To the extent that IPT applies, the supplier's business customers are not entitled to get refunds (for the 19% IPT passed on instead of VAT), and the supplier itself may no longer be entitled to input VAT deduction. These changes could entail a considerable reduction in the profit margin or a corresponding increase in the cost of the warranty offer. Most taxpayers had hoped for another extension of the effective date, which has finally been denied, however, so that IPT is applicable as of January 2023 (with relevant IPT filing deadlines coming up on 15 February 2023). In order to avoid IPT underpayments it is strongly recommended to act in a swift manner and, if not yet done, clarify whether specific paid guarantee promises are actually subject to IPT or (despite the changes still to) VAT, and avoid IPT/VAT compliance risks (see specific recommendations below how to reduce the scope of IPT and compliance risks in practice).
Guarantee promises traditionally subject to VAT
Paid guarantee promises typically comprise extended or expanded warranty promises offered to customers when they purchase a new product upon conclusion of the contract. In the past, these were mostly additional benefits for the purchase of motor vehicles, but now they can be found in almost all sectors, especially in the electrical and entertainment industries. Such products have typically been treated as ancillary and thus be subjected to the same VAT treatment as the sale of the insured product (and at the same time exempted from German IPT).
MoF's Change of view: Paid guarantee promises subject to IPT
In 2021, the German Ministry of Finance has repositioned itself in a tax decree with far-reaching consequences for companies offering paid guarantee promises of various kinds. The MoF appears to intend to consider additional payments for an additional guarantee promise largely as insurance benefits subject to German insurance premium tax instead of VAT. Initially these changes were assumed relevant for the car industry only (sale of motor vehicles). In a follow-up letter, the MoF clarified, however, that the new principles should be applied to all industries. The tax decree only mentions so-called full maintenance contracts as an exception, presumably because in these cases the entrepreneur does not insure any third-party risk of the customer, but only bears his own entrepreneurial risk (this point can be used to identify further exceptions from IPT, see below recommendations).
Change finally effective as of 2023 / No further extensions of transitional period / IPT filing required / Tax compliance risks
The effective date of the new regulations had been extended several times by the MoF, while many taxpayers had apparently hoped for a retraction of the tax decree or at least for further extensions until its actual application. To their surprise, towards the end of last year the MoF finally refused further extensions so that IPT must finally be submitted for relevant warranty commitments made after 1 January 2023 (first relevant filing deadlines coming up 15 February 2023). While a lot of affected companies have taken action in the meantime (mostly since the second half year of 2022), many companies are still struggling to get a grip on this rather confusing topic. It should be noted though, that IPT underpayments could be regarded as tax offenses and should be avoided.
Practical impact: Adverse tax consequences of IPT instead of VAT
The typical impact of the change is that VAT is replaced by IPT (both 19%). The supplier's business customers are not entitled to get IPT refunds (from IPT passed on to them), however. And the supplier itself may no longer be entitled for input VAT deduction (which can be particularly critical if the warranty promise includes services in kind, such as repair services, with corresponding input services burdened with input VAT; in consequence expenses for spare parts and materials required for repair work could be increased). These changes could entail a considerable reduction in the profit margin or a corresponding increase in the cost of the warranty offer.
How to remit IPT
To the extent IPT is in fact applicable, IPT is to be withheld and remitted by the companies that offer the relevant warranty promises. In case of a foreign company offering such warranty promises, the involved German distributor/reseller might be appointed as the responsible taxpayer for withholding and remitting the IPT. Such appointment requires a written agreement between the parties and a written notification of the Federal Central Tax Office. But even without such appointment, they are generally secondary liable if they collect the consideration for the respective guarantee promises.
Recommended actions to ensure IPT and VAT compliance
In order to avoid IPT underpayments, it is recommended to act in a swift manner and clarify whether specific warranty promises issued against consideration are subject to IPT or VAT. Affected companies should particularly review their offers to determine whether IPT and the associated disadvantages may be relevant (incl. input VAT deduction risks and the non-deductibility of IPT by business customers).
Considering the upcoming filing deadlines, in case of timing issues taxpayers can reach out to the IPT- and VAT-authorities. In any event, initially the following key steps could be reviewed and considered:
- Review which guarantee promises are being offered? In which company's name? How does this relate to the VAT-relevant supply chains? Is there a resale-structure for potentially affected guarantee promises in place (potentially with resellers now supplying VAT-exempt insurance brokerage (sec 4 no 11 German VAT Act)?
- Review to which extent could IPT (instead of VAT) have adverse consequences (incl. input VAT deduction risks and the non-deductibility of IPT by business customers)? Could insurance regulatory issues be an issue, i.e. might the supplier need an insurance license?
- Analyze whether it is possible that a specific warranty promise could fall outside the scope of IPT? There is indeed an emerging discussion and controversy about the exact and reasonable scope of the IPT application under the MoF tax decree.
Example: Particularly to the extent it can successfully be argued that a warranty promise (or mere extension) essentially rather concerns the supplier's "own risk" (rather than the customer's risks), IPT may be avoidable.
- Consider approaching the authorities with the attempt to align and agree on the IPT/VAT subjection (responsible for IPT and VAT)?
- If helpful, is it possible in the individual case to get a formalized approval (incl. the option of (un-)binding tax rulings)
- Take the necessary steps to avoid accusations of IPT (or VAT) underpayments.
- To the extent IPT is applicable (or unavoidable), review the IPT impact (incl. who will be the IPT payment debtor vis-à-vis the authorities / does pricing need to be amended et al.).
- Review and discuss with distributor/reseller whether the IPT payment obligation could be transferred to them.
Insurance licence required? / Compliance risks
A parallel discussion under regulatory laws is whether certain warranty promises may require an insurance license (without a license, selling such products could be a criminal offense). The relevant regulatory laws and their interpretation are not directly affected by the MoF decree (which concerns taxation only). However, the current discussion around IPT and VAT may be a good cause for companies to review their offerings to ensure they do not offer insurance type products in their own name that could require a license (such as typically the provision of accidental damage coverage). To offer insurance type products to customers, in practice a number of alternative solutions have been developed, often involving cooperation with a licensed insurance company, which would avoid serious compliance risks.