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Accounting and taxationAccounting and taxationaspect of insuranceaspect of insurance

BYBY

KirtiKirti SharmaSharma

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State Insurance History

1868 2% gross premium tax on foreign

insurance companies

1872 domestic companies were included 1983 tax administration transferred from

Department of Commerce to Department of

Revenue, Insurance Premium Tax Section of the

Corporate Income Tax Division

1986 transferred to Special Taxes Division

Insurance Taxes The Governors 21st Century Tax Reform Commission


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Taxes and Surcharges (CY2007)



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Premium Tax

Property and Casualty, Title and Risk Retention

Groups

1%, 1.26% or 2% of premiums

Life Insurers

2007 1.75%; 2008 1.625%; 2009 1.5%

Township Mutual Insurers

1%



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Types of Tax Subsidies for Health CareTypes of Tax Subsidies for Health CareUnder Current LawUnder Current Law

Health insurance subsidiesHealth insurance subsidies

Employer contributions for insurance are exempt fromEmployer contributions for insurance are exempt from

taxes for employeestaxes for employees

Section 125 plans subsidize worker contributionsSection 125 plans subsidize worker contributions SelfSelf--employed can deduct premiumsemployed can deduct premiums

Subsidies for outSubsidies for out--ofof--pocket health carepocket health careexpensesexpenses

Health Savings Accounts (HSAs)Health Savings Accounts (HSAs)

Health Reimbursement Arrangements (HRAs)Health Reimbursement Arrangements (HRAs)

Flexible Spending Accounts (FSAs)Flexible Spending Accounts (FSAs)

Deduction for expenses >7.5% of incomeDeduction for expenses >7.5% of income

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Tax Subsidies for OutTax Subsidies for Out--ofof--PocketPocketHealth Spending: HRAs, FSAs, DeductionHealth Spending: HRAs, FSAs, Deduction

Health Reimbursement ArrangementsHealth Reimbursement Arrangements

Used with any type of planUsed with any type of plan

TaxTax--free contributions by employers onlyfree contributions by employers only

Flexible Spending AccountsFlexible Spending Accounts TaxTax--free employer/individual contributionsfree employer/individual contributions

Money is deducted from paycheck, lowering taxableMoney is deducted from paycheck, lowering taxable

incomeincome

Use it or lose itUse it or lose it

Deduction for medical expensesDeduction for medical expenses

Direct expenses and insurance premiumsDirect expenses and insurance premiums

Only expenses above 7.5% income can be deductedOnly expenses above 7.5% income can be deducted

Must itemize deductionsMust itemize deductions

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Tax Subsidies for Health Insurance:Tax Subsidies for Health Insurance:EmployersEmployers

EmployersEmployers can deduct cost of health benefits for workers (butcan deduct cost of health benefits for workers (but

not a special subsidy for health insurance)not a special subsidy for health insurance)

Employer contributions for insurance are exempt from taxesEmployer contributions for insurance are exempt from taxes

forforemployeesemployees

Benefits provided as tax free compensationBenefits provided as tax free compensation

No income or payroll tax paid by workers on value ofNo income or payroll tax paid by workers on value of

benefitbenefit

Worker contributions can be made preWorker contributions can be made pre--tax (tax (125 plan125 plan))

Taxable income is reduced by amount of contributionsTaxable income is reduced by amount of contributions SelfSelf--employedemployedcan deduct premiumscan deduct premiums

IndividualsIndividuals buying insurance on their ownbuying insurance on their own do not generallydo not generallyget subsidiesget subsidies

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Example 1: Modest Income FamilyExample 1: Modest Income Family(15% Income Tax Bracket)(15% Income Tax Bracket)

With TaxWith TaxExemptionExemption

(current law)(current law)

Without TaxWithout TaxExemptionExemption

(if taxable)(if taxable)DifferenceDifference

WagesWages $50,000$50,000 $50,000$50,000

Taxable income, before insuranceTaxable income, before insurance $30,000$30,000 $30,000$30,000Employer premium contributionEmployer premium contribution $10,000$10,000 $10,000$10,000

Worker premium contributionWorker premium contribution $2,000$2,000 $2,000$2,000

Wages, with insuranceWages, with insurance $48,000$48,000 $60,000$60,000

Taxable income, with insuranceTaxable income, with insurance $28,000$28,000 $40,000$40,000 $12,000$12,000Income taxesIncome taxes $3,398$3,398 $5,198$5,198 $1,800$1,800

Worker payroll taxesWorker payroll taxes $3,672$3,672 $4,590$4,590 $918$918

Employer payroll taxesEmployer payroll taxes $3,672$3,672 $4,590$4,590 $918$918

Source: Kaiser Family Foundation calculations.Source: Kaiser Family Foundation calculations.

$12,000 x 15%$12,000 x 15%

(Social Security and Medicare)

(Social Security and Medicare)


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What Does the Exemption Cost?What Does the Exemption Cost?

A tax provision that acts like an entitlementA tax provision that acts like an entitlement

costs go up annually without an act of Congresscosts go up annually without an act of Congress

But, subsidies are hidden from workers and theBut, subsidies are hidden from workers and the

federal budgetfederal budget

As a result, costs can only be estimatedAs a result, costs can only be estimated

Estimated federal cost = $224.7 billion in 2008Estimated federal cost = $224.7 billion in 2008for active workers ($134.3 billion for incomefor active workers ($134.3 billion for incometaxes, $90.5 billion for payroll taxes)taxes, $90.5 billion for payroll taxes)

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Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only.Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only.


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Value of the Tax Exe ption n rea eValue of the Tax Exe ption n rea eith n o eith n o e

Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for activeSource: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for activeworkers only.workers only.

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Arguments Made For and AgainstArguments Made For and Againstthe Tax Exemptionthe Tax Exemption

For:For:

Encourages employer coverage and poolingEncourages employer coverage and pooling

Reflects negotiated tradeoffs between benefitsReflects negotiated tradeoffs between benefits

and wagesand wages Against:Against:

Provides regressive benefits; no subsidy forProvides regressive benefits; no subsidy for

those without employer coveragethose without employer coverage

Encourages over insurance (more generousEncourages over insurance (more generous

coverage)coverage)

Provides little opportunity to control federal costProvides little opportunity to control federal cost

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Accounting Standards 15 (Revised)

Revised AS15 requires an approved provident

fund to be treated as a Defined Benefit Plan

however there is no clarity on getting the same

actuarially valued as the actuaries have shown

their inability to value the same.


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Accounting Standards 15 (Revised)

Treatment of Transition provision in AS 15 - how should

we treat the impact of revised AS 15 pertaining to

previous years (transition proviso of AS 15). There is as

such no clarification on the treatment - whether the

same has to be adjusted below the line (through FFA) in

technical account or directly take into Balance sheet.

The question is to how it will be charged to

policyholders as if the Salary cost is being related to

Policyholders then this impact should also be taken intopolicyholders account (technical Account).


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Accounting Standard 22

Should tax be an appropriation or a charge in

Policyholder account?


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Need for a guidance note on allocation of

expenses and assets and liabilities for

preparation of segmental revenues and

segmental balance sheets. Presently eachInsurance company is using different methods

of allocation. The guidance note will help in

following uniform methods of allocation and

thus enhance the effectiveness of comparisonof financial statements of Insurance companies


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Expert advisory opinion on Accounting for

scheduled rent increase in case of operating

lease - The opinion refers to operating leases

which are renewable after specified timeintervals at the option of the lessee. The lease

agreement provides for an escalation clause in

lease payments at each such renewal

.


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The opinion expressed by the esteemed

committee requires that in respect of such

operating leases, lease payments must be

recognized on a straight line basis frominception of the lease. This requires the

recognition of future income / expense in the

current period, thus necessitating the creation

of liability / receivables in the initial years aslease payments are lower than expense /

income.


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The increase in costs refers to changes on account ofinflation and does not represent structured definedpayments over a period of time. The increased costsrefer to future contingent liabilities; the recognition

of the same in current periods is inconsistent with thematching principles of recognizing income andexpenses.

It is felt that the above accounting treatment hassignificant taxation impacts on account of TDS and

Service Tax. Further the treatment doesnt reflect atrue and fair presentation of costs.This position isrequested to be revisited.


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Disclosure of non financial data

Non financial data provides the users offinancial statement with additionalinformation and increases the value of

financial information.Thus should bemandated, eg:

Burn rate

Value of New Business

Persistency No. of branches

No. of agents


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Enhancing the credibility of theExternal Financial Information:

Auditing Issues Joint Audit:

Centralised accounting models

Varying materiality definitions

Overlap of coverage

Difficulties in tax audits

Limitation of 2 audits

Not conducive to development of specialists


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Auditing Issues

Actuarial Numbers

Actuarial liabilities certified by appointed

actuaries

Audit coverage restricted to confirmation ofactuarial assumptions

Not covered by an independent audit


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Auditing Issues

Guidance Note on Insurance Audit: Need for update

To include a more detailed guidance on

evaluation of actuarial estimates

Preparing auditors to meet the challenges

placed by new accounting pronouncements

AS-30, AS-31, AS-15

IFRS


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Auditing Issues

Clarifications required in respect ofregulations

Certification of management report

Reporting on contraventions of the provisions of theInsurance Act, 1938

Whether term deposits with banks are to be

reckoned for the purpose of computing limits for the

industry sector to which the investee belongs


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Auditing Issues

Cash flow statements

Could an option be given to insurance companies topresent cash flow statements using the indirect

methodSegment reporting

Segments defined under the regulations are notnecessarily the manner in which insurance

companies organise their operations


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Auditing Issues

Interim financial reporting:

Half Yearly / Quarterly financial reports which couldbe subjected to a limited review could assist insurancecompanies in meeting their listing requirements.

Audit of internal control systems

Currently restricted to a statement in themanagement report

Assertion on design and operation of internal controls

Separate certification by auditors


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Thank you.

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