30 July 2015

Insurance Europe: Summary of concerns raised by the European insurance industry regarding the OECD BEPS Project

The European insurance industry fully supports the aims of the BEPS Action Plan and the objectives of the EC Action Plan to ensure fairer and more efficient taxation and to effectively tackle corporate tax avoidance.

Permanent establishments

Only  the presence  of  key  entrepreneurial  risk-taking  functions  (KERT)  should  give  rise  to  tax permanent  establishments;  profits  are  allocated  for  tax  purposes  dependent  on  where  the  KERT  is located.  In  insurance,  the  KERT  is  with  the  person/entity  that  assumes  and manages  the  insurance risk  through  underwriting  and  thus  profit  should  be  allocated  to  such  function. If PEs  are  created  in the  location  of non-KERT  functions,  a  disproportionate  compliance  burden  would  result  as  numerous PEs could be created with no additional profits being attributed.

Risk transfer, transfer pricing and cross border (re)insurance

Insurers   optimise   and   diversify   their   risk   portfolio   via   intra-group   transfers   of   risk   through reinsurance.  OECD  BEPS  and  the  European  Commission’s  corporate  taxation  initiative  should  not impinge on these arrangements.

Income  arising  from  risk  assumption  in  a  different  territory  to  the  location  of  the  risk  is  not  an automatic indicator of BEPS activity in insurance. This is merely a consequence of insurers managing risks on a global basis, including through reinsurance.

CFC  rules  should  not  restrict  the  commercial  operations  of  insurers  and  arrangements  which  are demonstrably required to optimise capital efficiency and to reinsure third-party risks.

Capital and interest deductions

Existing  regulatory  requirements  put  an  overall  limit  on  the  level  of  debt  and  hence  interest deductions that an insurer can claim. Therefore, interest paid as part of insurers’ ordinary capital structures and business operations should be excluded from any further limitation.

Any specific transactions relating to interest expense which are seen as posing BEPS risk other than in respect of regulatory capital should be addressed by specific targeted rules.

Hybrid regulatory capital is not designed to create tax mismatches and its use does not constitute a harmful tax practice. On the other hand, this type of capital is very useful to insurers, for regulatory and commercial reasons. Therefore, hybrid regulatory capital should be exempted from any additional tax burden.

Country-by-country reporting

Enhancing the transparency towards tax authorities, streamlining of reporting requirements and the protection of commercially sensitive information have to be seen as equally import ant goals. Effective compliance with the new country-by-country reporting regime will require significant preparation and it is therefore important that companies receive clear and timely guidance regarding the definition of the data to be reported.

Insurance business models are unique and this needs to be recognised when the information on the CbCR template is considered.

Full position paper

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