Given accounting differences between global insurance companies in different jurisdictions, a new global minimum tax on certain multinational corporations creates the potential for double taxation for some insurance companies, according to a comment by AM Best.
The Organization for Economic Co-operation and Development (OECD) announced on October 8, 2021 that 136 out of 140 countries and jurisdictions have agreed that certain multinational enterprises (MNEs) will be subject to a minimum tax rate of 15% from 2023 .
The OECD proposal would apply to businesses, including insurers, with turnover above 750 million euros ($870.1 million).
Applying this new stipulation could be difficult for insurers with longer duration covers, as profits may not be made at the point of sale, unlike in other sectors,” said AM Best’s commentary. titled “OECD Announces Agreement Towards a Global Minimum Tax”.
The use of deferred tax balances by insurers allows for timing differences between accounting regimes, AM Best said.
The impact will depend on the final nature of laws passed by respective governments, exemptions that some protective governments may seek to maintain their competitive advantage, and accounting interpretations.
AM Best explained that the central point of such action is to base taxes on where profits emerge, even if companies do not have a physical presence in a particular country or jurisdiction and are a response to the digitalization of the global economy.
The deal consists of a two-pillar solution, which was presented to G20 foreign ministers in Washington, DC on October 13 and will be discussed by G20 leaders in Rome at the end of October.
AM Best then explained the two pillars.
Under Pillar 1 of the proposal, multinational companies with worldwide sales of more than 20 billion euros ($23.2 billion) and profitability above 10% would be covered. Pillar 1 is not applicable to regulated financial services companies. Profits up to 25% above the 10% threshold would be reallocated to market jurisdictions. The OECD estimates that up to $125 billion in profits will be reallocated to jurisdictions each year.
Under Pillar 2, which will have insurers within its scope, there will be an overall minimum tax rate of 15%. The minimum tax rate will apply to companies with a turnover of more than 750 million euros. The OECD estimates that Pillar 2 will generate $150 billion in additional global tax revenue each year.
Double taxation a possibility
AM Best said insurers around the world are subject to many accounting regimes, which makes it difficult to apply Pillar 2 requirements to the industry.
“Profits may not be made at the point of sale, like in other industries. While short-term insurance covers may fit into Pillar 2, longer-duration covers will be very difficult when applying Pillar 2 revenue and profit measures,” the commentary reads.
Life insurance, for example, has very long periods over which revenues and profits are earned, AM Best said, noting that the use of deferred tax balances allows for some of the timing differences between accounting regimes.
The insurance industry has sent comments to the OECD recommending that these deferred taxes be taken into account when determining the effective tax rate of a multinational company, the commentary says. “Without this, insurers could see double taxation and will not be treated on an equal footing with other industries.”
The ultimate impact of the rules will depend on the final version of laws passed by individual governments, exemptions that some protective governments may seek to maintain their competitive advantage, and accounting interpretations.
“We believe low-tax plans have so far resisted the implementation of BEAT in 2017, and places like Bermuda and Ireland are also seen as centers of excellence for underwriting, capital management and mature regulatory environments,” AM Best’s commentary concluded. (Editor’s Note: Reference to “BEAT” is the Base Erosion and Anti-Abuse Tax, passed as part of the U.S. Tax Reform in 2017, which reduced the tax advantage of Bermuda.).
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