The OECD and G20 address the tax challenges arising from the digitalisation of the economy
By Mervyn Skeet, chair of the GFIA taxation working group
How do you make international taxation rules fit for the digital age? That has been the top priority for GFIA’s taxation working group over the last 12 months, as it provided input into work by the OECD and the G20.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has been working on a two-pillar solution (see box) to the tax challenges that arise from the digitalisation of the economy. And GFIA has been closely engaged in the project, given the relevance to global insurance and reinsurance operations of the way international taxation operates.
In December 2020, GFIA responded to the OECD consultation on its blueprint for Pillar Two. It also had several discussions with the OECD secretariat and — spurred by the excellent coordination between GFIA member associations — many members held talks with their local fiscal authorities, all passing on consistent messages and bringing insurance issues to the OECD’s attention. As a result, GFIA is hopeful that the new model rules that will be published in late November 2021 will recognise that the unique nature of insurance requires special treatment.
Pillar One: insurers rightly exempt
The statement released by the Inclusive Framework in early October reiterated that regulated insurance and reinsurance are excluded from the scope of Pillar One. This is welcome news and important for the global (re)insurance industry. As GFIA has argued, insurers are subject to extensive prudential regulations that require them to hold capital locally to match local risks. Furthermore, taxes on insurance products, both indirect and on premiums, are generally levied in the country in which the risk is situated, which largely coincides with the location of the customer.
Pillar Two: welcome adjustments anticipated
On Pillar Two, GFIA has consistently and vocally maintained throughout this project that the unique nature of (re)insurance requires the Pillar Two rules to be applied differently to give a fair outcome for the industry. In particular, the anticipated adoption of deferred tax accounting in the model rules to eliminate the significant timing differences between financial and tax accounting would be especially welcome. The insurance industry works to a very long-term business model; many insurance policies extend over decades and large claim events and market movements on assets can lead to losses that take many years to recover. These timing differences can result in significant volatility that would not be adequately addressed by the credit and carry-forward mechanism set out in the OECD’s Pillar Two blueprint.
GFIA’s members will continue to advocate that there should be further consultation locally with the industry before the OECD model rules are implemented by individual countries.
“The unique nature of (re)insurance requires the Pillar Two rules to be applied differently to give a fair outcome for the industry.”
While the primary focus of the last year has been on the OECD proposals, other taxation issues remain on GFIA’s radar.
During the COVID-19 pandemic, for example, the working group enabled members to exchange information, particularly on how different jurisdictions treated issues such as the residency of individuals living and working away from their usual domicile.
Meanwhile, with the finalisation — after 20 years of debate — of International Financial Reporting Standard (IFRS) 17 on insurance contracts, an issue has arisen over how profit and losses are taxed in the year of transition to the new standard’s introduction in 2023. Canada, in particular, is taking a different approach to other countries, so the exchange of information in the working group has proved invaluable.
Finally, looking ahead, after delays due to the global pandemic, reviews of how value-added tax (VAT) is applied to financial services are moving again in the EU and the UK. GFIA’s taxation working group will be sure to follow developments closely in the weeks and months to come.
Association of British Insurers