existing taxable non-life and life insurance policies from 1 July 2016. In addition, the province has also reinstated the 15% retail sales tax on insurance premiums for property and casualty insurance policies, which is effective from the same date of 1 July 2016. Canada Quebec Compensation tax reduction The additional compensation tax that applies on all life and non-life insurance premiums is being reduced from 0.48% to 0.35% for premiums payable from 1 April 2017 to 31 March 2019. The compensation tax is eliminated with respect to premiums payable on or after 1 April 2019. China VAT update The Ministry of Finance and State Administration of Taxation (SAT) jointly issued a notice VAT of 6% would be charged on most insurance policies instead of Business Tax from 1 May 2016. Long-term (more than one year) life insurance policies are exempt from VAT along with types of insurance that were previously exempt from Business Tax also keep their exemption after the VAT reform, e.g., the insurance/credit insurance on export goods, agriculture and animal husbandry insurance. The Ministry of Finance and the State Administration of Taxation jointly issued a notice Cai Shui [2016] No. 68 (Circular 68) clarifying VAT issues in respect of reinsurance services on 18 June 2016. The notice retroactively applies from 1 May 2016. Reinsurance services provided by insurance companies in China to insurance companies outside China are exempt from VAT if these services are consumed entirely outside China. A taxpayer providing reinsurance services (except for reinsurance services provided by a domestic insurance company to an overseas insurance company) should be subject to the same VAT treatment applied to the original insurance contract. Where a reinsurance contract is related to more than one original contract and all original contracts are applicable to VAT exemption, the reinsurance contract shall be exempt from VAT. Otherwise, the reinsurance contract shall be subject to VAT according to the prevailing VAT policies. Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 3

Ecuador VAT increase announced VAT has been increased from 12% to 14% from 1 June 2016 until 31 May 2017 on non-life insurance policies, after which the tax rate will revert back to 12% again. Life insurance policies remain exempt from VAT. Fiji VAT decreased VAT has been reduced from 15% to 9% from 1 January 2016 for all existing taxable insurance policies. Life insurance policies remain exempt from VAT. France National Agricultural Catastrophe Fund reduced Further to law no. 2015-1785 dated 29 December 2015 article. 41, V, the tax rate for the fund of guarantee for the National Agricultural Catastrophe Fund was reduced from 11% to 5.5%, as from 1 January 2016. Greece Motor Insurance Bureau levy decreased The levy on motor third-party liability insurance for trucks used for international transport is to be reduced from 14% to 0.4% effective from 1 January 2017, which will mean that this levy for all vehicle types will therefore become subject to 0.4%. India Update on GST situation After the passage of the Constitution (122nd Amendment) Bill, 2014 in the Lok Sabha unanimously by the Rajya Sabha on 3 August 2016. Following this clearance, 21 states 2016. It thus paves the way for implementation of GST in India. This will be followed by formation of a GST council within sixty days of enactment, launch of a GST network and framing of Central, State GST law along with the Law for GST to be levied on supplies in the course of interstate trade. The Government may then take up the bill for Goods and Services Tax law possibly in the winter session of the Parliament. It is anticipated that the Government is aiming for an implementation date of April 2017. Krishi Kalyan Cess introduced on insurance policies The Government has introduced Krishi Kalyan Cess (KKC) at the rate of 0.5% on all the services on which the existing service tax is applicable with an implementation date of 1 June 2016. KKC is an indirect tax levy that is applicable on the provision of services in India (including insurance services, such as general insurance, life insurance, reinsurance services and insurance broking services). With the implementation of KKC, the effective 4 Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 4

service tax rate will be 15% (i.e., service tax 14% + Swachh Bharat Cess (SBC) 0.5% + KKC 0.5%). Further, in the case of life insurance services, the service provider/insurer has an option to either: 1. Pay service tax at 15% (service tax at 14% plus SBC at 0.5% plus 0.5% KKC) on the gross premium reduced by the amount allocated for investment on behalf of policyholder, if such amount is intimated to the policyholder at the time of providing service. 2. Or pay service tax at 1.5% (service tax at 1.4% plus SBC at 0.05% plus 0.05% KKC) on the gross premium of the single premium annuity insurance policies. 3. Or in all other cases, pay service tax at 3.75% (service tax at 3.5% plus SBC at 0.125%, (service tax at 1.75% plus SBC at 0.0625%, plus 0.0625%) on the premium charged in the subsequent years. The following schemes have been exempted from the levy of service tax in India: 1. General insurance services provided under the Niramaya Health Insurance Scheme. 2. Services of life insurance business provided by way of annuity under the National Pension Fund Regulatory and Development Authority of India. Latvia FCMC levy increased As of 15 April 2016, the FCMC has increased this levy. For motor third-party liability insurance policies, the new tax rate is increased from 0.18% to 0.2%. For life insurance policies, the new tax rate is increased from 0.184% to 0.221%. For all other non-life insurance policies, the new rate is increased from 0.236% to 0.283%. Luxembourg New insurance tax introduced vehicle civil liability insurance is to be introduced from 1 October 2016. Mauritius A Hit and Run fund has been introduced from 1 January 2016, which is levied on insurers and is used for the payment of compensation to persons suffering from personal injuries is required to contribute to the fund in accordance with a contribution per insurance policy underwritten for a period of one year that has been issued by it. The contributions vary from MUR25 to MUR200 depending upon the vehicle covered by the insurance policy. Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 5

Nauru Nonresident withholding tax introduced The Business Tax Act No. 31 of 2016 has been implemented from 1 July 2016 and imposes a 10% withholding tax on all payments of insurance premiums except for life insurance made to a nonresident insurer that does not have a permanent establishment in Nauru. New Zealand GST changes for nonresident suppliers The Government introduced the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Act in May 2016. Under the new act, cross-border supplies of services are subject to GST. Insurance services provided by overseas suppliers are likely to be caught within the scope of the proposal. A summary of the changes is as follows: to New Zealand resident consumers. Remote services are those for which there is no insurance. Remote services that are supplied to New Zealand GST-registered businesses will not be subject to GST. The recipient must notify the supplier that it is registered, or provide its GST registration number or New Zealand business number; otherwise, the service must be treated as if it was made to a non-gst registered business. Offshore suppliers may elect to zero-rate a supply of remote services to a New Zealand GST-registered business as opposed to treating it as an exempt supply. Where a zero-rating election has been made, a nonresident insurer will be denied an input tax deduction for an insurance payment made under a contract of insurance. Offshore suppliers will be required to register and return GST if their supplies to New Zealand residents exceed NZ$60,000 in a 12-month period. Remote services supplied to New Zealand GST-registered businesses will not count towards this threshold, unless a zero-rating election has been made. An offshore supplier must treat a remote service as being made to a New Zealand customer (and consequently charge GST on the supply) on the basis of two non- The new rules will come into force on 1 October 2016. Proposed changes to Earthquake Commission levy and Fire Service levy Changes relating to the Earthquake Commission levy and the Fire Service levy (FSL) are expected in mid-2017. Zealand (subject to some exemptions), and is calculated at NZ$0.076 per NZ$100 sum insured, subject to upper limits in certain situations. 6 Global insurance premium tax (IPT) newsletter Issue No. 2, 2016

The expected timeline of the key proposed changes is as follows: 1. Later in 2016: consultation process for public feedback on proposed changes to the FSL. 2. 1 July 2017: different application method, overall increase in levy. The levy will apply differently to residential and nonresidential sectors (levy rates The average levy contribution is expected to increase. The current estimated NZ$15.40 per year for residential property owners. NZ$32 per year for small-to-medium-sized businesses with NZ$230,000 of property insurance. NZ$1,400 per year for large businesses with NZ$10 million of insurance. 3. 1 July 2018: levy broadened in scope. include insurance for property material damage. The levy will be calculated on the amount insured under contracts for insurance of material damage. The levy on motor vehicle insurance will be broadened to include third-party insurance. 4. The levy rate to be reviewed every three years. will be reviewed and regularly updated. Pakistan Sales tax reduction in Sindh province The Sindh Finance Act 2016, which was approved on 25 July 2016, has reduced the sales tax levied on non-life and life insurance policies in this province from 14% to 13% retrospectively from 1 July 2016. Poland Contribution to Polish Insurance Association reduced The contribution for the Polish Insurance Association for all non-life, life and reinsurance policies has been decreased from 0.026% to 0.024% with effect from 2 February 2016. Contribution to Insurance Ombudsman increased The contribution to the Insurance Ombudsman for all non-life, life and reinsurance has been increased from 0.01% 0.0138% for domestic insurers and from 0.01% to 0.015% for foreign insurers with effect from 9 April 2016. Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 7

Spain National Guarantee Fund on motor insurance reduced The rate of contribution to the National Guarantee Fund applied to all motor insurance policies was reduced from 2% to 1.5% from 1st July 2016 as per Resolution Consorcio Extraordinary Risks on motor insurance reduced been reduced on all types of vehicles except for coaches, buses and trolleybuses from Gazette. The rates, which vary depending upon the type of vehicle insured, now range from 0.30 to 26.60. Sri Lanka VAT developments VAT was increased from 11% to 15% from 2 May 2016 on non-life insurance policies, but life policies remain exempt. However, the Supreme Court subsequently suspended the VAT changes so the VAT rate has now returned to 11% as of 11 July 2016. Tanzania VAT exemption introduced Aviation insurance has become exempt from VAT with effect from 1 July 2016. United Kingdom IPT standard rate increased The standard rate of IPT has been increased from 9.5% to 10%. The new standard rate will be due from 1 October 2016, with an exception for those insurers who use a special accounting scheme rather than the cash receipt method. The exception requires insurers to apply the new standard rate only to premiums received on or after 1 February 2017, where the premium relates to risks covered by the terms of a contract entered into before 1 October 2016. 8 Global insurance premium tax (IPT) newsletter Issue No. 2, 2016

Country focus United Kingdom: IPT and Brexit implications By Jochum Zutt and Adam Alonso three questions in relation to the potential impact of Brexit on IPT. We hereafter try to address some of the uncertainty by answering these three questions. Will the UK IPT rules change? We do not expect the UK IPT rules to change. IPT is not an EU harmonized tax. Therefore, Member States are free to decide whether IPT will be levied, at what rate it will be levied and to which insurance products it will apply. UK IPT law and guidance as we know it have been developed by the UK legislature itself, and on that basis, we do not expect an immediate change to these rules after the Brexit. The only harmonization on an EU level is around the location of risk rules. These rules help determine in which country an insurance product will be taxed. While after Brexit, the UK will be allowed to change these rules, we do not expect there to be an immediate change. Will EU case law still be applicable in the UK? In principle, EU case law will no longer be binding in the UK. However, due to the limited EU harmonization, the EU case law around IPT is very limited. There are only two major (C-191/99) and RVS (C-243/11). Kvaerner deals with the location of risk rules on insurance that covers risks in multiple countries and determines in which country the insurance premium is subject to IPT. to a branch in the Netherlands should partly be taxed in the Netherlands. The UK has aligned its rules with the decision in the Kvaerner case and we do not expect this to change after Brexit. RVS deals with the place of taxation for IPT purposes upon relocation of policyholders. In brief, the CJEU decided in this case that if a policyholder moves from the Netherlands to Belgium, IPT would be due in Belgium, being the country of residence of the policyholder, rather than the country where the insurance contract is entered into. The RVS decision was released 21 February 2013 and has not been implemented into UK IPT law yet. Instead, based on the UK IPT rules, IPT is due in the country where an insurance contract is entered into. Due to Brexit, we do not expect the RVS decision to be implemented in the UK. Currently, insurers should be able to directly rely on the RVS decision where it would after Brexit. However, we note that the practical consequences of the RVS decision are relatively limited in the UK as it only impacts long-term insurance contracts and the UK exempts life insurance, which is the most common type of long-term insurance. Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 9

Other than that, there are a number of CJEU decisions that are not directly IPT-related, but are referenced to when determining IPT obligations, e.g., the Mapfre case (C-584/13). The UK legislature currently mainly looks at these decisions as guidance on application of IPT rules and we do not expect this to change immediately after Brexit. Will Brexit have IPT consequences in other EU Member States? Brexit will have IPT consequences in other Member States. For insurers that operate throughout the EU, there is likely to be a change in IPT compliance requirements following Brexit. EU rules allow insurers to operate in other EU in Commission v. Spain, C-678/11). Some Member States do require such representation if the UK remains part of the European Economic Area (EEA) the impact of Brexit is likely EEA-based insurers. Furthermore, Brexit may result in a change in the application of IPT rules in other Member States, such as application of the location of risk rules. While the harmonization of location of risk rules in the EU should prevent double taxation of insurance within the EU, it does not necessarily prevent double taxation where a non-eea counterparty is involved. For example, if a German policyholder insures its British-registered car with a German insurer, the policyholder may end up paying IPT in both countries if the UK leaves the EEA: Germany would tax based on the policyholder location and the UK would tax the premium based on the fact that the car is registered in the UK. Finally, there may be a shift in the person liable for settling the IPT. In some Member States the broker or policyholder/insured is responsible for settling the IPT on insurance from non-eu/non-eea insurers. Conclusion While we believe the impact of Brexit on UK IPT rules will be limited, we appreciate that the impact on the application of the rules in other countries and the impact on IPT determined, but the EY IPT team is happy to support you in mapping the potential impact. 10 Global insurance premium tax (IPT) newsletter Issue No. 2, 2016

Ernst & Young LLP contacts David Bearman Partner Tel: + 44 20 7951 2249 Email: dbearman@uk.ey.com Tom Hilverkus Senior Manager Tel: + 44 20 7951 8925 Email: thilverkus@uk.ey.com Russell Brown Manager Tel: + 44 20 7951 0175 Email: rbrown8@uk.ey.com Adam Alonso Manager Tel: + 44 20 7951 1494 Email: aalonso@uk.ey.com Jochum Zutt Senior Manager Tel: + 44 20 7197 7219 Email: jzutt1@uk.ey.com Global insurance premium tax (IPT) newsletter Issue No. 2, 2016 11

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2016 EYGM Limited. All Rights Reserved. EYG no. 03276-163GBL EY-000005514.indd (UK) 09/16. Artwork by Creative Services Group Design. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com