Int Tax Public Finance (2013) 20:867–883DOI 10.1007/s10797-012-9252-x

P O L I C Y WAT C H

A proposal to apply the Kiwi-VAT to insurance servicesin the European Union

Sijbren Cnossen

Published online: 4 October 2012© Springer Science+Business Media New York 2012

Abstract In the spirit of the European Commission’s call for a simpler, more robustand efficient VAT system, this article proposes to integrate exempt insurance servicesinto the European VAT, and to abolish the discriminatory, excise-type insurance pre-mium taxes levied by the various Member States. The current VAT exemption (notaxation of insurance services and no credit for the VAT on inputs) is administrativelycomplex and economically distortionary. Instead, the value added of property and ca-sualty insurance companies can be taxed on a transactions basis by applying the VATto insurance premiums (creditable by VAT-liable businesses) and allowing a presump-tive tax credit for the VAT imputable to payouts (plus a credit for the actual VAT onpurchases). The presumptive tax credit should be taxed at the level of business recip-ients, but individuals would receive the VAT along with indemnity payments withouthaving to file a return. Exceptionally, the tax-credit VAT would not be applied to lifeand health insurance premiums, but insurers would be taxed on an accounts basis onthe sum of wages and business cash flow.

Keywords VAT · Insurance premium tax · Insurance · European Union

JEL Classification H21 · H25

1 Introduction

In December 2010, the European Commission adopted a Green Paper on the future ofVAT, inviting stakeholders to take a critical look at all aspects of the EU VAT Systemwhich has now been in place for 35 years. Following public consultations and the

S. Cnossen (�)CPB Netherlands Bureau for Economic Policy Analysis, P.O. Box 80510, 2508 GM, The Hague,The Netherlandse-mail: cnossen@ese.eur.nl

868 S. Cnossen

publication of an economic evaluation of the VAT system, the Commission issueda Communication, in which it outlined proposals for reform, including a broaden-ing of the tax base.1 In this spirit, this article outlines a proposal to abolish the VATexemption for insurance and the separate, excise-type taxation of insurance premi-ums. Instead, it proposes to integrate property and casualty insurance services fullyin the VAT base, basically by adopting the approach found in countries with modernVAT systems, such as New Zealand.2 In addition, it proposes to tax life and healthinsurance on the addition method.

Thus far, insurance services have been exempted under the EU VAT, because in the1960s, when the tax was introduced, law makers did not know how to tax them. Atthe level of the policyholder, the intermediation charge, which reflects the cost of theinsurance service, cannot be separated from the capital transfer to the common poolfrom which indemnity and contingent payouts are made. Under a tax on consumption,such as the VAT, the consideration for the service provision should be taxed but notthe capital transfer. Since value added could not be determined on a transaction-by-transaction basis, the law makers exempted insurance for lack of a better alternative.As is well-known, this means that the services provided by insurers are not taxed, butalso that insurers cannot credit the tax paid on purchases. Further, various MemberStates continued to levy or introduced excise-type of taxes on insurance premiums.

In the meantime, New Zealand and following its example South Africa, Australiaand Singapore—all of which introduced the VAT at a later date than the EU andcould learn from the EU VAT’s shortcomings—found a solution for the VAT problemwhich this paper recommends for the European Union. Particularly, the designers ofthe New Zealand VAT (called Goods and Services Tax, or GST for short) hit uponthe idea of avoiding the problem of determining taxable value added on the basis ofindividual policies by shifting it to the level of the insurance company where valueadded is the difference between premium receipts, on the one hand, and indemnitypayouts and taxable purchases, on the other hand.3 As is well-known, this differenceequals the sum of wages and above-normal returns (business cash flow), calculatedon a cash-flow basis;4 in other words, the VAT base.

1For the Green Paper, see European Commission (2010a), as well as the accompanying Commission StaffWorking Document (European Commission 2010b). For a summary of the public consultations, see Euro-pean Commission (2011a), for the economic evaluation paper, European Commission (2011b), and for theCommunication (European Commission 2011c).2For other proposals that would improve the structure and functioning of the VAT, see Cnossen (2010b)on VAT coordination, and Cnossen (2011) on immovable property.3This clever idea was originally developed and discussed in the tax literature by Barham et al. (1987).4The equivalence of valued added to the sum of wages and business cash-flow can be explained by con-sidering the accounting identity: Y ≡ W + R ≡ C + S(≡ I ). From this, it follows that C ≡ Y − S ≡W + [R − I ], in which C is consumption, Y is income, S is savings, W is wages, R is capital income,and I is investment. The term [R − I ] is business cash flow, that is, the above-normal return to capital oninframarginal investment. W +[R − I ] is value added as computed from the profit & loss account, but on acash flow basis instead of according to the matching principle which is used for income tax purposes. Thecash-flow basis of accounting eliminates the normal return to capital from the VAT base by the immediatewrite-off (full tax credit) of investments. Under the income tax’s matching principle, on the other hand, thenormal return is taxed, because investments are written down over their useful lives. For a brief exposition,see Cnossen (2010a) and for a more thorough treatment, see Auerbach (2008).

A proposal to apply the Kiwi-VAT to insurance services in the EU 869

This article analyzes and discusses the New Zealand (Kiwi-)approach, and ex-plains how it can be applied to the services supplied by the European insuranceindustry. The second section surveys and evaluates the bases and rate structures ofthe various insurance premium taxes levied by the Member States, and discusses theform and implications of the VAT exemption. It is argued that exemption and sepa-rate taxation are administratively complex and highly distortionary elements in thetax systems of the Member States. Accordingly, the separate taxes on insurance pre-miums should be abolished and the VAT exemption withdrawn. As shown in the thirdsection, full taxation is quite feasible, simpler and more efficient than the current sys-tem. The fourth section sums up the taxable status of insurance services under presentarrangements and under the Kiwi-approach, and provides some concluding thoughts.

2 How is insurance taxed in the European Union?

This section surveys and evaluates the current insurance premium taxes in the Euro-pean Union and discusses the VAT treatment of insurance activities.

2.1 Insurance premium taxes

2.1.1 Forms of insurance

As shown in Table 1, the major forms of insurance can be distinguished into generalinsurance, life insurance, and reinsurance. General insurance, purchased as a sepa-rate policy from an insurance company, basically takes two forms: (a) risk or hazard(property-casualty) insurance regarding material damage or financial loss of homes,properties, cars, and liability; and (b) personal insurance regarding health, injury, anddisability—generally linked to the treatment of medical care. General insurance in-volves indemnity payments (which make whole again or reinstate the previous posi-tion) for the loss incurred, as opposed to whole life or term insurance, which takes theform of contingent payments (a claim arises on the occurrence of a specified event).Reinsurance does not involve individual policies, but is more of a matter between in-surance companies. Table 1 also lists various parafiscal charges, not discussed further,often earmarked to fund some activity (e.g., fire fighting), institute or fund. The lasttwo columns indicate that insurance premium taxes are not major sources of revenue.Belgium and Germany are the only Member States where insurance taxes contributemore than 1 % of total tax revenue.

2.1.2 Survey

On the basis of this classification, Table 1 lists the crazy quilt of taxes on insur-ance premiums that are found in the Member States of the EU. Risk or hazard(property-casualty) insurance premiums are widely taxed, except in some new ac-cession countries, such as, Latvia, Lithuania, Poland, Romania, and Slovakia. SomeMember States define the type of insurance that is being taxed, other states broadlytax general insurance, but provide exemptions or reduced rates for, say, goods trans-port, export-related activities, life insurance, and reinsurance. These activities would

870 S. Cnossen

Tabl

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Type

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GD

P

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Gen

eral

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liabi

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fire

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mpt

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880.

38

Bel

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872 S. Cnossen

Tabl

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A proposal to apply the Kiwi-VAT to insurance services in the EU 873

simply not be taxed under product-specific insurance taxes. Rates, generally ad val-orem, vary widely across Member States.

Health-related insurance is taxed less widely and if taxed rates tend to be lowerthan those for risk or hazard insurance. Austria, for instance, imposes an 11 % taxon premiums for property-casualty insurance, but merely 1 % on health insurancepremiums. Further, most Member States do not tax life insurance, with the exceptionof Austria, Belgium, Ireland, Malta, and Portugal, which tax life insurance premiumsat (very) low rates.5

2.1.3 Evaluation

Insurance premium taxes are anachronistic levies, comparable with traditional stampduties still found in many developing countries. Unless insurance gives rise to nega-tive externalities (because insured persons impose costs on other people!), insurancetaxes do not belong in a modern, rationally designed tax system based on the prin-ciples of equal treatment and economic neutrality. It is difficult to argue that insur-ances should be taxed differentially higher than other goods and services bought byconsumers. Clearly, the insurance tax distorts consumer and producer choices: indi-viduals and businesses will ensure themselves less than they would do in the absenceof the tax.

The only possible justification for the insurance tax is that it makes up for the lessthan full taxation of insurance services under the VAT, but this is an odd way of justi-fying the tax. Generally, discriminatory treatment is not neutralized through anotherform of discrimination. Another reason might be to prevent warranty agreementswhose cost is embedded in product price taxable under the VAT, from being trans-formed into exempt insurance services,6 but the insurance tax is not the appropriateresponse to this form of tax avoidance. Further, it may be assumed that collection andcompliance costs are high, relative to, say, the VAT, while the revenue raised throughinsurance taxes is generally negligible.

2.2 VAT exemption

2.2.1 VAT treatment of insurance services

Under the common EU VAT, all forms of insurance are exempt from tax. Figure 1shows the legal basis for the exemption, the qualifying forms of insurance, and activi-ties that are excluded from the definition of insurance services.7 The exemption is also

5Greece and Slovenia tax life insurance for durations of less than 10 years. Italy taxes policies taken outbefore January 1, 2001. Sweden only taxes group life insurance.6As exemplified by the UK government’s decision to increase the insurance tax, called stamp duty, to thelevel of the VAT, a decision whose legitimacy was sanctioned by the European Court of Justice (ECJ)in GIL Insurance Ltd and Others vs. Commissioner of Customs and Excise, Case C-308/01 (2004) ECRI-04777.7The European Commission has attempted to streamline the exemptions for financial and insurance ser-vices by (i) clarifying and redefining the exemptions, and (ii) introducing a cost-sharing arrangement,

874 S. Cnossen

applicable to insurances agreed to without involving the services of insurance compa-nies. However, actuarial services, repair contracts, del credere agreements, factoringcontracts, damage assessment services, the recruitment of potential policy holdersfor an insurance company without actually concluding the insurance policy, and thecompensation which an insurance agent pays to a travel organization for passing on acustomer, do not fall under the VAT exemption. It is readily apparent from Fig. 1 thatvarious contentious boundary problems can arise.8

In addition there are various insurance activities not shown in the table but rele-vant to the discussion. These activities involve, among others: (a) services of agents,brokers, and claim adjusters, (b) warranties provided through an insurance companyor embedded in the selling price of a product, and (c) insurance that is not provideddirectly by an insurance company, such as, credit card company protection of pur-chases against breakage, rental company protection against damage included in therental fee, and insurance provided as part of a tour or travel package. The servicesof agents and brokers are exempt from VAT, but those of claim adjusters are taxedin some Member States. Warranties provided through an insurance company are ex-empt, but the cost of warranties embedded in product price is taxed. Further, insurancenot provided directly through insurance companies is exempt.

2.2.2 Evaluation

The VAT exemption of insurance services violates the logic and functionality of theVAT. Since the value added by insurance companies (wages + business cash flow)is not taxed (and disregarding the effect of insurance taxes), insurance services canbe offered at lower prices to consumers than other fully taxed services. Other thingsbeing equal, consumers will then buy more insurance services than they would doif the services were fully taxed—an effect that does not, except by chance, cancelthe opposite effect of insurance premium taxes. Further, exempt insurance compa-nies cannot pass on the VAT on their purchases to VAT-liable businesses which buyinsurance services. This causes a cascade-effect, that is, tax is levied on tax, whichartificially stimulates vertical integration.9

The non-creditable and non-refundable VAT also enters into the price of insuranceservices exported to other EU Member States, which infringes on the efficient work-ings of the single market. Apparently, the philosophy is that competitive conditionsare still maintained if no Member State can rebate the tax on inputs at export to other

which would allow economic operators to pool investments and redistribute the costs of these investmentsto the members of the group, without being taxed. See European Commission (2007a, 2007b, 2008). Fur-ther, the Commission has proposed a compulsory option to tax, that is, compulsory for Member States butoptional for financial institutions to opt in for taxation. For a perceptive analysis of the proposals, see de laFeria and Lockwood (2010), who conclude that the option to tax would give rise to significant discrepan-cies in the design and application amongst Member States, which the full-taxation proposal in this paperwould avoid.8As confirmed in various rulings of the ECJ. For a good review of the European jurisprudence, see de laFeria (2007). For a broad legal treatment, reference is made to Chap. 11 in Schenk and Oldman (2007).9For a brief but comprehensive review of the distortions caused by exemptions, see Chap. 8 in Ebrill et al.(2001).

A proposal to apply the Kiwi-VAT to insurance services in the EU 875

Fig. 1 VAT and Insurance in the European Union, 2012

states. (The analogy is that soccer is still a competitive game if all players have onearm tied behind their back!) The tax on insurance services exported to third coun-tries is refunded, but here contentious tax allocation issues arise because the VATon purchases must be attributed to exempt services (non-creditable) and zero-rated

876 S. Cnossen

export services (refundable), often in an arbitrary fashion. Further, exempt insurancecompanies will refrain from outsourcing various services, such as administrative ser-vices, because in-house provision saves the non-creditable VAT on the cost of laborincluded in purchase price. Insurance companies will also be induced to avoid theVAT on purchases by setting up subsidiaries from which they rent, say, computerservices.

In conclusion, there is much to be said for making insurance services fully taxableunder the VAT as has been done in countries with modern VAT systems. This verdictapplies also to other forms of financial services, enumerated in Article 135(1)b-g ofthe common VAT Directive.10 But the taxation of these services is more complicatedthan the taxation of insurance services. Since insurance services can be taxed withouttaxing these other financial services, there is no reason not to proceed with bringinginsurance services into the VAT base.

3 Application of VAT to insurance

3.1 Insurance companies

To elucidate the application of the VAT to insurance services, Table 2 shows a stylizedexample of the cash-flow particulars of an insurance company (which can be foundin the published annual accounts of most insurance companies). In the example, theinsurance company collects €100 million in premiums which are subject to 20 %VAT. These premiums constitute the company’s sales; after all it ‘sells’ insurancepolicies. Part of the premiums are used to make payouts, another part flows into anequalization reserve to take care of fluctuations in payouts over time. The reserve’sinvestments yield a return of €10 million (in the example, this return can be viewedas the normal return of the insurer), which can also be used to make payouts. To runits business, the insurer buys goods and services for which it pays €15 million plus20 % VAT. Further, the insurer pays the ongoing costs of its own organization (ad-ministrative personnel, canvassers, claim adjusters, etc.) of €25 million, includingthe management cost of the equalization reserve. Indemnity payouts total €65 mil-lion. Finally, the difference between receipts and expenses represents business cashflow (the above-normal return) of €5 million.

Exemption of the insurance services, the current VAT regime, means that the in-surer only pays VAT on its purchases, that is, €3 million, although gross value addedis €35 million (calculated as the difference between premium receipts of €100 mil-lion and payouts of €65 million). Ignoring the treatment of the adjustment of theinvestment return (but see below), this involves a VAT revenue loss of €4 million(€7 million on the value added minus the input VAT of €3 million). In the contextof the VAT, this means that insurance services are grossly under-taxed. Taxing thepremiums with 20 % insurance tax, without taking account of the input VAT, would

10The question why the inclusion of financial services in the VAT-base is desirable on efficiency grounds isconvincingly answered by Auerbach and Gordon (2002). For a comprehensive analysis of the applicationof VAT to financial services in Europe, see Huizinga (2002).

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Table 2 Cash-flow data of an insurance company in Euro (× 000)

Description Amounts(excl. VAT)

20 % VAT(incl. investmentreturn)

20 % VAT(excl. investmentreturn)

1. Receipts 110.000

a. Premiums 100.000 20.000 20.000

b. Investment return 10.000 2.000

2. Expenses 105.000

a. Wages 25.000

b. Purchases 15.000 (3.000) (3.000)

c. Payouts 65.000 (13.000) (13.000)

3. Business cash flow (1–2) 5.000

4. Net VAT payable 6.000 4.000

generate a yield of €20 million in the example. If we were to add the non-creditableVAT on inputs, then the total tax would be €23 million, a sizable over-taxation ofinsurance services compared to other goods and services which are taxed only on thenet value added.

For the correct computation of the VAT on insurance services, VAT should be at-tributed to payouts, which should be considered part of the ‘purchases’ of the insurer.After all, as capital transfers, these payouts do not belong in the VAT base. The VAT,which has been paid in respect of the payouts when the premiums were collected, canbe washed out through a kind of reverse-charge procedure under which the insurergrants itself a VAT credit of 20 % of €65 million, or €13 million, which it creditsagainst the VAT that has to be paid to the VAT office in respect of the premiums.Therefore, the VAT attributed to the payouts is not a cost to the insurer. Next, the im-puted VAT along with the amount of the payout is paid to claimants. If the claimant isa VAT-registered business, it has to include the indemnity payment (plus the imputedVAT) in sales on its VAT return. Earlier, the business received a credit for the VATpaid on the premium paid to the insurer, so, on balance, the VAT is not a cost to thebusiness either. As a final consumer, an individual claimant cannot file a return forthe VAT received along with the payout (earlier, she could not take a credit for theVAT on the premium). She can apply the payout plus the VAT to pay for the repair orreplacement of the damaged or lost property. So, at that time, the VAT flows back intothe treasury. If she decides to keep the money, the VAT refund is appropriate since noconsumption took place.

The payout on which VAT is reverse-charged includes an investment return of€10million which has not been subject to VAT. This return should also be taxed thereforeto compensate for the VAT credit on the payout. Further, an adjustment should bemade for the VAT paid in respect of taxable purchases. If all of these amounts aretaken into account, the insurer should pay a net amount of VAT of €6 million tothe treasury (see Table 2). This equals the amount of VAT which would have beenpayable if the net value added of the insurer—calculated as the sum of wages of €25million + business cash flow of €5 million—would have been taxed.

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Fig. 2 Exempt consumer

New Zealand nor any of the other countries with a modern VAT tax the invest-ment returns of insurers. In consequence, a notional credit is provided for the VATattributable to this return, although no VAT has earlier been paid in respect thereof.As shown in Table 1, the actual VAT payment then amounts to €4 million, less thatthe full VAT, although more than the VAT on purchases.

3.2 Insured individuals and businesses

This ingenious approach deserves to be emulated by the Member States of the EU.The result can be further elucidated with the aid of the following diagrams.11 The di-agram in Fig. 2 represents the VAT chain of a final consumer, generally an individual,who takes out an insurance policy. The insured pays €100 for his policy plus 20 %VAT, which the insurer pays to the VAT office and for which the insured, being anexempt individual, cannot get a VAT credit. Next, the insured incurs a loss of €30which is paid out after the insurer has provided itself a credit of €6 (20 % of €30).The payout is inclusive of the VAT of €6, which after all would also have to be paidin case of repair or replacement of the insured object (and which at that stage wouldhave to be paid to the VAT office). However, the insurer can grant itself a credit forthe amount of €6.12 Accordingly, the net VAT received by the tax office is €14. Thisis exactly the amount of VAT that should have been payable over the value added of€70 (€100 premium minus €30 loss compensation).

If the insured is a VAT-liable business, the VAT payment of the insurer wouldexactly compensate the VAT credit of the business (in either case, €20). The same

11The discussion in this section has benefited greatly from a bulletin issued by the Australian Tax Office(undated).12This “reverse-credit” can be likened to the reverse-credit that an importing business allows itself afterimposing a reverse-charge on out-of-state purchases under the EU’s deferred payment system.

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Fig. 3 VAT-liable business

story applies in case of a payout. The VAT of €6 received by the business fromthe insurer has to be paid to the VAT office, but compensates the VAT credit of thesame amount which the insurer grants itself. On balance, no VAT is payable, fullyin accordance with the nature of the VAT as a tax on private consumption and noton business. The diagram in Fig. 3 shows the VAT chain for a VAT-liable business.Its workings are self-explanatory. Note that the insurer should make mention of theamount of the “tax credit,” which the insured business has to include in its VAT return,when it makes the indemnity payment.

Under the New Zealand scheme, the insurer does not have to make a distinctionbetween a VAT-liable and a VAT-exempt person. This has the disadvantage that aVAT-liable business has to pay the VAT received from the insurer to the VAT office.Australia, therefore, has simplified the scheme somewhat by permitting insurers tomake a distinction between VAT-liable and VAT-exempt persons. VAT-liable personsreceive the indemnity payout without the amount of the imputed VAT, while the in-surer does not grant itself a credit for the same amount. Exempt persons, on the otherhand, receive the VAT along with the payout, while the insurer gets a credit for thesame amount. On balance, the result is the same therefore as under the New Zealandapproach.

The examples show that even in hindsight no distinction can be made at the levelof the insured between the consideration which is paid for the service provided bythe insurer and the capital transfer. The premiums and payouts, moreover, relate todifferent insured persons. Nevertheless, value added and only value added is taxed inline with the purport of the VAT, without causing administrative complexities or eco-nomic distortions. Perhaps, there is an analogy here between the premium paymenton a separate insurance policy, which is subject to VAT, and the payment in respectof a warranty embedded in price, which is also taxed.

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3.3 Life and health insurance

The previous discussion focused solely on property and casualty insurance. With lifeinsurance there is the difficulty that, besides the pooling of risk, it involves interme-diation between savers and investors. Barham et al. (1987) have shown that life in-surance can be taxed in similar fashion as general insurance by separating the chargefor financial intermediation and the cost of protection from the gross premium inorder to determine the savings component. The charge for financial intermediationis simply the difference between the gross premium and the net premium shown onlife insurance policies, while the cost of protection can be calculated using mortalitytables. As the authors note, the major problem with this approach is that the chargefor financial intermediation is not a constant proportion of the gross premium. In thelater years of a policy, moreover, the actual cost of protection may greatly exceed thepremium paid. Accordingly, the tax would rise in tandem and might actually exceedthe annual premium. Policy holders would balk at this situation, although the resultwould be correct in present value terms.

None of the countries that have adopted the New Zealand approach for taxing gen-eral insurance services have extended this treatment to life insurance. Life insuranceand annuities resemble pension funds and annuity schemes which would have to betaxed, too, on their intermediation services if equal treatment is to be provided. Fur-ther, there is the consideration that these forms of insurance target individuals ratherthan businesses; hence cascading does not occur. This argument also applies to healthinsurance, a form of risk pooling, often universal, compulsory and with redistributiveelements—in other words, a quasi-tax that would hardly function better by imposingVAT on it.

Nevertheless, equal treatment and neutrality would be promoted by taxing life andhealth insurance services. Although this would be difficult on a transactions basis, itcan be done on an accounts basis by taxing the sum of wages and business cash flowof life and health insurance companies under the addition method.13 Insurance pre-miums would not be taxed but a credit would be allowed for the VAT on purchases bythe companies. The addition method would avoid the difficulties of the approach ad-vocated for casualty and property insurance, but it can be applied only after accountsbecome available, perhaps on a quarterly basis. Israel, Argentina, and France haveexperience with the addition method tax, while Italy administers such as tax, calledIRAP, at the regional level.

4 Summary and conclusion

Table 3 summarizes the tax situation under current arrangements, that is, the insur-ance tax and the VAT exemption, and the situation that would ensue if insuranceservices would be fully taxed under the Kiwi-approach. Current arrangements are

13For a brief description of the workings of the addition method tax and a comparison with other forms ofconsumption tax, see Cnossen (2010a).

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Table 3 Current and proposed taxation of insurance services

Type of insurance Risks General currenttaxable status

VAT proposala

Insurance tax VAT

a. Risk or hazard(property-casualty)

Car, household effects, home,liability, legal assistance,travel, cancelation

Taxed Exempt Taxed

Transport of goods, aviation,sea-going vessels

Exempt Exempt Taxed

Export credit Exempt Exempt Taxed

b. Health Sickness, disability Exempt Exempt Taxed

c. Life Exempt Exempt Taxed

d. Reinsurance Exempt Exempt Taxed

e. Brokers andagents

Exempt Exempt Taxed

f. Loss adjusters Exempt Taxed Taxed

g. Warranties

• as insurance Taxed Exempt Taxed

• in product price Exempt Taxed Taxed

h. Insurance outsideinsurance companies

In credit card fee for loss ordamage to purchased good

Exempt Exempt Taxed

In lease fee for loss of damageto rented car or other object

As part of payment for travel

aIn the case of VAT-liable businesses, taxed means taxed with credit, including a refund of prior-stage taxif required

broadly summarized and may differ from one Member State to another state. Un-der most insurance taxes, property and casualty insurance is generally taxed, exceptinsurance relating to the transportation of goods, aviation and marine activities. Ex-port credit insurance is also exempt, as are most forms of health and life insurance.The exemption or non-taxation extends to various intermediation services and typesof insurance not provided through an insurance company. All of these activities arecurrently exempted under VAT, although VAT has to be paid in respect of taxablepurchases. However, the activities of loss adjusters are taxed under VAT. This is alsothe case with warranties embedded in product prices, a reason why Member Statesapply insurance tax to warranties provided separately through insurance policies.

Under the Kiwi-approach, all forms of property and casualty insurance and in-termediation services would be taxed alike. It would not be necessary to make adistinction between taxable forms of insurance and non-taxable forms, such as goodstransportation. Transport companies would simply be able to credit the VAT on in-surance against the VAT on transport services. Upon shipment to other EU MemberStates or third countries the full VAT on purchases and indemnity payments wouldbe refundable. This would provide for a more level playing field in the single mar-ket than is currently available. For similar reasons, reinsurance does not have to be

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exempted. Importantly, correct treatment requires that investment returns of insurers,which are eligible for a reverse-credit if paid out, should be taxed, in contrast to cur-rent Kiwi-practice. In contrast to Kiwi-practice, life and health insurance should betaxed under the addition method tax which achieves the same result as the tax creditVAT.

In conclusion, the insurance premium tax is an anachronistic levy for which thereshould be no place in a rational tax system. The same applies to the VAT exemptionwhich violates the logic and functionality of the tax. No sensible argument can bemade why the VAT on insurance services should depend on the ratio between taxableinputs and exempt sales. The article has not touched upon the revenue consequencesof the abolition of insurance taxes and the application of the standard VAT rate toinsurance services. In most Member States, the revenue from insurance premiumtaxes is negligible. Besides, the main argument is one of efficiency. Full taxation ofinsurance services would improve the efficient workings of the single market.

Acknowledgements The author is grateful for the helpful comments received from Bernd Genser, Ritade la Feria, Stephen Matthews, and two anonymous referees.

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