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The Belgian tax administration has clarified its stance on the value-added tax regime applicable to third parties engaged in handling insurance claims on behalf of insurance companies and brokers.
In a move that that practitioners say will upend business as usual for claims handlers, Belgium’s Federal Public Service Finance set out guidance June 12, (2017/C/36), which makes it clear that the Belgian tax administration will no longer allow insurance settlement companies to invoke the general VAT exemption, permitted for financial and insurance services and guaranteed under EU VAT legislation.
Claims settlement companies whose only service is to settle claims in the name of and on behalf of insurers and who don’t intervene in the closing of an insurance agreement—helping find and introducing clients to the insurer—will all have to start charging VAT on their services starting Jan. 1, 2018, the administrative guideline said.
“We are talking about entities that don’t at all intervene and that are in essence simply providing a service at the level of claims handling and settlement,” Stijn Vastmans, a partner at the Belgian law firm Tiberghien said. “They now have an issue because VAT should be charged on all those services.”
As a result, insurance claims handlers will have to start charging Belgium’s standard 21 percent VAT rate on claims settlement services such as the receipt of claims, correspondence with clients relating to claims settlement, investigations into complaints about claims handling and investigations into contested claims.
Practitioners and industry representatives interviewed by Bloomberg BNA say the move will have repercussions far beyond making the services of claims-handling companies 21 percent more expensive.
“The decision of the Belgian VAT authorities has a direct impact on the insurers and other parties involved in damages covered by an insurance contract,” such as lease companies, said Francois de Clippele, a press and communications adviser at Assuralia, the Belgian industry group that represents the interests of insurance companies.
“They could incur additional VAT on claims handling services,” he said. “In case of claims handling services supplied by a foreign service provider, they must take the reverse charge mechanism into account.”
The Belgian tax administration published the guidance in the wake of a 2016 ruling from the European Court of Justice (C-40/15) that held that an insurer needs to itself assume the risks insured and that there needs to be a contractual relationship between the insurer and the insured for the VAT exemption for insurance transactions to apply.
Claims settlement services don’t fall under the VAT exemption for insurance services when such third-party service providers don’t intervene in the closing or modification of the insurance agreement as a broker or agent, Europe’s highest court said.
Vastmans said the changed position would have repercussions for all third-party companies that supply claims settlement services if they don’t intervene in the signing of the contract and don’t have the status of an insurance agent or broker.
“VAT will have to be charged on all these services, and the insurers or intermediaries won’t be able to deduct that VAT because they are exempt VAT persons,” he said in a June 22 phone interview.
As a result, their services will become 21 percent more expensive, he noted. “And the question is: Who will swallow this—the claims handler or the insurance company? I think in essence the client will ultimately swallow this.”
Vastmans added that local insurers were already bracing for the change.
“They are organizing to keep the VAT impact as small as possible, and so you see that they are investigating schemes such as VAT grouping, cost-sharing associations and the like.”
VAT groups allow a member country’s tax authorities to treat groups of closely linked companies as a single taxable person, while cost-sharing associations allow members who engage in VAT-exempt activities to achieve scaling benefits by pooling, for instance, personnel and IT services without triggering VAT charges.
De Clippele similarly said the impact for companies that provide insurance claims-handling services will be “substantial”.
“On the one hand, they will incur additional VAT obligations such as reporting obligations,” he said in a statement emailed to Bloomberg BNA June 22. “On the other hand, they will be granted the right to recover VAT—to the extent their output transactions are deemed to be subject to VAT.”
However, Wim Panis, partner at the Brussels office of the Stibbe law firm, said claims settlers’ right to VAT recovery would likely be nothing to write home about, pointing out that claims handling services primarily produce staff costs.
“Those do not carry VAT, so VAT cannot be deducted from this. Yet if you wanted to charge this cost, there would suddenly be an added 21 percent VAT charge,” he said in a June 22 phone interview. “It’s only in those cases where you really have a lot of VAT costs that it becomes interesting to be able to work with VAT.”
Panis said he expected the tax administration’s guidance to result in a consolidation wave of sorts, with varying degrees of incorporation and cooperation between insurers and claims settlers. “I think a move towards interaction and closer collaboration will be launched, where some brokers will consider integrating claims handlers into their services,” he said.
One possible scenario, he said, is that insurance brokers or companies fully incorporate an independent claims handling company to avoid VAT billing. A less drastic step, he said, would be for claims handlers and insurance companies or brokers to establish a VAT group or cost-sharing association. But both scenarios would also present disadvantages, he explained.
Noting that VAT groups require the different entities to share close financial, economic and organizational ties, he pointed out that claims handlers would also have to give up a level of independence.
Services provided to cost-sharing associations, meanwhile, “can be exempted from VAT provided that the provision of those services works in a cost-covering or cost-sharing manner, so not with a margin of profit,” Panis said.
He said, however, that claims handlers that today work truly independently will want to have the possibility of having their own profit margins. “So I think there are solutions in that direction, but they won’t work for everybody.”
Panis added that some claims handlers would no doubt choose to remain fully independent, standalone companies. But noting the additional VAT cost, he said, “the rules of competition will have to play here and reveal whether the additional VAT cost can be justified, or rather, whether those purchasing the service can continue to carry it in light of the supply and demand.”
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