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Taxing domestic life products

As is well known, the Revenue have for some time been conducting an investigation into insurance products under the title of Single premium insurance product investigation, or SPIP. One would expect an investigation into single premium products to achieve significant returns to Revenue from its enquiries. It is not specifically an inquiry into any loss of tax revenues from the life insurance products as such. Previous investigations into bogus non-resident accounts and off shore assets did of course look at the taxation of the income from the assets but in addition enquired as to the source of the funds used and whether this money had been taxed.

It is as well to remind oneself as to how insurance products are taxed in order to see that the main target is probably the source of the funds placed into the insurance policy.

Since the year 2000, when the law on taxation of insurance products was significantly changed, there have been two parallel methods of dealing with the products of Irish life companies.

In general, income and profits on policies are taxed in the hands of the life company. In the case of policies written broadly until 31 December 2000, profits which accrued to the policyholder were taxed in effect at the standard rate of income tax and still continue to be so taxed until the policy ceases. The proceeds of a policy in most cases represent a capital profit but, by virtue of section 593 TCA 1997, no chargeable gain accrues to the original policyholder on the disposal of a life policy. So far as the policyholder is concerned the tax rate is the standard rate of income tax.

Because tax under the old regime is accounted for on an annual basis, it was and is the net profit on the policy which is rolled up and re-invested for the benefit of the policy holder through the investment funds of the life company.

For policies written under the new regime, (generally speaking from 1 January 2001 but with some transitional adjustments) the tax treatment in contrast allows the policyholder’s income to accrue gross. Tax is withheld by the life company or appropriate intermediary at standard rate on annual distributions if any but with an additional 3% in respect of other distributions as well as on the profit on the policy when it is realised. This required a detailed scheme of returns by the life companies in respect of tax deducted.

One way or the other, life companies were and are bringing to account the tax on the net and gross funds, although the tax regimes have been subject to frequent adjustment mainly so as to advance the payment of tax to the exchequer. Generally speaking, then, tax on the products ought not to have been the issue.

Why investigate?

Revenue’s problem was that they did not who was investing in life company products, what was the source of the investment nor what happened to the proceeds. Other investigations perhaps gave reason to suspect that life products were being used to bring non-taxed funds back into view but in a new guise.

Interestingly, in a briefing to TALC in February this year, Revenue reported that 93% of off-shore asset case had been settled and that the take was €800 million. At that time Revenue also reported that 7 cases had been referred to the High Court for further information. It is not surprising that the SPIP enquiry is seen as a being similarly fruitful. The fruitfulness is not confined to the tax take; existing enquiries have had the beneficial effect of encouraging compliance from all tax payers and SPIP should add to that pressure.

A two stage approach

The first part of the investigation, launched in May 2005 was to encourage voluntary disclosures. Taxpayers were asked to indicate an intention to disclose and then to do so. By September 2005, such disclosures had netted €380 million.

It appears that in 800 cases, taxpayers had advised of an intention to make a disclosure but had not yet contacted Revenue. These cases will be followed up.

Following on from the voluntary disclosure process, the next stage of the investigation is similar to the procedure operated with previous investigations whereby financial institutions provided Revenue with policy details on foot of High Court orders.

This involved an initial sampling exercise, following which Revenue were in a position to seek High Court orders and so follow up on cases where tax is outstanding and where they suspect disclosures were not made during last summer’s “disclosure window”.

So, by the summer of 2006, there had been identified a first tranche of policies where the investment was in aggregate €50,000 upwards.

The figures are not precise but there appears to be around 90,000 policies in this tranche involving perhaps 35 to 45,000 taxpayers. This does not mean that these taxpayers are not compliant. The insurance companies simply identify policies according to the parameters laid down in the High Court orders (at the time of writing, eleven such orders have been sought) and report policy details to Revenue in October 2006.

In line with the procedures laid down, policyholders whose policies are to be reported to Revenue are being notified of this in writing by the insurance companies. The lists of policies reported will include any cockles sown among the wheat. Now it is in no one’s interest including that of the Revenue that genuine wheat be tossed on to the harvest fires along with the cockles

Responding to a notification

To deal with this problem, Revenue proposed that the insurance companies, when writing to their customers advising them of the information being sent to Revenue, include a form of declaration that compliant taxpayers can complete. The submission of the form would be a factor when Revenue considers which taxpayers are to be further contacted [i.e. investigated] as the enquiry progresses.

While the intention is to be applauded, the declaration was seen by practitioners as too broad. The wording is as follows: “I do not have an outstanding tax liability”. The Institute along with the other CCAB-I bodies had expressed dissatisfaction with the lack of consultation on this development. In August 2006, there was a meeting of TALC to discuss the declaration amongst other recent developments in relation to the SPIP investigation.

The following points emerged: • The Declaration “I do not have an outstanding tax liability” is intended to be confined to taxable periods ending on or before the 31 December 2003 where there are undeclared liabilities. This point, at the time of writing, is to be confirmed by Revenue on their website; • Use of the Declaration form is not mandatory; it is not a statutory form, and accountants are free to write in on their own terms without using the Declaration form; • A declaration, when made, is to be completed for each policy; • A sample of declarations will be checked; • Revenue are working on a methodology to gather information on policies where the aggregate investment is below €50,000.

It is useful to repeat the observations made in this respect in the Institute’s eNews bulletins.

On 28 July 2006, eNews reported;

“We can understand Revenue’s motivation for such a declaration. In the past, some taxpayers made declarations in regard to one investigation, for example the Bogus Non resident Account investigation, while omitting details of other tax defaults … We cannot condone this.

Following the meeting of TALC referred to above and the Revenue clarifications, eNews reported on 4 August 2006:

“We stressed our support for Revenue’s efforts in detecting evasion, as evidenced by the work of our members in assisting clients in making disclosures and by the work of our respective organisations in ensuring that relevant information on dealing with the investigations is made available to members..

“We also have been advised that where taxpayers come forward in the context of a SPIP investigation to disclose funds otherwise undeclared which had been invested in SPIPs, along with other tax defaults, and such disclosure is made immediately in advance of Revenue receiving information from the insurance companies in October, the Revenue will not pursue the case with a view to prosecution and the “cooperation” mitigation of penalties of 75% will be available”

Again it is important to emphasise that a notification from an insurance company should not be ignored.

Gerald Murphy is Taxation Executive with the Institute of Chartered Accountants in Ireland.