As published in A.M. Best, Bestwire, July 23 2015
As insurers and reinsurers prepare for the coming changes in the international tax arena, they should seek to deepen the awareness of government officials of "the commercial context in which the insurance business operates," according to Jon Stevens, a partner in U.K. law firm DWF.
Tax authorities and government officials, Stevens told Best's News Service, may not fully understand, for instance, that a multinational insurer may be using an offshore jurisdiction for legitimate and commercially sound regulatory reasons. The instinctive suspicion, he suggested, may be that such locales are a tax dodge.
Richard Britain, a partner in DWF's corporate team, said insurers should also understand that tax should not be the only consideration in the structuring of their operations. "Equally and possibly more important," he said, "is ensuring that your other compliance and regulatory structures are properly conducted."
Stevens and Britain spoke in the wake of comments from the London-based International Underwriting Association, which was itself reacting to an initiative from the Organization for Economic Cooperation and Development. The OECD's Base Erosion and Profit Shifting project, better known as BEPS, is attempting to shine a light on international taxation.
The OECD has cited concerns that corporations are able to avoid tax by maximizing their use of friendly jurisdictions. The IUA, which represents the London company market, has warned the IUA's efforts will have "profound implications" for the insurance sector.
Nick Lowe, the IUA's director of government affairs, said in a statement the insurance and reinsurance industry should try to "ensure that any new rules are fair and equitable" (Best's News Service, July 20, 2015).
While Britain does not regard the likely effects of the coming changes as unique to insurance, he does see some that are worth noting. In addition to the interplay between taxation and regulation, he cited the importance of the measurement of risk. Britain said Solvency II has focused attention on cross border standards both within the European Union and beyond, as expressed by the desire of non-EU states to achieve equivalence.
Jenny Coletta, financial services tax partner at consultant EY in London, said the OECD initiative heralds "a time of unprecedented tax change" for large multinational insurance groups. The BEPS project, she noted, applies to all OECD member countries and others with observer status.
"The final outcome of BEPS," Coletta said in an email, "will be a comprehensive set of OECD guidance that member countries and observer countries will automatically adopt through the existing framework of double-tax treaties, and/or domestic law changes in local law."
Coletta said the insurance sector will have to respond to increased pressures in such areas as financial reporting and compliance, pricing and the cost of capital, reputational risk, and the personal accountability of senior executives.
Coletta said the insurance groups should lobby the OECD and their national governments, as they assess their own risk and prepare to meet any challenges that might arise.
"Insurance is a relatively unknown industry to many tax authorities," Coletta said, "and therefore, there is a high risk that some of the proposed tax changes could have unintended consequences for the sector. This makes it vital that insurers are active in shaping the debate."
Britain regards the IUA's concerns as "perfectly sensible in terms of making sure that the proposals and the legislation are consistent with an understanding of the unique elements of insurance business."
While Stevens expects the international tax picture to change significantly, he does not expect these changes to come in overnight. Coordinating multiple jurisdictions, with their different tax systems, "is going to take a huge amount of time and coordination," he said.
Stevens said there is evidence that individual jurisdictions may take matters in their own hands and try to get ahead of the international curve. "If anything, that is a further complication for businesses and insurance businesses," he said.
Stevens said the diverted profits tax, which has been introduced in the United Kingdom, was designed to deal with many of the issues that arise from cross-border transactions. The aim of the tax, Stevens said, is to discourage companies from shifting tax liabilities from the United Kingdom to low-tax jurisdictions. "So the U.K. has already begun to do its own thing," he said.
While the United Kingdom might argue it is only doing what will ultimately happen on a wider scale, Stevens said, there is a danger that, as other jurisdictions takes their own initiatives, the final result might not tie up "as neatly as it should."
Coletta said the provisions of the diverted profits tax may require companies to confer with national tax authorities on cross-border transactions. "It is vital that transactions are supported by commercial drivers and that key functions and appropriate staff are located in overseas jurisdictions," she said.
The tax, Coletta added, may also "impact insurers' perception of the attractiveness of conducting business in the U.K."
Britain does not believe the U.K. government's response to BEPS poses a threat to the London market. "Arguably, it's the opposite," he said. "I think there is a general recognition that the moves that have been made – the diverted profits tax, in particular — are there to make the U.K. an attractive jurisdiction for businesses to operate from."
As published in A.M. Best, Bestwire, July 23 2015