Making sense of VAT on insurance services
This week's column looks at the bewildering and complex world of VAT on insurance. For the roadmap of this, I am grateful to my colleague Paulina Pilch, one of the insurance industry gurus in our tax department.
Insurance services are and always have been VAT exempt under the VAT law. The KWiU's (official statistical classification of services) definition of financial services includes insurance. This means that insurers do not have to charge you VAT on insurance contracts.
Since VAT was introduced, insurance companies have treated all of their activities, except for advertising and representation, as VAT exempt. This is understandable when it comes to insurance contracts, but more interesting in areas such as recoveries, where the insurer sells off any assets acquired or recovered after paying out for the loss on the basis of an insurance agreement.
Usually after, say, a car is stolen, the individual or company receives money from the insurer. In cases when the police subsequently find the car, the insurer is its legal owner and sells it, since the policyholder has usually taken the proceeds and bought a new car already. Since this is a sale made as part of an overall insurance arrangement, it is treated as being covered by the VAT exemption for insurance, and no VAT is charged on the sale. Such an approach to VAT was supported by the official interpretations issued by the Central Statistical Office (GUS), which stated that insurance services include the sale of recovered goods.
You can imagine that the 22% VAT on the sale of cars by insurance companies amounts to an enormous amount of money, even allowing for the percentage that is never recovered. Now, if you were selling cars in any other business circumstance, you would be obliged to charge VAT. The tax authorities finally realized that they could challenge the argument that the sale of recovered cars is VAT exempt, and tried to levy VAT. They argued that that although insurance services are VAT exempt according to the law, the sale of recovered cars involves selling goods and not insurance services. Therefore there is no reason to apply the exemption. The Finance Ministry also issued a letter of clarification to that effect, saying insurance companies should have been charging VAT on the sale of all recovered goods since the beginning of time (or at least since the introduction of VAT, which amounts to the same thing).
Needless to say, the tax offices audited the biggest insurers and levied VAT on all car sales. The insurers appealed, with the result that in one case the Supreme Administrative Court (NSA) ruled in favor of the tax authorities. In its ruling, the NSA said statistical information cannot influence the law or change regulations included in the law. A further case in the NSA is still pending, but nobody expects a different ruling from the first. It is interesting to note, however, that in some previous tax cases the NSA has said statistical classifications are binding.
So, there was a mess. And as you know, few things depress me more than tax authorities making up a law or reinterpreting it in unexpected ways on the spur of the moment and then going back several years to collect as much as they can in interest and penalties. After all, if the ministry is writing a VAT law to deal with VAT on insurance, you would assume that they would look at the whole process of conducting an insurance business and clarify what is and is not an insurance activity within the meaning of other laws, and then match the VAT law to that. Also, if there is a definition of insurance in one law, it seems reasonable that a similar interpretation of insurance should apply in another law.
But it appears that at last order has been restored and a sensible solution is in sight. An extended first article that determines what should be understood as insurance activity was recently added to the insurance act. The article lists the sale of recovered goods as part of the activity of an insurance company. So effective Sept. 24, there should be no doubt that insurance activity includes not only signing insurance agreements but also ancillary activities such as disposing of recovered goods acquired by the insurer as a result of paying out for losses incurred.
Unfortunately, the change is not retroactive, and so how to treat goods recovered before Sept. 24 is still a contentious issue.
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen. Paulina Pilch is a senior consultant in the tax department.
