Solvency Assessment and Management: The impact of … · As National Treasury is busy with a review of the four fund tax ... implement the Solvency II directives. ... Gross roll-up

Solvency Assessment and Management:

The impact of the implementation

of the Solvency II Directive principles

on the taxation of insurers

in jurisdictions comparable to South Africa

Prepared by: Solvency Assessment and Management Tax Working Group 2

Prepared for: Solvency Assessment and Management Tax Task Group

Date: 5 May 2012

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Contents Page

Introduction 3

Chapter 1 - Approach 4

Chapter 2 - Executive Summary: Long-term insurers 5

Chapter 3 - Executive Summary: Short-term insurers 6

Chapter 4 - Highlights per Jurisdiction: Long-term insurers 7

Chapter 5 - Highlights per Jurisdiction: Short-term insurers 12

Chapter 6 - Conclusion 15

Abbreviations 16

Acknowledgements 17

Appendices 18

Key Summary 18

United Kingdom 23

Ireland 42

The Netherlands 60

Germany 71

Switzerland 74

Luxembourg 82

Czech Republic 103

France 114

Sweden 128

Canada 135

Hong Kong 150

Australia 168

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Introduction

The Financial Services Board (FSB) is in the process of implementing a risk-based supervisory regime for the prudential regulation of the insurance industry in South Africa. The Solvency Assessment and Management (SAM) project is the South African equivalent of Solvency II and is likely to result in significant changes to the way both long-term and short-term insurers determine their technical provisions, their capital requirements, how they manage the risks in the businesses and how they report to both the public and the Regulator.

A significant component of the tax computation of both long-term and short-term insurers in South Africa arises from valuation of policyholder liabilities. Currently the value of liabilities is calibrated to regulatory measures set out in the provisions of the Long-term and Short-term Insurance Acts (Acts no. 52 and 53 of 1998), read with various Directives and Board Notices. These valuation measures are likely to change when SAM is implemented.

The SAM Steering Committee has formulated a Tax Task Group to consider the tax impacts of the changes that are expected to arise under SAM and provide recommendations for amendments to tax legislation. Working Group 2 which is a sub-committee of the Tax Task Group, was tasked with reviewing how other relevant jurisdictions have taken taxation into account when implementing Solvency II in order to guide the South African process. As National Treasury is busy with a review of the four fund tax approach, the taxation of policyholder tax was not included in the scope of this research..

This report summarises the approach taken in performing the research and sets out the findings arising therefrom.

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Chapter 1 - Approach

1.1 At a meeting of Working Group 2 members on 16 August 2011, it was agreed that the group would approach the research by obtaining a list of all jurisdictions that are expected to implement the Solvency II directives.

1.2 From that list the group determined the jurisdictions most relevant to South Africa in terms of the basis of taxation, the regulatory environment, size and state of development of the economy, and any other relevant factors.

The following jurisdictions were selected:

United Kingdom: long-term and short-term

Ireland: long-term and short-term

The Netherlands: long-term and short-term

Germany: long-term and short-term

Switzerland: long-term and short-term

Luxembourg: long-term and short-term

Czech Republic: long-term and short-term

France: long-term and short-term

Sweden: long-term only

Canada: long-term and short-term

Hong Kong: long-term and short-term

Australia‘s short-term regime was also researched because of their existing risk-based regulatory system.

1.3 Working Group 2 recommended to the Tax Task Group that the focus of the research would be income tax on insurance profits. Taxation of policyholders would be considered, but only as a secondary focus. Value-Added Tax and Capital Gains Tax would be out of scope, and deferred tax would be considered only to the extent that there is an impact on the taxation of insurance profits. These recommendations were ratified by the Tax Task Group.

1.4 The research was conducted within an agreed standard framework of questions. Accuracy of research was the responsibility of the member who performed the research and has not been independently verified.

1.5 An overall summary of the research is set out in Chapters 2 (Long-term insurance) and 3 (Short-term insurance), as well as in the Summary Appendix. In addition, certain features in respect of each jurisdiction are highlighted as a quick reference in Chapters 4 (Long-term insurance) and 5 (Short-term insurance). The research for each jurisdiction is attached to this report as an Appendix.

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Chapter 2 - Executive Summary: Long-term insurers

2.1 Taxation of shareholders profits is based on accounting profits as a starting point in most of the jurisdictions reviewed.

2.2 A surprising number of countries use local GAAP as the starting point for the tax computation. However, these jurisdictions are in the process of transitioning to IFRS.

2.3 The United Kingdom appears to be the only jurisdiction with a tax calculation based on the regulatory (Solvency I) regime. Amendments are being implemented to change the starting point for the tax computation to be the accounting Profits Before Tax. Transitional adjustments are expected to arise. These include the reversal of the Deferred Acquisition Cost (DAC) asset and Deferred income reserves. Tax amendments will ensure that there is not a double inclusion or relief from tax on reversal of these reserves.

2.4 The move to an accounting basis in the United Kingdom is also expected to give rise to changes in reserving bases which could result in a surplus. Any surplus will be subject to tax over a 10 year period.

2.5 The taxation of policyholders seems to be unique to each jurisdiction. Some jurisdictions allow a deduction for contributions, others require the contribution to be made from after-tax income. Gross roll-up (that is tax-free accrual during the policy term) features as does taxation during the policy term, either on actual income arising on policyholders‘ funds or on a deemed yield. Certain jurisdictions levy an exit tax, some with a deemed chargeable event if exit does not take place within a specified time period. Other jurisdictions provide an exemption in respect of policy proceeds.

2.6 Please refer to Chapter 4 for a summary of interesting features arising in respect of each jurisdiction reviewed. In addition, an overall overview is provided in the Summary attached as an appendix. Detailed research in respect of each jurisdiction is available in the Appendices to this report.

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Chapter 3 - Executive Summary: Short-term insurers

3.1 The accounting profits are the starting point for most jurisdictions, although various adjustments for tax purposes tend to be required.

3.2 A surprising number of countries use local GAAP as the starting point for the tax computation rather than IFRS, although these jurisdictions are in the process of transitioning to IFRS.

3.3 Of the jurisdictions that do use IFRS, the changes that may arise from the introduction of Phase II of the IFRS 4 standard have not been specifically considered. This is perhaps not surprising given the delay in the finalisation of Phase II and the uncertainty over key aspects thereof.

3.4 Solvency II is generally not expected to have an impact on the computation of taxable income of short-term insurers.

3.5 Most jurisdictions allow a deduction for the Unexpired Risk Reserve.

3.6 Most jurisdictions also include expenses related to claims settlement in the calculation of the outstanding claims reserves and these are allowed for tax purposes.

3.7 Contingency and claims equalisation reserves are either not allowed for tax or will be released to tax over a number of years. There appears to be a reduction in the number of jurisdictions that allow such general reserves as a tax deduction.

3.8 The United Kingdom has introduced a concept of ―appropriate amount‖ of reserves. The appropriateness of the quantum of the technical reserves set up by the short-term insurer must be attested to by a suitably skilled person. Any excess over the appropriate amount is disallowed as a deduction for tax purposes.

3.9 Premium taxes are a feature in a number of jurisdictions.

3.10 Please refer to Chapter 5 for a summary of interesting features arising in respect of each jurisdiction reviewed. In addition, an overall overview is provided in the Summary attached as an appendix. Detailed research in respect of each jurisdiction is available in the Appendices to this report.

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Chapter 4 - Highlights per Jurisdiction: Long-term insurers

Summarised below are certain features relevant to each jurisdiction that are of interest because of the way they differ from the current tax basis in South Africa.

United Kingdom

4.1.1 Taxation of life insurance companies is currently based on regulatory returns made to the Financial Services Authority (FSA). Life insurance business is divided into three categories: Basic Life Assurance and General Annuity business (BLAGAB), Permanent Health Insurance business (PHI) and Gross Roll Up business (GRB) which covers pension business.

4.1.2 PHI and GRB are taxed on a trading profits basis (premiums, reinsurance recoveries and investment returns taxable with deductions for expenses, claims paid and technical reserves).

4.1.3 BLAGAB is taxed on an I-E basis, that is, investment income and capital gains less management expenses. Acquisition expenses are deductible over 7 years. I-E tax is charged on an annual basis over the term of the policy as the investment income accrues. The insurer calculates and pays the tax to the revenue authorities.

4.1.4 Shareholders profits are taxed at the corporation tax rate (25% wef 1 April 2012). The balance of taxable profits is regarded as policyholder profits and is taxed at the basic income tax rate of 20%.

4.1.5 Although the taxation of policy proceeds in the hands of policyholders is subject to many complex rules, generally:

BLAGAB policies are taxed as they build-up. High-rate taxpayers may pay additional tax on exit with a credit given for the 20% I-E tax paid by the insurer.

GRB policies roll-up gross of tax with tax payable when the pension annuity is paid.

PHI policies are taxed once the policy is in payment.

4.1.6 With effect from 1 January 2013, risk (or protection) business which until now has been included in BLAGAB, will be taxed on a trading profits basis (it will be included in GRB going forward).

4.1.7 The tax related changes to be implemented once the Solvency II regime is introduced are said to be the most extensive to impact the life insurance industry for many decades. Currently taxation of life insurers is based on regulatory returns. However, from 2013, FSA returns will no longer exist in a form which will support the current tax legislation. The starting point for taxable trading profits will therefore change to be the Profit Before Tax in the financial statements. This will bring the life insurance tax regime into line with that of other industries. For accounts prepared under both UK GAAP and IFRS, adjustments to this starting point will also be required for taxable items of income and expense included in other statements in the accounts (for example in the Statement of Recognised Gains and Losses or in the Statement of Changes in Equity). The above will form the basis of the taxable trading profit calculations subject to any adjustment required by any specific tax legislation or by generally applicable tax principles established in decided cases by the courts.

4.1.8 Transitional adjustments will arise on the move from an FSA return basis to a statutory accounts basis, as follows:

Deferred Acquisition Costs and Deferred Income reserves are to be excluded from the tax calculation to the extent that they have been previously relieved / taxed.

Untaxed surplus subject to restrictions will on transition be brought into tax over ten years.

Other transitional adjustments will also be spread over 10 years from 2013. This includes any other amounts where there is a difference between what has previously been brought into account for tax purposes versus accounting profit.

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4.1.9 The impact of subsequent transitional adjustments related to the accounting changes (such as the phasing out of UK GAAP and the introduction of IFRS 4 Phase II) are also being considered.

Ireland

4.2.1 The basis of the tax computation is the profit for accounting purposes. EU-listed groups are required to use IFRS, other entities may use Irish GAAP.

4.2.2 Solvency II changes to the regulatory returns are not expected to result in changes to the tax computation. However, should IFRS change in time to align more closely to Solvency II there may be a tax impact. As an indication, changes on first time adoption of IFRS were phased in for tax over 5 years.

4.2.3 Surplus arising to the benefit of shareholders is taxed as trading profit. In addition, a portion of the transfer to the fund for future appropriations is deemed to be taxable shareholders‘ surplus.

4.2.4 For new basis business (policies incepted from 1 January 2001), there is no annual tax imposed on policyholder‘s funds, policyholders‘ funds therefore roll-up gross of tax. Policyholders are subject to an exit tax. The policy gain is taxed on the happening of a chargeable event (the earlier of maturity, surrender etc, or every 8 years).

4.2.5 The exit tax is withheld by the life insurer. For most policies the tax is deducted at 30%. However, in the case of ―personal portfolio life policies‖ tax is deducted at 50%. These are policies where the assets backing the policy can be selected by the policyholder and are only available to certain policyholders.

4.2.6 Tax rules for life assurance, collective investments and bank deposit products are broadly similar. This is a deliberate policy decision.

The Netherlands

4.3.1 Generally the commercial accounts are the guideline for determining the income tax liability and income tax follows the accounting principles. However, separate tax accounting rules are provided for in the ―Decree on the Determination of Profits and Reserves of Insurers 2001‖.

4.3.2 There are special rules for calculation of technical provisions for life insurers (awaiting further information).

4.3.3 No significant changes are expected to be introduced as a result of Solvency II.

4.3.4 Acquisition expenses may be deducted in the year incurred, except for recurring premium policies, in which case the deduction period is the lesser of 10 years or the policy contract period.

4.3.5 Investment gains are subject to specific rules for tax purposes, for example, income may be exempt under the participation exemption

Germany

4.3.6 Taxable income is based on local (German) GAAP with certain adjustments, for example, special rules for investments, for recognition of provisions and valuation of insurance reserves.

4.3.7 Acquisition costs are deductible upfront, not deferred.

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Switzerland

4.3.8 Tax is based on the statutory accounts i.e. financial reporting/accounting which is Swiss GAAP but certain listed companies use IFRS or US GAAP. No distinction is made between long-term and short-term insurers.

4.3.9 The introduction of Solvency II is not expected to result in changes to the tax base.

4.3.10 Investments via life policies allow for a deduction in respect of premiums, and proceeds are either not taxable or taxed at preferential rates.

Luxembourg

4.3.11 The taxable income is determined by the difference between the net assets invested at the end of the accounting period and the net assets invested at the start of the accounting period, increased by drawings made during the period and decreased by capital contributed during the period. In most cases, this corresponds to the Luxembourg GAAP accounting result. Differences may however arise from diverging valuation rules (such as differences in valuation of assets, diverging depreciation rules, etc). Luxembourg GAAP rules differ from the IFRS standard. It follows that the Luxembourg tax result may differ from the Luxembourg GAAP result as well as the IFRS result.

4.3.12 At this stage there is still uncertainty whether Solvency II will impact the tax computation.

4.3.13 Reinsurance companies are required to set up equalization reserves. These are deductible for tax purposes. This mechanism allows Luxembourg reinsurance companies to benefit from tax deferral.

Czech Republic

4.3.14 Although there has been a move away from mutual societies to companies with shareholders, the former is still common in the Czech Republic. The current tax system for life companies is still strongly influenced by the legacy issues which applied when all life insurers were mutual societies.

4.3.15 The tax on shareholder profits is calculated using the applicable accounting standards.

4.3.16 Policyholders pay no tax during the duration of the contract, but bear a final withholding tax of 15% of policy proceeds less contributions (i.e. the capital value that exceeds the contributions made by the policyholder). .

France

4.3.17 Taxable income corresponds to accounting income from French local statutory books, subject to specific adjustments. There are significant differences between statutory accounting and IFRS. Adjustments to the French local statutory results include non-deductible items (such as excessive charges, taxes), non-taxable items (such as income attributable to foreign permanent establishments, dividends and certain capital gains in relation to substantial holdings), timing differences (such as disallowed reserves, taxable unrealised gains on forex and investment funds).

4.3.18 There is no income tax on interest build-up during the duration of the contract. Interest build-up is however subject to social security taxes during the contract period. Proceeds received in excess of premiums paid are taxable at various fixed rates depending on the contract duration. Social security taxes are due upon contract termination for unit linked contracts.

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Sweden

4.3.19 Mutual societies are still prevalent in the Swedish market and the insurance tax system is still very much influenced by the mutual societies concept.

4.3.20 Life companies in Sweden are subject to two types of taxes namely corporate income tax (―CIT‖) and a yield tax depending on the nature of the policy.

4.3.21 CIT is a tax on profits and is calculated as income less expenses. The calculation therefore includes premiums and reinsurance claims received as income and allows a deduction for claims and reinsurance premiums paid as well as certain technical provisions.

4.3.22 Yield tax is a flat rate tax calculated as the capital value (i.e. premiums received) at the beginning of the year (this is subject to amendment – going forward actual capital levels during the year will be used as the basis) multiplied by the average Swedish bond rate (this is a deemed return on the capital invested) multiplied by a flat tax rate of 15% in the case of pension policies and 27% in the case of saving policies. No deduction for expenses incurred is permitted in the calculation.

4.3.23 A distinction is drawn between pension policies, savings policies and risk business.

4.3.24 The shareholder is subject to CIT on the investment returns earned on its assets as well as fees earned in respect of external services. Any surplus realised in the policyholder funds, although distributable to the shareholders, is not subject to tax in their hands. Since the surplus is not subject to tax, the reserving valuation method for liabilities is not relevant to the determination of tax payable. A possibility exists that the legislation may be changed in this respect.

4.3.25 Pure risk policies are subject to CIT. An exception to this is 100% life insurance policies (without saving elements) which are subject to yield tax. Normally no deduction is given to the policyholder for premiums paid and the policy pay out (due to a loss event) is exempt This approach to 100% life insurance risk business appears counter intuitive – one would expect where there is a distinction between risk and savings that the pure risk business would be subject to CIT. Based on discussions, this is an anomaly in the Swedish tax system.

4.3.26 From the policyholder perspective, in the case of pension business, a deduction is given in respect of contributions to pension policies, investment returns are subject to the yield tax at a rate of 15% and the policy pay out at the end of the period is taxable in the individual‘s hands.

4.3.27 Investment business is subject to the yield tax in the life company. This is considered a tax payable by the company on behalf of the policyholders. No deduction is given to the policyholder for contributions and the policy pay out at the end of the period is exempt. It is acknowledged that the yield tax basis provides an advantage for life insurance companies compared to equivalent investment vehicles. It is understood that consideration is being given to extending this basis of taxation to other investment vehicles.

4.3.28 Solvency II is not expected to have any impact on the taxation regime for long term insurers.

Canada

4.3.29 Tax is based on IFRS profits. However, adjustments are required for certain unrealised gains which may be taxed immediately, book depreciation, as well as dividends from Canadian corporations which are generally tax exempt. The regulatory return is also prepared using IFRS.

4.3.30 Solvency II is not being considered in Canada. Solvency and capital requirements are separately considered as part of the regulatory return.

4.3.31 Any changes that may arise due to the implementation of IFRS 4 Phase II would probably be phased in over a period of 5 years based on previous experience.

4.3.32 Policyholders are taxed based on the type of policy they hold, and the income earned (some policies provide for a deferral on some investment income). Death benefits are generally tax

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free. Interest build-up is generally not taxable in the hands of policyholders, except for policies that are a savings vehicle in which case the policyholder is taxed annually. In addition, a proxy tax of 15% of the investment income accumulating in certain policy reserves of the life company must be paid by the life insurer. Excess of proceeds (including policy dividend and loans) over cost basis is taxable. Proceeds on death is generally tax-free except where the policy is a savings vehicle.

Hong Kong

4.3.33 The assessable profits are deemed to be 5% of the onshore premium (premium receivable in Hong Kong or premium receivable outside Hong Kong from Hong Kong residents where the proposals are received in Hong Kong) less corresponding reinsurance premium or, on election, based on adjusted surplus calculated with reference to actuarial-based statutory accounts. Such election once made is irrevocable.

4.3.34 Research to date indicates that no amendments are currently contemplated as a result of Solvency II.

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Chapter 5 - Highlights per Jurisdiction: Short-term insurers

Summarised below are certain features relevant to each jurisdiction that are of interest because of the way they differ from the current tax basis in South Africa.

United Kingdom

5.1.1 The basis of the tax computation is the profit for accounting purposes. EU-listed groups are required to use IFRS, other entities may use UK GAAP, although it is expected that the accounting bases will merge over time.

5.1.2 The technical reserves (unpaid/outstanding claims, IBNR and unexpired risk) for accounting purposes are deductible for tax purposes provided they do not exceed the ―appropriate amount‖. The General Insurers‘ Technical Reserves (Appropriate Amount) Tax Regulations introduced in 2009 require general insurers to give confirmation to HMRC that the amount of liabilities (including unpaid claims reported, IBNR and unexpired risk) stated in the accounts is not an excessive estimate of the liabilities (i.e. appropriate). The confirmation must be founded on or supported by an opinion in writing given to the general insurer by an actuary or a suitably skilled person (which may include a director or employee of the general insurer) stating that the amount of liabilities is not an excessive estimate. If the liabilities are considered to be in excess of the appropriate amount then the corporation tax deduction is restricted.

5.1.3 Any reserve for unexpired risks (URR) is deductible subject to the Appropriate Amount regulations (see above). This is not the case in South Africa currently.

5.1.4 Contingency Reserves are not deductible. Any Claims Equalisation Reserves deductible in the past will be released in line with new accounting and regulatory treatment. It is expected that the tax effect of such released reserves will be spread in equal instalments over 6 years. South Africa does not allow a deduction for contingency reserves.

5.1.5 All claims handling expenses are included in the claims reserves (unpaid claims and IBNR) and are deductible subject to the Appropriate Amount regulations. Accordingly, a deduction is allowed for future claims handling costs.

5.1.6 Premium taxes are payable in respect of most short-term covers (most risks at 6% but certain covers at higher rates).

Ireland

5.1.7 The basis of the tax computation is the profit for accounting purposes. EU-listed groups are required to use IFRS, other entities may use Irish GAAP.

5.1.8 Solvency II changes to the regulatory returns are not expected to result in changes to the tax computation. However, should IFRS change in time to align more closely to Solvency II there may be a tax impact. As an indication, changes on first time adoption of IFRS were phased in for tax over 5 years.

5.1.9 A deduction is allowed for the Unexpired Risk Reserve. This is not the case in South Africa currently.

5.1.10 Acquisition expenses are apportioned on a similar basis as that used for the UPR. Accordingly, this means that acquisition expenses are spread over the same period as premiums are recognised for tax purposes.

5.1.11 Premiums for certain risks attract a premium tax of 3%.

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The Netherlands

5.1.12 Income tax generally follows the commercial accounts, but separate tax accounting rules apply. For example, equalisation reserves (non-existent under IFRS) and calculation of investments at lower of cost price or market value.

5.1.13 A deduction is allowed for the Unexpired Risk Reserve, if substantiated with actuarial calculations. This is not the case in South Africa currently.

5.1.14 Certain equalisation and catastrophe reserves are allowed for tax purposes. This is not the case in South Africa currently.

5.1.15 If sufficiently substantiated, claims handling and loss adjustment expenses may be included in the outstanding claims reserves and are deductible for tax purposes.

5.1.16 Certain covers attract premium tax in the region of 9.5%.

Germany

5.1.17 Taxable income is based on local (German) GAAP with certain adjustments, for example, the recognition of provisions and valuation of insurance reserves.

5.1.18 Equalisation reserves are required to be set up in certain circumstances and are deductible for tax purposes. This is not the case in South Africa currently.

Switzerland

5.1.19 Tax is based on the statutory accounts i.e. financial reporting/accounting which is Swiss GAAP but certain listed companies use IFRS or US GAAP. No distinction is made between long-term and short-term insurers.


5.1.21 The introduction of Solvency II is not expected to result in changes to the tax base.

5.1.22 Premium tax of 5% applies with certain exemptions (sickness, disability, transport insurance).

Luxembourg

5.1.23 The taxable income is determined by the difference between the net assets invested at the end of the accounting period and the net assets invested at the start of the accounting period, increased by drawings made during the period and decreased by capital contributed during the period. In most cases, this corresponds to the Luxembourg GAAP accounting result. Differences may however arise from diverging valuation rules (such as differences in valuation of assets, diverging depreciation rules, etc). Luxembourg GAAP rules differ from the IFRS standard. It follows that the Luxembourg tax result may differ from the Luxembourg GAAP result as well as the IFRS result.

5.1.24 At this stage there is still uncertainty whether Solvency II will impact the tax computation.


5.1.26 Claims handing expenses are included in the calculation of the outstanding claims reserves and are therefore deductible in advance of actual incurral.

5.1.27 Premium tax of 4% applies for all types of risk or protection insurance, with additional tax levied in respect of fire risks, provided that the risk insured or the policyholders are located in Luxembourg.

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Czech Republic

5.1.28 Taxable income is based on Czech Accounting Standards.


5.1.30 Since 2010 a contingency reserve has been allowed as a tax deductible expense/taxable income in relation to transfers to or from the reserve. Such reserves are not deductible in South Africa.

France

5.1.31 Taxable income corresponds to accounting income from French local statutory books, subject to specific adjustments. There are significant differences between statutory accounting and IFRS. Adjustments to the French local statutory results include non-deductible items (such as excessive charges, taxes), non-taxable items (such as income attributable to foreign permanent establishments, dividends and certain capital gains in relation to substantial holdings), timing differences (such as disallowed reserves, taxable unrealised gains on forex and investment funds).

5.1.32 Claims handing expenses are included in the calculation of the outstanding claims reserves and are therefore deductible in advance of actual incurral.

5.1.33 Significant premium taxes are payable, charged to policyholders but collected by the insurer, ranging from 7% (agricultural insurances) to 30% (fire risks).

Canada

5.1.34 Tax is based on IFRS profits. However, adjustments are required for certain reserves (Accident & Sickness policies at 95% of book reserves), as well as for unrealised gains, book depreciation and dividends from Canadian corporations. The regulatory return is also prepared using IFRS.

5.1.35 A deduction is allowed for the Unexpired Risk Reserve at 95% of the book reserve. This is not the case in South Africa currently.

5.1.36 Any changes that may arise due to the implementation of IFRS 4 Phase II would probably be phased in over a period of 5 years based on previous experience.

Hong Kong


5.1.38 Direct and indirect claims handing expenses are included in the calculation of the outstanding claims reserves and are therefore deductible in advance of actual incurral.

Australia

5.1.39 The UPR calculation for tax purposes is limited in terms of legislation such that no loss relating to future periods is accelerated to the current tax period, i.e. no deduction is available for the URR.

5.1.40 Indirect claims handling costs are not permitted in the calculation of the outstanding claims reserves, only direct settlement costs associated with outstanding claims may be taken into account.

5.1.41 A premium tax of between 2% and 11% is levied depending on the state and on the type of insurance.

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Chapter 6 - Conclusion

In South Africa the value of policyholder liabilities is a significant component of the tax computation. In terms of current tax legislation, the value of these liabilities is required to be determined in accordance with the regulatory provisions. The regulatory requirements are expected to change significantly once the Pillar 1 (quantitative) aspects of SAM are operational.

Most of the other jurisdictions that were reviewed already base their tax computations on accounting profits as the starting point. Accordingly, how those jurisdictions plan to implement Solvency II will not assist us from a tax perspective.

The only jurisdiction that faces similar challenges to South Africa is the United Kingdom. This report sets out some of the transitional adjustments that the UK has already identified. It is recommended that the UK implementation be watched closely to provide further guidance in our implementation process.

As regards short-term insurers, the ―appropriate amount‖ regulations in the UK whereby an actuary or similarly skilled person attests to the appropriateness of the quantum of the reserves, is a concept that could be adopted in South Africa.

The impact of IFRS 4 Phase II should also be closely followed. Further announcements are expected in the second half of 2012. It will be useful to consider how the various jurisdictions react to these adjustments.

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Abbreviations

GAAP Generally Accepted Accounting Practice

HMRC HM Revenue and Customs, the UK Revenue authority

IBNR Reserve for Incurred But Not Reported claims

IFRS International Financial Reporting Standards

SAM Solvency Assessment and Management

UPR Unearned Premium Reserve

URR Unexpired Risk Reserve

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Acknowledgements

Sincere thanks to the members of Working Group 2 of the Solvency Assessment and Management Tax Task Group for their support and for the research conducted:

Fatima Ismail and Adriaan van Wijk of Swiss Re

Stephan Minne of KPMG

Rouxann Vlok and Gustavo Arroyo of RMB Structured Insurance

Anneline Janse van Rensburg of Hollard

Antoinette Rudman of Outsurance

Denver Chetty of Clientele

Mpho Lefakane of Munich Re

Jos Smit of PWC

Marlene Jordaan of Old Mutual

Johan de la Rey and Hannalie Pietersen of SARS

Danie Claassen and Liezel Coetzee of Sanlam

Thanks also to the following who assisted the members with research:

Yacoob Jaffar of KPMG

Arnold Schoombee of RMB Structured Insurance

Special thanks to Elma van der Vleuten of the FSB for administrative support and Carolyn Neser for assistance with compiling the report.

Kari Lagler

Chairperson

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Appendices

Key Summary

Jurisdiction Does the tax basis

follow accounting?

Is IFRS profit the

starting point for

the tax base?

Does the tax basis

follow the

regulatory return?

Tax basis expected to

change with introduction

of Solvency II?

Expected impact of

introduction of

IFRS 4 Phase II?

United Kingdom Long-term Not at present, but is being amended wef 1 Jan 2013

wef 1 Jan 2013 IFRS/UK GAAP will be used as the starting point. IFRS is mandatory for EU listed companies. UK GAAP is used, to be replaced by IFRS for all large UK insurers by 2014

Yes, at present, but is being amended

Yes, move to accounting profits as a base for the tax calculation

Not known at this stage

United Kingdom Short-term Yes IFRS mandatory for EU listed companies, but UK GAAP is also used

No Solvency II reserves being looked at as possible basis for tax calculation. Reversal of Claims Equalisation Reserves

Reversal of Claims Equalisation Reserves

Ireland Long-term Yes IFRS mandatory for EU listed companies, but Irish GAAP is also used

No Only if IFRS is amended in line with Solvency II.


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follow accounting?

Is IFRS profit the

starting point for

the tax base?

Does the tax basis

follow the

regulatory return?



of Solvency II?

Expected impact of

introduction of

IFRS 4 Phase II?

Ireland Short-term Yes IFRS mandatory for EU listed companies, but Irish GAAP is also used

No Only if IFRS is amended in line with Solvency II.


The Netherlands Long-term Yes, but a special regime for insurance companies

No, separate tax accounting rules

No No None. Separate tax accounting rules

The Netherlands Short-term Yes, but a special regime for insurance companies

No, separate tax accounting rules

No No None. Separate tax accounting rules

Germany Long-term Yes No, based on local (German) GAAP, transitioning to IFRS

No No N/a, tax is based on local GAAP accounts

Germany Short-term Yes No, based on local (German) GAAP, transitioning to IFRS

No No N/a, tax is based on local GAAP accounts

Switzerland Long-term Yes Tax base is similar to IFRS profit

No Not expected to change significantly, if at all


Switzerland Short-term Yes Tax base is similar to IFRS profit

No Not expected to change significantly, if at all


Luxembourg Long-term Yes, primarily No, largely follows Lux GAAP, transitioning to IFRS

No Unlikely Not known at this stage

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follow accounting?

Is IFRS profit the

starting point for

the tax base?

Does the tax basis

follow the

regulatory return?



of Solvency II?

Expected impact of

introduction of

IFRS 4 Phase II?

Luxembourg Short-term Yes, primarily No, largely follows Lux GAAP, transitioning to IFRS

No Unlikely Not known at this stage

Czech Republic Long-term Yes No, shareholder profit is calculated in accordance with Czech Accounting Standards

No No Should be no impact

Czech Republic Short-term Yes No, shareholder profit is calculated in accordance with Czech Accounting Standards

No No Should be no impact

France Long-term Yes, based on accounting income from French local statutory books, with adjustments

No, based on accounting income from French local statutory books

No Tax rules may be revisited in future, specifically reserving and mark to market on investments

No impact, because tax is not based on IFRS profits

France Short-term Yes, based on accounting income from French local statutory books, with adjustments

No, based on accounting income from French local statutory books

No Tax rules may be revisited in future, specifically reserving and mark to market on investments

No impact, because tax is not based on IFRS profits

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follow accounting?

Is IFRS profit the

starting point for

the tax base?

Does the tax basis

follow the

regulatory return?



of Solvency II?

Expected impact of

introduction of

IFRS 4 Phase II?

Sweden Long-term No No No: pension and investment business taxed on deemed yield; other business effectively on trading profits

Not expected to have any impact.

Not expected to have any impact.

Canada Long-term Yes Yes Regulatory returns are prepared using IFRS

No, Canada is not considering Solvency II


Canada Short-term Yes Yes Regulatory returns are prepared using IFRS

No, Canada is not considering Solvency II


Hong Kong Long-term No, assessable profits deemed to be 5% of onshore premiums. Adjusted surplus calculated with reference to actuarial-based statutory accounts may be elected as an alternative.

No, assessable profits deemed to be 5% of onshore premiums. Adjusted surplus calculated with reference to actuarial-based statutory accounts may be elected as an alternative.

No, it generally follows accounting

No Not known at this stage

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follow accounting?

Is IFRS profit the

starting point for

the tax base?

Does the tax basis

follow the

regulatory return?



of Solvency II?

Expected impact of

introduction of

IFRS 4 Phase II?

Hong Kong Short-term Yes, based on accounting, with adjustments for non-taxable income and offshore underwriting profits

Hong Kong Financial Reporting Standards which are aligned to IFRS

No, it generally follows accounting

No Not known at this stage

Australia Short-term There are differences, for example, URR is not allowed for tax, only direct claims settlement costs may be reserved for, equalisation reserves are not allowed for tax.

For certain reserves IFRS is the starting point but with adjustments.

No, the tax basis has separate rules for calculating reserves.

Unlikely as Australia may not introduce Solvency II. The regulatory basis already uses a risk-based model.

No changes expected at this stage.

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United Kingdom

Long-term insurers

Framework for research of LT insurers in comparable jurisdictions : Section 29A (“Four Funds”)

Item Section 29A/Four Funds - SA UK Life tax

1. Applicable legislation Section 29A of the Income Tax Act , 1962 (IT Act)

Schedule 3 of the Long Term Insurance Act, 1998

Tax Directive issued by the Financial Services Board on the ―value of liabilities‖ according to section 29A of the IT Act (LT Tax).

Directive issued by the Financial Services Board on– o the prescribed requirements for the calculation of the

value of the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).

o the application of SA GAAP to the requirements – differences between the annual financial statements and the long-term insurance return (140.B.iii LT).

o disregarding amounts representing negative liabilities in respect of long-term policies when calculating the value of assets according to paragraph 4(iv) of schedule 3 to the Long-Term insurance Act, 1998 (145.A.i LT).

Taxation of life insurance companies is currently based on regulatory returns made to the Financial Services Authority (FSA). The tax legislation makes frequent direct reference to regulatory returns and to the underlying regulatory rules.

However, Solvency II establishes a new regulatory framework and from 2013 FSA returns will no longer exist in a form which will support the current tax legislation. The principal legislation governing the current life insurance tax regime can be found in the following Acts of Parliament:

Income and Corporation Taxes Act (ICTA) 1988

Finance Act 1989

Corporation Tax Act 2009

2. Key objectives of the legislation (differentiate between Risk and Savings, if relevant)

Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made

The Life company is viewed as an investment vehicle and thus it is taxed on its investment income (and chargeable gains), with relief for expenses of management. This is the I-E basis of taxing life companies. This basis ensures that investment income and chargeable gains are taxed each year as they build up rather than waiting until policies mature/surrender.

Life insurance business is divided into three categories, Basic Life Assurance and General Annuity business (BLAGAB), Permanent Health Insurance business (PHI) and Gross Roll Up business (GRB).

Most life insurance companies are taxed on the I-E basis and for BLAGAB the I-E taxes investment income, capital gains less management expenses. However, for PHI and GRB only shareholder profits are taxed, so the I – E basis is not used for these classes of business. GRB consists of the following:

1. Pension business The Pension is taxable when finally taken. PB must be excluded from the I-E regime if investment return is to

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between risk and savings business of the insurer. accrue free of tax. 2. Overseas Life Assurance business (OLAB) This includes all business with non UK residents satisfying the OLAB qualifying conditions. The objective is to

prevent the UK I-E basis from deterring non UK residents from taking out policies with UK companies. 3. Life reinsurance business (LRB)

This business has been taxed on trading profits since 1995 when the concept of LRB was introduced as part of an anti avoidance measure. Companies writing basic life assurance and general annuity business were reinsuring their business with reinsurers, typically in Bermuda, but sometimes to another UK company or to another country that would not be taxed on its investment return. They would later on receive reinsurance recoveries equal to the premiums the UK company paid plus investment return, minus the expenses and profits of the Bermudian reinsurer. The UK company would therefore have converted taxable investment return into a reinsurance recovery and would not be taxed on the reinsurance recovery.

The 1995 Finance Act changed the law to impose an imputed investment return on the UK company. In order to avoid double taxation, a UK company reinsuring this business needed to not be taxed on the same investment return again: therefore "life reinsurance business" was born.

There are exemptions to the rules for UK companies (including UK branches) within the same group with 90% common ownership, because the cedant will not be subject to the imputation of investment return on such reinsurance.

The current regime thus taxes investment return on the cedant company, thus at the beginning of the reinsurance chain.

4. Individual Savings Account Business (ISAB) and 5. Child Trust Fund Business (CTFB)

Where the company is a pure reinsurer (all or substantially all of the life business is GRB), the companies life profits are taxed as trade profits under CTA 2009 s35 and not I-E basis.

The commercial accounts are generally disregarded in the taxation of life business. However, there is a principal exception and this is in relation to the taxation of loan assets relating to BLAGAB, interest payable and loan liabilities generally.

The taxation of loan assets is covered by the 'loan relationship regime' which applies to both assets and liabilities for the purposes of BLAGAB and PHI. Hence the statutory accounts are again relevant in determining the taxable amounts.

3. Indicate the proportion of mutual insurers versus companies with shareholders. Does the presence of mutual insurers influence the tax

Insurance companies with shareholders = 100%. Although the largest insurers were mutual insurers in 1993 a single four funds tax system applicable to all long-term insurers was introduced. No changes were made to the taxation of insurers when insurers demutualised. The distinction between the various policyholder funds and the corporate fund is still in effect.

The concept of mutuality is long established. For mutual companies, the normal I-E basis, including GRB and PHI computations applies. In general profits are only taxed at policyholder rates. GRB profits are minimal as a result of the taxable surplus being offset by the tax deductible policyholder bonuses.

The Government does not intend that there should be any change to the principles underlying the tax treatment of mutual business as a result of Solvency II. Mutuality will be determined, as now, by reference to the facts of individual cases in the light of the principles of mutuality and the taxation of mutual business established by the courts in decided cases in the past. In general, the revised tax code will apply equally to

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legislation, and if yes, what aspects and how is the tax impacted?

mutual life insurers.

4. Overall comparison of the legislation

- Currently, there are three categories for tax purposes of long term business: 1. Basic Life Assurance and General Annuity business (BLAGAB), 2. GRB and 3. Permanent health insurance (PHI).

The latter two categories are both taxed on a trading profits basis. However, GRB forms part of a company‘s life assurance business, and the taxable measure is determined according to the special rules for life assurance business based on the regulatory return.

5. Calculation of shareholder taxable income

The taxable income of the corporate fund (shareholder interest in the insurer) is determined by applying the general principles of the IT Act and by including the annual ―profit transfers of excess assets from the policyholder funds as income. Expenses incurred for tax purposes by the corporate fund exclude expenses directly or indirectly attributable to business conducted with policyholders.

The corporate fund is treated as a separate taxpayer which is a company and which is a connected person in relation to the other 3 funds.

I-E profits (referred to the relevant profit) includes BLAGAB income and gains as well as excess adjusted life assurance trade profits, plus the GRB and PHI shareholder profits less non trade deficits and the expenses deduction.

UK life assurance taxation results in a single tax charge on the life company that comprises the tax on investment return attributable to policyholders and the tax on trading profits derived by a company from carry on its business. Effectively, the regime aims to replicate as much as possible the tax regime that would have applied if the policyholders and the shareholders were dealt with separately. It is therefore necessary to have a mechanism for distinguishing between shareholder and policyholder profits and the life tax legislation (s89 FA 1989) has a prescribed method for achieving this and thus the shareholder share of profit is calculated as follows:

£

Life assurance trade profit X

Less: *shareholder‘s share of BLAGAB non taxable dividends (X)

Shareholder share of the I-E profit X

*The shareholder share of BLAGAB non taxable dividends is calculated as follows:

A/B x BLAGAB non taxable dividends

A= the life assurance trade profit. This represents the life assurance profit of the company if it was taxed on a trading profits basis

B= investment return less expenses in relation to life assurance business.

The calculation therefore determines a percentage that represents the shareholders share of the life profits.

Both 'A' and 'B' are calculated before the offset of any losses brought forward.

S89 (4) specifies that where 'A' exceeds 'B' or 'B' is less than or equal to zero, all income is shareholders'. Where otherwise 'A' is negative, all income is policyholders'.

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New life tax regime:

Under the new life tax regime, there is still a concept of the shareholder and policyholder share. This is still required as the regime will still aim to replicate as much as possible the tax regime that would have applied if the policyholders and the shareholders were dealt with separately.

Also see point 10 below.

6. Reserving valuation method (value of liabilities)

Value of liabilities of the insurer in respect of business conducted by it in the relevant policyholder fund as determined by the Chief Actuary of the Financial Services Board in consultation with SARS. Capital adequacy reserves are specifically excluded [and increases are allowed for the value of certain re-insurance assets].

―Liabilities‖, in relation to an insurance company, means the mathematical reserves as determined in accordance with chapter 7.3 of the Integrated Prudential Sourcebook, and those which arise from deposit back arrangements. This is due to the fact that many companies will carry out two different valuations of their liabilities, a ―regulatory‖ valuation as before and a ―realistic‖ valuation which is on a very different basis (as it takes into account future bonuses etc).

Mathematical reserves are tax deductible for GRB and PHI (and for Life Assurance trade profits purposes (LATP)). Reversionary bonuses in favor of Policyholders/annuitants from surplus are also deductible.

Mathematical reserving will be impacted by the changes to technical provisions under Solvency II and also ultimately IFRS4 phase 2. Although there isn‘t a general rule of thumb to indicate if mathematical reserves will be higher or lower than those currently used. Some prudence may by stripped out which would tend to lower reserves but on the other hand discount rates may be lower leading to higher reserves. Under Solvency II Solvency II is that the mathematical reserves represent the best estimate of the present value of the obligation with further requirements that a risk margin must be introduced to allow for non-hedge able risks and a risk-free discount rate must be used, which by its nature will be lower than the rate derived by reference to the yield of the actual assets held by the insurance company, which is currently used.

7. Discretionary margins

The financial effect of each discretionary margin must be noted separately and should be motivated. The Chief Actuary of the Financial Services Board may, in consultation with the Commissioner for SARS disallow some or all of the discretionary margins for tax purposes.

n/a

8. Treatment of ―negative Rand reserves‖ (Day 1 gain issue)

Dependant on treatment for regulatory purposes. If policyholder liabilities for regulatory purposes are reduced with negative rand reserves the value of liabilities for income tax purposes will automatically be reduced.

n/a

9. Deductibility of expenses (separately specify

In contrast with the deductible expenses of the corporate fund described in paragraph 5 the individual and company policyholder funds may deduct the following

The BLAGAB proportion of acquisition expenses is spread over 7 years in the I-E computation.

Maintenance expenses are deducted as incurred as with other categories of business.

Bonuses paid to policyholders of a capital nature are not deductible for tax purposes in the life assurance

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acquisition costs, annual costs, insurers general operating expenses, specific investment related costs etc)

amounts:

expenses and allowances directly attributable to the income of the fund;

a formula based percentage of– o expenses directly incurred iro selling and

administration of the relevant policies (acquisitions costs and investment related costs);

o all other expenses of the insurer which are attributable to the business conducted with the relevant policy holders (general operating expenses), excluding expenses directly incurred to produce exempt amounts.

The formula effectively reduces allowable expenditure with a portion of total return of the policyholder fund in the form of exempt income and capital gains.

50 per cent of the formula based percentage used in the previous bullet, multiplied by the transfer from the policyholder fund to the corporate fund.

trade profits and gross roll-up business computations. (UK tax legislation generally provides that expenses of a capital nature should not be deductible. In the case of life taxation, prima facie a deduction is available for bonuses paid to policyholders each year. Bonuses may be seen to be capital in nature if for example, in a particular year, the policyholders are paid significant one off bonuses, as they may be seen to be related to a capital transaction. The legislation makes specific reference to bonuses paid out of inherited estate as being disallowable on the grounds that they are capital in nature. The inherited estate of a life company in general terms refers to profit that has built up over time)

10. Taxation of policyholders vs shareholders. Is there a differentiation between how policyholders are taxed versus shareholders?

In following the trustee principle, premiums and reinsurance claims received and claims and reinsurance premiums paid by the insurer are disregarded in determining the taxable income of the individual and company policyholder funds.

The income of the untaxed policyholder fund is exempt from income tax.

The income taxable in the corporate fund is the returns on assets in that fund, the transfers from the 3 policyholder funds and income from business conducted which does not relate to business with policyholders or administration of policyholder assets.

The allowable deductions of the 3 taxable funds are described in paragraphs 5 and 9.

Transfers from the corporate fund to any of the policyholder funds and the return of those amounts to the corporate fund do not affect the taxable income of any of the funds. Losses in a fund may not be set off against

See point 5 above.

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taxable income in another fund.

11. Timing of taxation of policyholders

Policyholders are not directly taxed on investment results achieved by insurer. However the value of their interest in the policy or policy benefits may be reduced by the tax payable by the insurer in respect of the policyholder funds.

GRB policies roll up gross of tax – taxation takes place when the policy is in payment, for example, when a pension annuity is paid.

BLAGAB policies are taxed as they build up.

PHI policies are taxable in the same way as other general insurance business in the UK, which is on a trading profits basis.

12. Responsibility for paying the tax (on insurer or policyholder). What is the tax treatment in the policyholders hands?

Insurer pays tax determined for four funds and effectively pays tax of the policyholder funds on behalf of policyholders. Policyholders are not taxed on maturity of original policies with insurers. Second hand policies are subject to taxation.

Responsibility lies with the insurer. The insurer withholds tax on behalf of policyholders and pays across to HM Revenue & Customs.

13. Final or withholding tax for policyholders?

No tax payable by policyholders, unless the policy is second hand.

See point 12 above.

14. Applicable tax rates The income tax rates (effective capital gains tax rate in brackets) of the four funds are:

Corporate fund – 28% (14%)

Individual policyholder fund – 30% (7.5%)

Company policyholder fund – 28% (14%)

Untaxed policyholder fund – 0% (0%)

Shareholder profits are taxed at the corporation tax rate of 26% from 1 April 2011. A reduction to 25% has been enacted and will take effect from 1 April 2012. Further reductions to 24% and 23% are expected to apply from 1 April 2013 and 1 April 2014 respectively, but have not yet been enacted.

The balance of taxable profits is policyholder profits and is taxed at the basic income tax rate of 20%.

15. Is there a difference in the taxation depending on the type of product?

Any type of policy entered by the insurer with the 3 categories of policyholders is to be dealt with in the relevant policyholder fund. However, all annuity contracts in respect of which annuities are being paid are allocated to the untaxed policyholder fund. No difference in taxation rules for risk and investment policies.

Main difference lies in the timing of taxation – see point 11 above.

16. Comparison of life-wrapped to equivalent investment

Regulated collective investment schemes in securities are structured as vesting trusts and benefit from deferred taxation. Income accrued to the trust is taxed in the hands of the holders of participatory

Some but not all collective investment vehicles are treated as tax transparent thus the tax treatment of income and gains of collective investment vehicles is of relevance to the taxation of life company holders as well as the tax treatment of income from them and gains arising from them to life companies. The rules

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products, for example Collective Investment Schemes/Mutual Funds

interest if distributed to them within 12 months from date of accrual. If not distributed by the trustees within 12 months, the trust is taxed on the income. Capital gains on the disposal of assets by the trust are exempt in the hands of the vested beneficiaries and the holders of participatory interests are only taxed on disposal of their interests.

are complex. See attached a guidance table (as seen on the Life Manual 'LAM2008') which is not intended to be exhaustive of the tax treatments,

17. Is the jurisdiction amending for Solvency II only or conducting a holistic review?

Amendments relating to SAM (if any) should be finalized prior to finalization of the holistic review of the taxation of long-term insurers.

The tax related changes to be implemented once the Solvency II regime is introduced are said to be the most extensive to Life assurance business in the last 97 years.

Currently, as mentioned, taxation of life insurance companies is based on regulatory returns made to the Financial Services Authority (FSA). From 2013, FSA returns will no longer exist in a form which will support the current tax legislation.

The starting point for trading profits will primarily be the Profit before tax in the financial statements. This will bring the life insurance tax regime into line with that of other industries.

For accounts prepared under both UK GAAP and IFRS adjustments to this starting point will also be required for taxable items of income and expense included in other statements in the accounts (for example in the Statement of Recognized Gains and Losses or in the Statement of Changes in Equity).

The above will form the basis of the trading profit calculations subject to any adjustment required by any specific tax legislation or by generally applicable tax principles established in decided cases by the courts.

There will be a reduction in the number of separate categories for taxing long-term business e.g. GRB and PHI will be combined into one trade profits computation

18. Status of amendments arising from review (once-off/staggered)?

- Although it now appears that the current regulatory returns may continue to be required for the year ending 31 December 2013, the new tax regime is due to be effective from 1 January that year

19. Treatment on transition

No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilized selling expenses.

Transitional adjustments will arise on the move from an FSA return basis to a statutory accounts basis. They can largely described as follows:

1. The Deferred Acquisition costs and Deferred Income reserves are to be excluded from the tax calculation to the extent that they have been relieved/taxed.

2. Untaxed surplus subject to restrictions will on transition be brought into tax over ten years (this is subject to any absolute bar on release of assets/surplus) The latter will result in deferral of tax for 2 years from transition date or until the bar is removed, whichever occurs earlier.

3. Other transitional adjustments will also be spread over 10 years from 2013. This includes any other amounts where there is a difference between what has been brought into account in surplus vs accounting profit.

4. Life assurance trade losses in excess of gross roll up business losses subsisting at 31 December 2012 will be carried forward into the new regime as BLAGAB trading losses.

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5. An anti avoidance rule to counter the pre-emption of the transitional provisions. 6. A regulatory power covering transition with further regulations is expected early in 2012.

20. Other Capital gains / losses are determined for the taxable transferor fund when assets are transferred to another fund.

To ensure consistency and fairness, the UK Government realizes that the requirement to allocate trade profits and BLAGAB income and gains on a factual basis could present a potential burden on those companies who do not currently allocate a substantial part of their assets to specific lines of business for commercial reasons. Thus companies who wish to allocate factually should rather elect to do so. Where no election has been made, the location of income, realized/unrealized gains and capital gains will be on a statutory basis.

Further proposals are being explored with regards to other aspects of the life related tax code (e.g. loan relationships, intangible assets, taxation of shareholder fund assets and the taxation of transfers of business). The impact of subsequent transitional adjustments related to the accounting changes (e.g. phasing out of UK GAAP and the introduction of IFRS 4 Phase 2) is also being considered.

Additional Questions

Long-term and Short-term insurers

1. Does the tax basis follow accounting, that is, is the tax base the same or similar to the IFRS profit?

- No, Accounting is based on UK GAAP which will merge with IFRS over time. It is expected that all large UK companies will be required to adopt IFRS by 2014.

2. If yes, are there any significant adjustments made for tax purposes? (Please specify)

- N/A

3. If no, please set out the basis for the calculation of profits/taxable income for tax purposes.

- Taxation of life insurance companies is currently based on regulatory returns made to the Financial Services Authority (FSA). The tax legislation makes frequent direct reference to regulatory returns and to the underlying regulatory rules. Life insurance business is divided into three categories, Basic Life Assurance and General Annuity business (BLAGAB), Permanent Health Insurance business (PHI) and Gross Roll Up business (GRB). Most life insurance

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companies are taxed on the I-E basis. For BLAGAB the I-E taxes investment income, capital gains less management expenses. However, for PHI and GRB only shareholder profits are taxed, so the I – E basis is not used for these classes of business

4. Is the tax basis expected to change in any way with the introduction of Solvency II? (Please specify)

- Yes, the UK GAAP/IFRS accounts will be used as the starting point for the tax calculations from 1 January 2013.

The accounts (whether under UK GAAP or IFRS) will have a variety of valuation and timing differences from the regulatory return, some of which will be effective for tax, and some which will not. In the case of tax effective differences, if appropriate adjustments are not made, there will be profits which are taxed twice or not at all. It is the general aim of the transitional arrangements to prevent this happening.

5. What will be the expected impact of the introduction of IFRS 4 Phase II and are transitional measures planned? e.g. once off increase in earned profits to be taxed over [x] years

- Transitional adjustments will arise on the move from an FSA return basis to a statutory accounts basis. They can largely be described as follows:

- The Deferred Acquisition costs and Deferred Income reserves are to be excluded from the tax calculation to the extent that they have been relieved/taxed.

- Untaxed surplus subject to restrictions will on transition be brought into tax over ten years (this is subject to any absolute bar on release of assets/surplus) The latter will result in deferral of tax for 2 years from transition date or until the bar is removed, whichever occurs earlier.

- Other transitional adjustments will also be spread over 10 years from 2013. This includes any other amounts where there is a difference between what has been brought into account in surplus vs accounting profit.

- Life assurance trade losses in excess of gross roll up business losses subsisting at 31 December 2012 will be carried forward into the new regime as BLAGAB trading losses.

- An anti avoidance rule to counter the pre-emption of the transitional provisions. (This is mainly to prevent companies from obtaining an unintended tax advantage by way of the transitional rules. There will be a clearance procedure to allow companies to seek certainty over the application of the targeted anti avoidance rule 'TAAR' to proposed transactions. Also, reading HMRCs 'Overview of Tax Legislature and rates' dated 21 March 2012, it states 'The legislation will include a targeted anti-avoidance rule to address cases where companies enter into arrangements with a main purpose of securing a tax advantage in connection with the transitional rules (published on 21 March 2012 on the HMRC website).

- A regulatory power covering transition with further regulations is expected early in 2012.

6. Are reinsurers taxed in a different manner to direct insurers?

- Yes, for the short-term insurers in the UK the general principle is to tax the commercial accounting results whereas the taxation of life reinsurers is currently based on regulatory returns made to the FSA.

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7. Are captive insurers and/or cell insurers taxed differently from traditional insurers?

- N/A

Long-term insurers

1. As for questions 1-5 above, but worth bearing in mind that the questions relate to shareholder profits.

- See above.

2. Is there special treatment of upfront acquisition costs?

- Amounts paid by life companies in securing new business (such as commissions to financial advisers) are written off in current regulatory returns as they are incurred, and tax relief is received on the same basis (with the exception of BLAGAB expenses spread under section 86 FA 1989). However, the accounting treatment is for such costs to be spread forward over the period in which margins are expected to arise from the relevant insurance contract. Thus, for a number of years after the transition to an accounts basis, costs will appear in the accounts which have already been relieved. Such costs will need to be identified by companies, and will be disallowed as they appear in the accounts to avoid double relief

3. Is Risk/Protection business taxed on a different basis compared to Investment/Savings business? Consider shareholders and policyholders separately.

Protection business has historically been taxed on an I- E basis, but under the new life tax regime it will be carved out of the I_E regime. This very point was subject to debate amongst the UK insurance industry. Many insurers felt that companies were able to gain an unfair advantage in taxing protection business on an I-E basis. This is because the nature of protection business means that a company will incur lots of expenses up front. If they are able to gain value for those expenses then they can price that into the protection products they sell. Therefore post 2013, protection business will form part of the GRB/trading profit computation.

4. Are policyholders taxed on entry, roll-up or exit? Please provide an overview of the tax.

- The Life company is viewed as an investment vehicle and thus it is taxed on its investment income (and chargeable gains), with relief for expenses of management. Thus the I-E basis. The life company is a proxy for the underlying policyholders to tax investment return each year as it builds up rather than waiting until policies mature/surrender. Taxation of investment returns in the hands of the life company is recognised in policyholder taxation.

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Short-term insurance

Framework for research of ST insurers in comparable jurisdictions : Section 29A (“Four Funds”)

Item SA - Section 28 [UK Jurisdiction] Key Difference

1. Applicable legislation - Section 28 of Income Tax Act, 58 of 1962 (―the Act‖);

- General provisions of the Act – for e.g. general deduction etc;

- Section 32 of the Short-Term Insurance Act, No 53 of 1998 (―the STI Act‖),

- Board Notice No 27 of 2010 (FSB, Registrar of Short-term Insurance)

Regulations were introduced in 2009. The General Insurers‘ Technical Reserves (Appropriate Amount) Tax Regulations require general insurers to give confirmation to HMRC that the amount of liabilities (including unpaid claims reported, IBNR and unexpired risk) stated in the accounts is not excessive estimate of the liabilities (i.e. appropriate). The confirmation must be founded on or supported by an opinion in writing given to the general insurer by an actuary or a suitable skilled person (which may include a director or employee of the general insurer) stating that the amount of liabilities is not an excessive estimate. If the liabilities are considered to be in excess of the appropriate amount then the corporation tax deduction is restricted.

There is an abligation for general insurers to submit a copy of the regulatory return as part of their statutory corporation tax return.

There is no specific legislation in the UK dealing with the taxation of general insurers/cell captives. The main legislation in the area of taxation of UK companies is the Corporation Tax Act (CTA) 2009 and 2010 which equally apply to the taxation of general insurers/cell captives. As a general principle, the taxation of a particular item follows the accounting treatment so long those accounts are in accordance with GAAP. In the UK, the basis for the commercial accounts of general insurers is the Companies Act 2006 which prescribes the UK GAAP or IFRS. Further guidance and interpretation of the UK GAAP is provided by the Association of British Insurers‘ Statement of Recommended Practice (―SORP‖) on accounting for insurance business.

The tax treatment of a specific item is closely linked with the accounting treatment, with certain specific adjustments where applicable. This is explained further below.

2. Key objectives of the legislation

Determine taxable income of short-term insurers. Regulates the following specific matters(i.e. deviations from general tax rules):

- Liability in respect of premiums on re-insurance (section 28(2)(a));

- Actual claims incurred (section 28(2)(b));

- Liabilities contemplated in section32(1)(a) and (b) of STI Act.

To ensure no excessive deductions claimed/allowed for tax purposes. Creation of a simple and stable tax basis better aligned with the taxation of companies generally.

In the UK the general principle is to tax the commercial accounting results.


SA has specific legislation, following years of case law, regulating the tax implication of insurance income and expenses. In SA the principles that form the basis for the taxation of income differ from accounting concepts. IFRS 4

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Phase 2 may result in a different timing of the recognition of the expenses, SAM may recognize expenses on a different basis again, given that a larger set of expenses my be recognized under the SAM cash flow.

Except for the ―appropriate amount‖ regulation the UK tax treatment follows the accounting treatment.


General note: Short-term insurers are required to provide for liabilities (as listed below) in accordance with the provisions of the STI Act.

Note that for regulatory reserves only approved re-insurance is taken into account.

This is based on regulatory return in the UK and tax treatment follows the regulatory return.

4.1 Unearned Premium Reserve (UPR)

For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act. Two methods:

(i) Prescribed formula; or

(ii) Own approved formula.

Section 28(2)(cA) of the Act- allows a deduction, subject to discretion of Commissioner (S28(9) of the Act). This deduction to be added to taxable income in next year of assessment (section 28(5) of the Act. Provisions of section 23(e) (disallowance of creation of reserves) of the Act do not apply to this provision for liabilities (section28(6)(b)).

Under the annual basis of accounting written premiums should be recognized as earned over the period of the policy, having regard to the incidence of risk. Time apportionment of the premium is normally appropriate if the incidence of risk is the same throughout the period of cover. If there is a marked unevenness in the incidence of risk over the period of cover, a basis which reflects the profile of risk should be used. The proportion of the written premiums relating to the unexpired period of these policies will be carried forward as an unearned premiums provision at the balance sheet date.

There is no specific tax legislation determining the level of the UPR reserve for tax purposes. As a general principle, the UPR is tax deductible in accordance with generally accepted accounting practice (either under UK GAAP or IFRS).

It seems that the UK tax authorities rely completely on the accounting treatment, and deductibility is not subject to any discretion by the HMRC.

4.2 Claims Incurred but not yet reported (IBNR)

For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act. Section 28(2)(cA) of the Act- allows a deduction, after a reduction of amounts incurred and allowable under section 28(2)(b). The Commissioner may exercise the discretion under section

IBNR calculated based on experience or statistical methods.

Normally tax deductible in accordance with generally accepted accounting practice subject to the appropriate amount regulations outlined in point 4.4 below.

SA practice to allow 7% deduction but only restricted by UK tax authorities if considered in excess of the ―appropriate amount‖ as outlined in point 4.4.

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28(9) of the Act to make further adjustments.

4.3 Unexpired Risk Reserve (URR)

Only created for accounting and regulatory return purposes where an insurer incurs an underwriting loss and insurer and auditor considers it necessary to create a reserve for claims costs and costs to carry on business.

No deduction is allowable under section 28(2)(cA) as liabilities consisting of the unexpired risk provision as contemplated in section 32(1)(d) of the Short Term Insurance Act are not covered.

Where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the UPP provision in relation to such policies after deduction of any acquisition cost deferred, an URR is established. An assessment of whether an URR provision is made for each grouping of business that is managed, together with any unexpired risk surpluses and deficits within that grouping being offset. In calculation the expected value of future claims in relation to the unexpired periods of risk on policies in force at the balance sheet date, the future investment return arising on investments supporting the Unearned premium provision and the unexpired risks provisions may be taken into account.

Normally tax deductible in accordance with generally accepted accounting practice subject to the appropriate amount regulations outlined in point 4.4 below.

In SA no deduction is allowed. In the UK, the HMRC allows a deduction in accordance to GAAP unless confirmed excessive.

4.4 Unpaid claims (outstanding claims reserve)

S 28(2)(b): claims actually incurred (whether paid or not) allowed as a deduction. Amount to be reduced with any amounts recoverable under re-insurance, guarantee, security etc. Normal tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.

Provision is made at the balance sheet date for the expected ultimate cost of settling of all claims incurred in respect of events up to that date, whether reported or not, together with related claims handling expenses, less amounts already paid. If a liability is known to exist but there is uncertainty as to its eventual amount, a provision is nevertheless made. The level of claims provisions is set such that no adverse run-off deviation is envisaged. Explicit discounting of claims provision is allowed only if certain criteria are met, such as e.g.:

The expected average interval between the date or the settlement of claims discounted and the accounting date is at least four years;

There are adequate data available to construct a reliable model of the rate of claims settlement;

Assets are available that are appropriate in magnitude and nature to cover discounted liabilities.

Normally tax decutible in accordance with GAAP. Regulations were introduced in 2009. The General Insurers‘ Technical Reserves (Appropriate Amount) Tax Regulations

Deductible in SA and UK as long as requirements are met.

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require general insurers to give confirmation to HMRC that the amount of liabilities (including unpaid claims reported, IBNR and unexpired risk) stated in the accounts is not excessive estimate of the liabilities (i.e. appropriate). The confirmation must be founded on or supported by an opinion in writing given to the general insurer by an actuary or a suitable skilled person (which may include a director or employee of the general insurer) stating that the amount of liabilities is not an excessive estimate. If the liabilities are considered to be in excess of the appropriate amount then the corporation tax deduction is restricted. In practice, such tax restrictions are thought to be rare.

4.5 Equalisation reserves (―CER‖)

No applicable in SA Currently prescribed for certain classes of business. These amounts are set aside for the purpose of mitigating exceptionally high loss ratios in future years. Transfer in – by reference to that years‘s net written premium. Transfer out – by reference to claims incurred and earned premium in that year. Maximum reserve limit – by reference to net premium written for that year and previous 4 years. Included within technical provisions in the commercial accounts.

Currently the amount shown as an equalization reserve in the regulatory return is tax deductible, although an election may be made to treat it as non-dectuctible. Releases of reserves for which a tax deduction has been claimed are taxable.

Under the Solvency II directive, which is expected to apply from January 2013, there will be no regulatory requirement for CERs and they will disappear, resulting in the release of built-up reserves for tax. Legislation will therefore be necessary either to provide for continued tax relief or to ensure that reserves are released over a transitional period of 6 years if relief is no longer available.

Not applicable in SA and in the UK it will not be deductible going forward.

5. Contingency and capital adequacy reserves

Regulatory requirement to reserve the following:

- Contingency: 10% of gross premiums less approved re-insurance premiums;

- Capital Adequacy: 15% of gross

Not reflected in the Companies Act accounts and not deductible for tax purposes. However, Equalisation Reserves are prescribed in the regulatory return for certain classes of business. These amounts are set aside for the purposes of mitigating exceptional high loss ratios in future years. If the new Solvency II methodology for calculating insurance technical reserves is adopted in the financial statements,

None.

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premiums less approved re-insurance premiums.

Deduction for these reserves disallowed under section 23(e) of the Act.

there may be one-off transitional impact on the current methods and the level of reserving. Refer to 4.5 above.

6. Are different products taxed differently?

No. No. The UK only makes a distinction for tax purposes between short term and long term buinsess. All short term business is taxed in the same way as outlined in this note. Long term business is mainly taxed under the I-E system.

None

7. Deductibility of expenses (separately specify acquisition costs, annual costs, insurers general operating expenses, specific investment related costs etc)

Expenses actually incurred (other than claims and re-insurance premiums specifically provided for in section 28) deductible in terms of general deduction formula (section 11(a) read with section 23 of the Act).

Investment related costs: normal principles apply. For e.g. if directly linked to exempt income (for e.g. dividends), or of a capital nature, no deduction.

Cost arising from the conclusion of insurance contracts including direct costs, such an acquisition commission or the cost of drawing up the insurance document or including the insurance contract in the portfolio, and indirect costs, such as advertising costs or the administrative expenses connected with the processing of proposals and the issuing of policies are deferred in line with the unearned premium. Provision is also made for all future claims handling costs both on outstanding claims and IBNR.

Tax deductibility follows accounting treatment

In SA expense will be deductible when incurred but in the UK the expenses are deferred and treated as decutible in accordance with GAAP. Timing difference is treatment of expenses between the two jurisdictions.

12. Applicable tax rates 28%. Capital gains: 14% The mainstream corporation tax rate is 26% from 1 April 2011 and applies to those with profits greater than GBP 1.5 million i.e. larger companies. Lower rates apply for companies that are not large. It has been announced that the corporation tax rate will reduce by 1% a year until 2014 (23%).

Insurance premium tax of 6% applies to most general insurance where the situs of risk is in the UK and the contract is entered into on or after 4 January 2011. The higher rate of 20% applies to travel insurance, domestic appliances and insurance sold by suppliers of vehicle insurance.

There are exemptions for international risks, reinsurance and for life and other long term business.

Corporation tax is payable on chargeable gains arising on disposal of shares (chargeable asset) in subsidiaries. The rate at which chargeable gains are subject to corporation tax depends on the level of the company‘s other profits.

Certain reliefs and exemptions are available to either reduce

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the amount of chargeable gain subject to corporation tax or eliminate the gain completely

13. Amending for Solvency II only or holistic review?

Holistic review


Refer to point 4.5


If new Solvency II methodology for calculating insurance technical reserves is adopted in financial statements, there may be a one-off transitional impact on current methods and the reserving level. (Also refer to point 4.5) How this is to be taxed (e.g. spreading) has not yet been decided.

16. VAT The provision of insurance as well as reinsurance is an exempt supply for VAT purposes. The exemption extends to services qualifying as services of an insurance intermediary. The services of an insurance intermediary may qualify for exemption if they involve:

The bringing together of persons seeking insurance with those providing insurance;

Preparatory work carried out in the conclusion of insurance contracts;

Assistance in the administration and performance of such contracts, including services of claims handling; or

The collection of premiums.

17. Other Cell Captives tend not ot be UK resident but may be brought into UK tax under the UK CFC regime and so are taxed as though they were standard general insurers. Captives are often not within the EU or equivalent jurisdictions and so are likely not to have to comply with Solvency 2. Captive insurance companies are potentially subject to corporation tax in the UK under the CFC rules subject to certain exemptions. UK parent will also be subject to transfer pricing rules. Profits arising from genuine third party activities undertaken offshore is not subject to tax.

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As part of its ongoing overhaul of its tax system, the UK Government has published its proposals for the reform of CFC regime. The proposed changes are intended to target the artificial diversion of UK profits.

Exempt foreign profits where there is no artificial diversion of UK profits.

Under the new CFC rules, it is proposed that a new insurance exemption will apply to general insurers that are part of a group to exempt profits arising from overseas insurance operations and foreign to foreign intra-group insurance activity in line with a more territorial approach.

The revised CFC rules are expected to apply to accounting periods ending after Royal Assent (expected Summer 2012).


Long and short-term insurers


In the UK, the basis for the commercial accounts of the general insurers is the Companies Act which prescribes the UK GAAP or IFRS. As a general principle the taxation of a particular item follows the accounting treatment so long those accounts are in accordance with GAAP. For EU listed companies the accounts must be prepared under IFRS. Often, there will be little or no difference in the outstanding claims provisions under the two accounting standards. The main exception so far as insurance provisions are concerned relates to claims equalisation reserves which may be feature under UK GAAP but are omitted under IFRS. HMRC have confirmed that claims equalisation reserves ( ―CER‖)are in any event outside the scope of the Regulations.


Except for the ―appropriate amount‖ regulation the UK tax treatment follows the commercial accounting results.

Under the Solvency 11 directive, which is expected to apply from Jan 2013, there will be no regulatory requirement for CERs and they will disappear resulting in the release of built-up reserves for tax.

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3. Does the tax basis follow the regulatory return? If yes, how will this change when the regulatory basis changes to comply with Solvency II?

See point 2 above.

4. If the tax basis is not based on either accounting or regulatory, please set out the basis for the calculation of profits/taxable income for tax purposes.

Explained above.


Current indications are that insurance provisions will be discounted and be equal to a best estimate plus a risk margin. These provisions may not be the same as those calculated for inclusion in the financial statements (and therefore may be different to those that will be used for tax purposes). It seems that the HMRC regards the anticipated Solvency II basis for reserves as a reasonable basis for tax purposes. The UK is expecting further regulations soon.

6. What will be the expected impact of the introduction of IFRS 4 Phase II and are transitional measures planned? (eg: once off increase in earned profits to be taxed over [x] number of years).

See above


No


Cell Captives tend not to be UK residents but may be brought into UK tax under the UK CFC regime and so are taxed as though they were standard general insurers.

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Short-term insurers only

1. Is the Unexpired Risk Reserve (URR) deductible for tax purposes?

Yes, normally tax deductible in accordance with generally accepted accounting practice subject to the appropriate amount regulations.

2. Are claims handling and loss adjustment expenses included in the outstanding claims reserves and are these deductible for tax purposes?

Yes

3. Is discounting of reserves permitted?

Yes

Sources:

1. Technical Note: Solvency 11 and the Taxation of Insurance Companies dated 23 March 2011 – HM Revenue & Customs

2. Discussions with Jonathan Howe and Stuart Higgins – partners at PWC, UK.

3. Publication by Ian Morris BWCI Group called ―General Insurance reserves: new UK tax rules, dated 25 November 2009

4. HM Revenue & Customs: International Accounting Standards – the UK implications

5. An article by Barnett Waddingham called ―― Excessive Reserving‖ Test for tax on UK General Insurers?‖ – November 2009

6. Grant Thornton issued an article ―General insurance reserves: the ―appropriate amount‖ allowable for tax‖

7. I also find a lot of information on PWC UK‘s website. http://www.pwc.co.uk/eng/issues/solvencyii.html

8. Publication by David Hindley et called: UK Tax legislation for General Insurance Technical Provisions

9. Websites: http://www.hmrc.gov.uk/manuals/gimanual/GIM6000.htm

10. International comparison of insurance taxation, Financial Services 2011 issued by PWC during 2011.

Research compiled by: Anneline Janse Van Rensburg

http://www.pwc.co.uk/eng/issues/solvencyii.html

http://www.hmrc.gov.uk/manuals/gimanual/GIM6000.htm

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Ireland

Long-term insurance


Item Section 29A/Four Funds Ireland: Life Business Key Difference

1. Applicable legislation Section 29A of the Income Tax Act, 1962 (IT Act)

Schedule 3 of the Long-term Insurance Act, 1998


Directive issued by the Financial Services Board on–

o the prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).



General Provisions of the Taxes Consolidated Act (TCA) 1997

S.76A TCA 1997,

S.76B TCA 1997,

S.81 TCA 1997,

Schedule 17A TCA 1997. Specific Provisions of the TCA 1997

S.706 – S.730K TCA 1997. General Anti Avoidance Provisions

S. 811 TCA 1997.


Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders.

The legislation outlines the taxation of ―New Basis‖ business, i.e. pension business (whenever written) and life business commenced on or after 1 January 2001 and ―Old Basis‖ business i.e. life assurance policies, written prior to 1 January 2001.

Generally speaking, the tax treatment of New Basis

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The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.

business follows the accounting treatment.

There is no tax at fund level, Therefore policyholders funds ―roll up‖ gross of tax. The only policyholder tax is an ―exit tax‖ that is a withholding tax on exit or every 8 years.

We have not dealt with Old Basis business in this paper as it should not be relevant to any proposed operations.

3. Indicate the proportion of mutual insurers versus companies with shareholders. Does the presence of mutual insurers influence the tax legislation, and if yes, what aspects and how is the tax impacted?


The companies selling life business on a cross border basis are companies with shareholders. None of the major domestic life insurers (i.e. companies selling life insurance in Ireland) are mutuals.

4. Overall comparison of the legislation - -




The company is taxed on its overall trading profit.



Life (re)insurers are required to provide for liabilities, on a prudential basis, in accordance with the provisions S.I. No. 23/1996 — European Communities (Insurance Undertakings: Accounts) Regulations, 1996.

The regulatory regime for direct life companies and life reinsurers is different as noted below.

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Direct life companies:

The key pieces of regulation from an Irish perspective are the European Communities (Life Insurance) Framework Regulations 1994 (S.I. 360 of 1994) and the Life Insurance Directive 2002/83/EEC (―the Regulations‖). The Regulations outline the detailed rules to be applied by Irish companies and the format and content of the regulatory returns that must be submitted to the Central Bank of Ireland (―CBI‖) on an annual basis.

These rules are supported by guidance notes from the CBI about the application of the Regulations and also by guidance from the Society of Actuaries in Ireland.

The Appointed Actuary of the company plays a key role in the Irish regulatory structure. In particular, on an annual basis the Appointed Actuary must determine the liabilities in accordance with the Regulations and guidance notes and sign a certificate confirming that the liabilities comply with the Regulations. While the Regulations give quite a bit of detail, they do still rely on the judgment of the Appointed Actuary.

Life reinsurers:

Life reinsurance companies are required to provide to the Central Bank of Ireland each year a Statement of Actuarial Opinion (―SAO‖) on their life technical reserves, both gross and net of reinsurance and before and after Deferred Acquisition Costs (―DAC‖). The Company must hold prudent reserves i.e. they must hold an aggregate (i.e. not specific to a specific liability item) margin for prudence over the best estimate. Booked reserves are approved by the Board.

In relation to New Basis business, life insurance companies prepare financial statements under Irish GAAP or IFRS and these accounts, rather than regulatory returns, are followed for tax

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purposes.

While the financial statements and regulatory returns should broadly be consistent in their approach to reserving, the final number in the financial statements may differ from that in the regulatory returns, as dictated by accounting standards and the view of the Board. S.76A would indicate that accounts prepared under IFRS or equivalent Irish GAAP should be followed for tax purposes but the Revenue do regularly review technical provisions and seek explanations for any claims provisions in excess of those calculated by the independent actuary.

7. Discretionary margins The financial effect of each discretionary margin must be noted separately and should be motivated. The Chief Actuary of the Financial Services Board may, in consultation with the Commissioner for SARS disallow some or all of the discretionary margins for tax purposes.

Life insurers:

Prudent assumptions should be set particularly in relation to policyholder behaviour (e.g. exercising options). These are usually determined on the basis of best estimate assumptions with an appropriate explicit margin for prudence incorporated. These assumptions can be revisited each year and updated if necessary.

Life reinsurers:

The Signing Actuary must be able to demonstrate that the technical provisions represent a prudent view of future liabilities given the nature, risk and uncertainty of future cash flows.



Life insurers:

The liabilities should be at least equal to the surrender value for each individual policy (i.e. cannot be negative).

Life reinsurers:

Negative reserves are permitted for life business as long as the requirements in 6 and 7 above are satisfied. However, a life reinsurance

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undertaking must hold technical provisions that are equal to the minimum guaranteed surrender values calculated at the level of the reinsurance contract.


In contrast with the deductible expenses of the corporate fund described in paragraph 5 the individual and company policyholder funds may deduct the following amounts:







Where a company is engaged in New Basis business, the profits of the company will be computed and charged to tax under the provisions applicable to the taxation of an entity which carries on an active trade in Ireland (known as a ‗Case I‘ trade). That is to say, in general, the tax treatment follows the accounting treatment, subject to the normal disallowances for certain expenditure items, applicable to Case I trades, as provided under the tax legislation.

Under s.730A(7)(b), a proportion of the transfer to the fund for future appropriation (FFA) will be regarded as taxable shareholder profits with the balance treated as belonging to policyholders. The proportion of the transfer to FFA, which will be regarded as shareholder profits, will be that proportion which represents the upper limit under the company‘s constitution, which may be allocated to shareholders out of any surplus, but subject to a minimum or ‗floor‘ of 5% of the transfer. In the case of negative transfers to the fund, the same proportion will be deductible but only to the extent that the cumulative transfers post 1 January 2001 exceed the value of the fund as at 31 December 2000.

A deduction will be allowed in respect of Irish dividend income included in shareholder profits to the extent that these are reflected in shareholder profit.



The income of the untaxed policyholder fund is

Company

Under New Basis life assurance companies will be charged to tax on the profits of their Case I trade (as discussed in section 9)

Policyholders

Policyholders are subject to a special exit tax at

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exempt from income tax.



Transfers from the corporate fund to any of the policyholder funds and the return of those amounts to the corporate fund do not affect the taxable income of any of the funds. Losses in a fund may not be set off against taxable income in another fund.

a rate of 30%. Subject to certain exemptions, the exit tax applies not only on exit or extraction of funds, but on each 8

th anniversary of the

original investment. The tax is applied to the gain arising on the chargeable event.

Exceptions to the requirement to deduct tax generally apply in respect of the following policyholders/circumstances:

Non-resident policyholders Certain resident entities, for example, life

assurance companies, certain pension providers, and others.

The assignment of a policy between spouses The assignment of a policy as a security for a

debt.

11. Timing of taxation of policyholders Policyholders are not directly taxed on investment results achieved by insurer. However the value of their interest in the policy or policy benefits may be reduced by the tax payable by the insurer in respect of the policyholder funds.

As noted in section 10, policyholders are taxed every 8 years from the date of the initial investment or on exit or on the extraction of funds from a life policy.

Special rules apply to pension policies.



In the case of a life business carried on in Ireland, the insurer is responsible for the return and collection of tax.

In the case of a payment in respect of a foreign life policy held by an Irish policyholder, the policyholder is responsible for the return and payment of the tax.



The exit tax set out above is the final tax for policyholders.





Policyholder

The rate of tax for all gains from New Basis policies (except from personal portfolio life policies (PPLPs)), on a chargeable event occurring on or after 1 January 2011 is 30%.

The rate of tax on chargeable events arising on

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Untaxed policyholder fund – 0% (0%) a PPLP is the standard rate of tax (currently 20%, Finance Act 2010) plus 30%.

Company

The Case I trade is subject to tax on the profits at 12.5%.



As noted in section 14 above, in the case of a PPLP, where property underlying the policy can be selected by the holder of the policy or by a connected person so that the portfolio of assets is personal to the policyholder, the current applicable rate of 50% is applied.

16. Comparison of life-wrapped to equivalent investment products, for example Collective Investment Schemes/Mutual Funds

Regulated collective investment schemes in securities are structured as vesting trusts and benefit from deferred taxation. Income accrued to the trust is taxed in the hands of the holders of participatory interest if distributed to them within 12 months from date of accrual. If not distributed by the trustees within 12 months, the trust is taxed on the income. Capital gains on the disposal of assets by the trust are exempt in the hands of the vested beneficiaries and the holders of participatory interests are only taxed on disposal of their interests.

The tax rules for life assurance collective investments and bank deposit products are broadly the same. This is a deliberate policy decision.


Amendments relating to SAM (if any) should be finalised prior to finalisation of the holistic review of the taxation of long-term insurers.

The tax treatment is driven by the financial statements. To the extent that Solvency II changes the regulatory returns only, there should be little or no tax impact. Should IFRS change in time to be brought into line with Solvency II there may be a tax impact. Tax should continue to follow the financial statements.


- See above.

19. Treatment on transition No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on

Tax generally follows the accounts. Should IFRS change to become consistent with Solvency II there may be transitional adjustments. No tax rules yet exist for such transitional adjustments but similar

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implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilized selling expenses.

adjustments on first time adoption of IFRS were phased in for tax purposes over 5 years


There is no tax at fund level. The company is only taxed on its profits.


Long-term


In Ireland tax follows accounting principles. Insurance Companies may prepare accounts under either Irish GAAP Or International Financial Reporting Standards (IFRS), except in the case of consolidated accounts of EU listed Companies where IFRS is mandatory.


The tax treatment is driven by the financial statements. To the extent that Solvency II changes the regulatory returns only, there should be little or no tax impact. Should IFRS change in time to be brought into line with Solvency II there may be a tax impact. Tax should continue to follow the financial statements. Tax generally follows the accounts. Should IFRS change to become consistent with Solvency II there may be transitional adjustments. No tax rules yet exist for such transitional adjustments but similar adjustments on first time adoption of IFRS were phased in for tax purposes over 5 years


N/A

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Refer to 2 above

5. What will be the expected impact of the introduction of IFRS 4 Phase II?

Not known at this stage‖.


Reinsurance premiums should be accounted for when payable and are included as a separate line in the P & L account. All reinsurance balances (except commission) are disclosed separately on the face of both the P & L account and balance sheet.


There is no special treatment for the taxation of Captive Insurers. They are taxed under the normal rules which applies to mutual insurers and states that taxation is based on investment income and capital gains.



In addition, companies reporting under IFRS or falling within the scope of FRS 26 are required to defer elements of front-end or origination fees on contracts which do not transfer ―significant insurance risk‖. Taxation under the Old business basis: spread over seven years in the ―I-E‖ computation. Follows regulatory treatment in the NC1 computation. Taxation under the New business basis: follows accounting treatment in case 1 computation (refer to annexure ―Irish Taxation‖).

10. Is Risk/Protection business taxed on a different basis compared to Investment/Savings business? Consider

shareholders and policyholders separately.

Risk Business (Shareholder):

Risk Business (Policyholder):

Investment Business (Shareholder):

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Investments Business (Policyholder):


On the new business basis the Gross Roll up is applicable to policyholder funds, i.e. no tax payable. Shareholders‘ surplus is taxed as a trading profit. Further a proportion of the transfer to the fund for future appropriations is deemed to be taxable shareholders‘ surplus. New basis business cannot be offset against old basis business policyholder profits.

Sources:

1. Price Waterhouse Cooper: International insurance Taxation Comparison, May 2009 (John O‘Leary);

2. KPMG: Insurance Solvency II update (24 November 2011);

3. Financial regulator Guidance Notes for the completion of Non-Life annual returns 2008, Irish Financial Regulator;

4. Guide to Non-Life Insurance Regulation in Ireland: Dillon & Eustace Attorneys (Andrew Bates, Tom Conney, Paula Kelleher, Breeda Cunningham, Andrew Lawless);

5. Guide to Life Insurance Regulation in Ireland: Dillon & Eustace Attorneys (Andrew Bates, Tom Conney, Paula Kelleher, Breeda Cunningham, Andrew Lawless);

6. Price Waterhouse Cooper: Ireland Insurance Taxation 2008 (John O‘Leary);

7. Irish Income Tax Act 1967;

8. General guidelines for calculating tax due for Life assurance companies in Ireland 2008 (Revenue commissioner);

9. Price Waterhouse Cooper: International insurance Taxation Comparison, 2011 (John O‘Leary)

Research compiled by: Arnold Schoombee

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Item Section 28 Ireland Key Difference





Non-Life Insurance (Provision of Information) (Renewal of Policy of Insurance) Regulations,

2007

Insurance Act, 2000

European Communities (Non-Life Insurance) Framework Regulations, 1994 (as amended)

3

European Communities (Insurance Undertakings) Accounts Regulations 1994

Insurance Act, 1989

Insurance (No 2) Act, 1983

Central Bank Act 1942 (as amended)

Insurance Act, 1936

The Irish tax regime governing non-life (general) insurance business is set out in domestic

tax legislation as amended and supplemented by national tax laws which implement EU

legislative provisions

2. Key objectives of the legislation Determine taxable income of short-term insurers. Regulates the following specific matters(i.e. deviations from general tax rules):



- Liabilities contemplated in section32 (1)(a) and (b) of STI Act.

The Irish Insurance Act has four key objectives which are as follows:-

The regulatory responsibility for insurance intermediaries has been transferred to the Central Bank of Ireland (CBoI).

The Minister for Enterprise, Trade and Employment ("the Minister") has the power to make regulations to require insurers and

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insurance intermediaries to make disclosure of information to policyholders.

The existing system of notification in relation to reinsurers and reinsurance intermediaries is to be strengthened.

Authorised officers now have increased powers and offences and penalties imposed by previous Insurance Acts have been updated.





4.1 Unearned Premium Reserve (UPR) For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act. Two methods:

(iii) Prescribed formula; or

(iv) Own approved formula.


Calculation of UPR is generally by time apportionment. This is appropriate if the incidence of risk is the same throughout the period of cover. If there is a marked unevenness in the incidence of risk over the period of cover, a basis reflecting the profile of risk will be used to calculate the UPR.Insurance policies often span the year-end of the insurer. Therefore the practice is to recognise the premium in full in the accounts but to set-up an Unearned Premium Provision for the period of premiums not yet earned. Where it is anticipated that claims and expenses in respect of business in force at the end of an accounting period will exceed related premiums, an unexpired risk provision will usually also be made to provide for the anticipated loss. The practice of the ITA is to allow a deduction for the provisions included in the accounts of an insurance company in respect of unearned premiums and unexpired risks


For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act. Section 28(2)(cA) of

Claims in relation to incidents in a year will often only be reported after the books for an accounting period are closed. As such, insurance companies will often

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the Act- allows a deduction, after a reduction of amounts incurred and allowable under section 28(2)(b). The Commissioner may exercise the discretion under section 28(9) of the Act to make further adjustments.

provide for IBNR. These provisions are deductible for tax purposes provided they are calculated with substantial accuracy and do not contain a reserve over the amount provided for based on statistical evidence. Calculated based on historical experience and/or actuarial or statistical methods.

4.3 Unexpired Risk Reserve (URR) Only created for accounting and regulatory return purposes where an insurer incurs an underwriting loss and insurer and auditor considers it necessary to create a reserve for claims costs and costs to carry on business.

No deduction is allowable under section 28(2)(cA) as liabilities consisting of the unexpired risk provision as contemplated in section 32(1)(d) of the Short-term Insurance Act are not covered.

4.4 Unpaid claims (outstanding claims reserve) S 28(2)(b): claims actually incurred (whether paid or not) allowed as a deduction. Amount to be reduced with any amounts recoverable under re-insurance, guarantee, security etc. Normal tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.

Calculated on a case by case basis.

Discounting of claims reserves not a feature of industry in Ireland. Permitted in limited circumstances by EU Accounts Directives.

5. Contingency and capital adequacy reserves Regulatory requirement to reserve the following:


- Capital Adequacy: 15% of gross premiums less approved re-insurance premiums.


Insurance companies may establish reserves to meet solvency requirements or reserves to

provide against unexpected incidence of claims (e.g. catastrophic events). These reserves

are generally not deductible for tax purposes. Where a general Insurer cedes more than 90% of its gross written premium in any class of business it must maintain a technical reserve of the larger amount of 10% of the gross premium income, or 10% of the gross technical reserves relating to that business class.

6. Are different products taxed differently? No. Taxation of captive insurers is broadly the same as

Page 55 of 176


non captives.




Acquisition expenses will be apportioned on a similar basis as that used for UPR.

Loss adjustment expenses on unsettled claims (claims handling expenses) is calculated in accordance with ABSI SORP and taxation allowed when provided for.

Experience related refunds will be credited when earned in accordance with ABI SORP. In practice many companies recognize such refunds on a receipt basis.

Realised gains and losses are calculated by reference to net sales proceeds and the original purchase costs. The gain or loss is taken directly to profit and loss (P&L) account.

Unrealised investment gains and losses are calculated as the difference between market values at the end of the year and the market value at the beginning of the year or purchase cost for assets acquired during the year, together with the reversal of unrealised gains and losses recognised in earlier accounting periods, which have since been realised.

Under Irish GAAP, unrealised gains/losses are recorded either in the P&L account or through equity, depending on the classification of the underlying investment (e.g. held for trading versus available for sale.

Irish GAAP (pre FRS26): are included in taxable income.

Unrealised gains and losses may not be taxed/ deducted until realised.

IFRS/ FRS26: In accordance with IAS 39/ fair value measurement of financial assets is allowed.

In computing taxable trading profits, gains/ (whether realised/ which are recognised in the P&L account under IAS 39/ FRS26 are taxable.

Gains and losses taxable until they are recognised in the P&L account on a disposal of the assets. mark-to-

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market all investments. Deferred tax provided on unrealised gains, which are recognised in the accounts.

non-technical

supporting technical

Included in taxable income. Dividends are exempt if received from other Irish resident companies.

Dividends from portfolio shareholdings (5%) also exempt.

Taxation payable are deducted from gross

P&L payable.

Follows accounting treatment. Premiums paid to group company should be at arms length companies).

Taxation

12. Applicable tax rates 28%. Capital gains: 14%

The capital gains tax rates are as follows:

Individual Policyholder Fund 7.5%;

Untaxed Policyholder Fund 0%;

Company Policyholder Fund 14%;

Corporate Fund 14%.

The capital losses can only be set off against capital gains.

12.5% on trading income and 25% on non-trading income. Non-life insurance levy of 3% on the gross amount received by an insurer in respect of certain non-life insurance premiums where the risk is located in Ireland. The exceptions are re-insurance, health insurance, marine, aviation and transit insurance, export credit insurance and dental insurance contracts. Premium tax of 2% where the risk is based in Ireland (exemptions for export credit and certain marine, aviation and transport risks)..


The CBoI is aiming for the provisions of the Solvency II regime to come into force on 1 January 2014. However, the transposition of the Solvency II legal requirements would be completed by 31 March 2013, while provisions relating to supervisory approvals (e.g. internal models, ancillary own funds, undertaking specific parameters) would apply from 1 June 2013. Any approvals that were granted would then come into force on 1 January 2014, along with the rest of

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the Solvency II regime.

There is currently no agreement, formal or otherwise, within the European Council or the European Parliament on the above proposal, or on any of the other proposals which are under consideration. Discussions on Omnibus II will continue under the Polish presidency, which commenced on 1 July 2011. The next steps for Omnibus II are agreement by the European Council, followed by agreement of the European Parliament, which will lead to formal adoption of the Omnibus II Directive.



16. VAT Exempt from VAT. Generally no VAT recovery available unless company sells products to customers outside of the EU.

17. Other


Short-term insurers


Unexpired risk is calculated on a statistical basis or management estimate in accordance with ABI SORP. The tax deductions will be in accordance with accounting practice.



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In Ireland tax follows accounting principles. Insurance Companies may prepare accounts under either Irish GAAP Or International Financial Reporting Standards (IFRS), except in the case of consolidated accounts of EU listed Companies where IFRS is mandatory.


No.


Realised gains and losses are calculated by reference to net sales proceeds and the original purchase costs. The gain or loss is taken directly to the Profit & Loss account (P & L) account. Unrealised investment gains and losses are calculated as the difference between market values at the end of the year and the market value at the beginning of the year of purchase cost for assets acquired during the year, together with the reversal of unrealised gains and losses recognized in earlier accounting periods, which have since been realised. Under Irish GAAP, unrealised gains/losses are recorded either in the P & L account or through equity, depending on the classification of the underlying investment.

Irish GAAP: realised gains and losses are included in taxable income. Unrealised gains and losses may not be taxed and deducted until realised. IFRS/FRS26: In accordance with IAS 39/FRS26, fair value measurement of financial assets are allowed. In computing taxable profits and income , which are recognised in the P & L account under IAS 39/FRS 26 is taxable. Gains and losses taken to the reserves do not become taxable until they are recognised in the P & L account on disposal of the assets.


The tax treatment is driven by the financial statements. To the extent that Solvency II changes the regulatory returns only, there should be little or no tax impact. Should IFRS change in time to be brought into line with Solvency II there may be a tax impact. Tax should continue to follow the financial statements. Tax generally follows the accounts. Should IFRS change to become consistent with Solvency II there may be transitional adjustments. No tax rules yet exist for such transitional adjustments but similar adjustments on first time adoption of IFRS were phased in for tax purposes over 5 years.


2.


Reinsurance premiums paid/payable are deducted from gross premiums. Claims recoveries netted in P & L accounts Against claims paid/payable. All reinsurance movements (except commissions) are disclosed separately within the Technical account on the face of the P & L account. The taxation follows accounting and premiums paid to the group should be at arm‘s length (for all companies).

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Captive insurers are taxed at the normal rules which apply to mutual insurers. No distinction is drawn.


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The Netherlands

Long-term and Short-term insurance

Framework For Research Of LT and ST Insurers In Comparable Jurisdictions

Item South Africa Netherlands Key Difference








Dutch corporate income tax act (Wet op de Vennootschapsbelasting 1969)

Special regime for insurance companies: Decree on the Determination of Profits and Reserves of Insurers 2001 (‗BWRV‘)

N/A



The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt

Generally the commercial accounts are the guideline for determining the income tax liability. A separate tax concept, ‗good commercial practice‘, has however been developed.

Income is taxed at the level of the insurance company. . Income allocated to policyholders is treated as an expense.

Income tax follows the accounting principles. No distinction is made between policyholders and shareholders for income tax purposes.

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policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer.

No distinction is made between risk and savings business of the insurer.


Insurance companies with shareholders = 100%. Although the largest insurers were mutual insurers in 1993 a single four funds tax system applicable to all long-term insurers was introduced.

No changes were made to the taxation of insurers when insurers demutualised. The distinction between the various policyholder funds and the corporate fund is still in effect.

According to the latest available data mutual companies had 30% of the market share in 2008.

No special income tax treatment is afforded to mutual insurers. A refund of premiums to the members of a mutual company is deductible for tax purposes provided certain conditions are met.

No specific differences noted.


- Refer to 2 above. Refer to 2 above.




The commercial accounts are used as a guideline to allocate income to the shareholders.

Income allocated to policyholders, for bonuses, is treated as an expense. Net income is taxed at the level of the insurance company.




The actuarial reserves are calculated in accordance with the accounting principles. The accounting principles use the net method, although Zillmer and Höckner methods are also used.

Even though the accounting principles are followed, it should be in accordance with the BWRV. The BWRV inter alia prescribes that technical provisions have to be calculated at tariff rates (net method).

The actuarial reserves are calculated in accordance with the accounting principles.

7. Discretionary margins The financial effect of each discretionary margin must be noted separately and should be motivated. The

The provision should be calculated at tariff rates (net method).

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Chief Actuary of the Financial Services Board may, in consultation with the Commissioner for SARS disallow some or all of the discretionary margins for tax purposes.











Expenses which are incurred in a year can also be deducted in that year. However with respect to acquisition expenses the following rule applies. These expenses are deductible in the years which it is incurred. For periodical premium paying life insurance contracts they are tax deductible in equal installments over a 10 year period or over the shorter actual term of the contract.




Income allocated to policyholders is treated as a deductible expense for the shareholders. The net income is attributable to the shareholders.

The net income is taxed in the hands of the shareholders.

No distinction is made between policyholders and shareholders for income tax purposes.

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Not applicable as income is taxed in the hands of the shareholders (see paragraph 10 above).

N/A



A separate annual tax return is required for insurers. No specific differences noted.


No tax payable by policyholders, unless the policy is second hand. No tax is payable by the policyholders for income not distributed to

the policyholders. N/A






The current tax rate is 20% on the first EUR 200 000 profits. The excess is taxed at a rate of 25%.

A lower corporate tax rate prevails in the Netherlands.

15. Is there a difference in the taxation depending on the type

Any type of policy entered by the insurer with the 3 categories of policyholders is to be dealt with in the

No No specific differences noted.

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of product? relevant policyholder fund. However, all annuity contracts in respect of which annuities are being paid are allocated to the untaxed policyholder fund. No difference in taxation rules for risk and investment policies.


Regulated collective investment schemes in securities are structured as vesting trusts and benefit from deferred taxation. Income accrued to the trust is taxed in the hands of the holders of participatory interest if distributed to them within 12 months from date of accrual. If not distributed by the trustees within 12 months, the trust is taxed on the income.

Capital gains on the disposal of assets by the trust are exempt in the hands of the vested beneficiaries and the holders of participatory interests are only taxed on disposal of their interests.

No special income tax treatment applies to mutual funds. However, there is one exception with respect to the repayment of profit sharing.

No special income tax treatment applies to mutual funds.



There are no significant changes to the Decree (‗BWRV‘) announced with respect to the implementation of Solvency II.


- N/A

19. Treatment on transition No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilised selling expenses.

N/A

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Dividend income is included in taxable income.

Demonstrable impairments as a result of market losses on investments can be deducted for income tax purposes.

The Netherlands levy an insurance premium tax (‗IPT‘) of 9.7% on premiums. Life insurance companies are exempt from IPT.

Capital tax has been abolished with effect from 1 January 2006.

Dividend income is included in taxable income.

No capital gains tax is levied.

Framework for research of ST insurers in comparable jurisdictions : Section 28






Dutch corporate income tax act (‗Wet op de Vennootschapsbelasting 1969‘)

Special regime for insurance companies:

Decree on the Determination of Profits and Reserves of Insurers 2001 (‗BWRV‘)

N/A


Determine taxable income of short-term insurers.

Regulates the following specific matters(i.e. deviations from general tax rules):




Generally the commercial accounts are the guideline for determining the income tax liability. A separate tax concept, ‗good commercial practice‘, has however been developed.

Income tax follows the accounting principles.

3. Overall comparison Refer to 2 above. Refer to 2 above. Refer to 2 above.

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of the legislation






(i) Prescribed formula; or

(ii) Own approved formula.

Section 28(2)(cA) of the Act allows a deduction, subject to discretion of Commissioner (S28(9) of the Act). This deduction to be added to taxable income in next year of assessment (section 28(5) of the Act). Provisions of section 23(e) (disallowance of creation of reserves) of the Act do not apply to this provision for liabilities (section28(6)(b)).

Unearned premium reserves are generally allowed as per the accounts. According to a Supreme Court case on 20 July 1999 and insurance company is not allowed to form a provision for old age, even if such a provision is prescribed by the Regulatory Authorities.



For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act. Section 28(2)(cA) of the Act- allows a deduction, after a reduction of amounts incurred and allowable under section 28(2)(b). The Commissioner may exercise the discretion under section 28(9) of the Act to make further adjustments.

The IBNR is calculated based on a statistical method. The IBNR is allowed as per the accounts.





Time apportionment methods or statistical estimates are used. This is generally allowed as per accounts.

Deduction for movement in URR is allowed in Netherlands.


S 28(2)(b): claims actually incurred (whether paid or not) allowed as a deduction. Amount to be reduced with any amounts recoverable under re-insurance, guarantee, security etc. Normal

Calculated on a case by case basis and/or statistical estimates. Discounting allowed for long tail business if conditions, as included in the EU directive, are met.


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tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.

Generally allowed as per accounts.






Solvency requirements are imposed by the Regulator. This is not allowed as a deductible item.



No. No. No specific differences noted.




Acquisition expenses: deductible when incurred;

Loss adjustment expenses on unsettled claims: allowed as a deduction when substantiated on the basis of average time and cost spent per claim;

Investment reserves are not allowed as a deductible item although demonstrable impairments can be deducted;

Losses on investment assets: A negative balance of realised gains and realized and unrealized losses has to be offset against the fiscal equalization reserve. Further losses are included in taxable income.


12. Applicable tax rates

28%. Capital gains: 14%

The current corporate income tax rate is 20% on the first EUR 200 000 profits. The excess is taxed at a rate of 25%.No tax on capital gains.

No tax on capital gains.


There are no significant changes to the Decree (‗BWRV‘) announced with respect to the implementation of Solvency II.

14. Status of amendments arising from review (once-

N/A

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off/staggered)?

15. Treatment on transition N/A

16. VAT There is a VAT exemption for providing insurance services. In practice it is often still possible that insurance companies partly recover a pro-rata of their input VAT.

17. Other

Capital tax has been abolished since 1 January 2006.

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Additional questions

Does the tax basis follow accounting that is, is the tax base the same or similar to the IFRS profit? If yes, are there any significant adjustments made for tax purposes?

The Netherlands have separate tax accounting rules, for example:

On equalization reserves (non existing under IFRS),

Calculation of investments at lower of cost price or market value, or

Calculation of technical provision for life insurers against tariff rates (awaiting further information as to the operation of tariff rates).

Both the Risk/Protection business and the Investment/Savings business have to apply the same tax rules. Whether policyholders are taxed on maturity of roll-up funds or whether individuals are taxed at specific rate per annum depends on the different products.

There is special treatment of upfront acquisition costs. The expenses are deductible in the years which it is incurred. Upfront commission is thus deductible in full. It is only for periodical premium paying life insurance contracts, that the cost are tax deductible in equal installments over a 10 year period or over the shorter actual term of the contract.

What will be the expected impact of the introduction of IFRS 4 Phase II and are transitional measures planned? e.g. once off increase in earned profits to be taxed over [x] years?

This should in principle also not impact taxable profits since the Netherlands have separate tax accounting rules.

Is the tax basis expected to change in any way with the introduction of Solvency II? (Please specify)

In principle no.

IBNR: Please confirm that claims handling expenses may not be added to the outstanding claims reserve calculations. Can you ascertain the rationale behind this? Is this consistent across all outstanding claims type reserves (e.g. INF,IBNR, IBNER)?

If sufficiently substantiated, claims handling and loss adjustment expenses may be included in the outstanding claims reserves and are deductible for tax purposes.

Is discounting of reserves permitted?

Unclear and will have to be further analyzed, if required.

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Are captive insurers and/or cell insurers taxed differently from traditional insurers?

In principle no. There are however in certain cases discussions with tax authorities regarding the arms length character of premiums paid to captives.

Are reinsurers taxed in a different manner to direct insurers?

In principle no.

Is the Unexpired Risk Reserve (URR) deductible for tax purposes?

Yes, if substantiated with actuarial calculations.

Research compiled by: Jos Smit

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Germany


Framework for research of LT and ST insurers in comparable jurisdictions : Section 29A (“Four Funds”)

Note:

Please be aware that the distinction between long and short-term insurers is not very common under German tax law, which rather divides into the classes ―Life & Health insurance‖ and ―Property & Casualty insurance‖. Life and Health insurers have to capitalize a provision for premium refunds, meaning that at least 90% of revenues are allocated to the reserve in order to finance distributions to the policyholders. Thus, the allocation to provision for premium refunds reduces the effective tax burden of Life & Health insurers. Among this, other specific taxation rules for Life & health insurers exist, e.g. taxation of capital investment returns, etc.

1. Does the tax basis for insurance companies (both long and short-term) follow accounting, that is, is the tax base the same or similar to the IFRS profit?

The determination of taxable income is based on the results shown in the annual accounts as adjusted to comply with pertinent tax provisions according to the underlying taxation principle in Germany that tax accounting is based on commercial accounting (so-called ―Maßgeblichkeitsgrundsatz‖). However, the taxable income is derived from the local GAAP accounts which differ from the accounting under IAS/IFRS

2. If yes, are there any significant adjustments made for tax purposes? (Please specify) There are multiple tax (accounting) deviations by way of example:

-write up and write down of capital investments follow special rules specified by announcements of German fiscal authorities

-special rules for the recognition of provisions (discounting, etc.)

-special rules for the valuation of insurance reserves, e.g. close-to-reality valuation of claims reserve

-provision for contingent losses are not tax-deductible

3. Does the tax basis for long and short-term insurers follow the regulatory return? If yes, how will this change when the regulatory basis changes to comply with Solvency II?

Basically no, but regulatory guidelines may influence taxation in certain circumstances (e.g. allocation of minimum capital for domestic branches of foreign insurers) – no changes expected in this regard with Solvency II

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n/a, see above

5. Is the tax basis for insurers expected to change in any way with the introduction of Solvency II? (Please specify) n/a, see above


n/a, taxation is based on accounts under local GAAP

7. Are reinsurers taxed in a different manner to direct insurers? n/a, taxation follows the basic principles

8. Are captive insurers and/or cell insurers taxed differently from traditional insurers? n/a, taxation follows the basic principles

Long-term insurers only

1. As for questions 1-5 above, but worth bearing in mind that the questions relate to shareholder (corporate) profits. cf. ―Note‖ put in front

2. Is there special treatment of upfront acquisition costs? Deferred acquisition costs are not capitalized within balance sheet under local GAAP or tax balance sheet and thus the respective expense is (tax) deductible (in contrast to IFRS, where DAC‘s are activated and depreciated within the duration of the insurance contract).

3. Is risk/protection business taxed on a different basis compared to investment/savings business? Consider shareholders and policyholders separately.

Basically no differences re the taxation of risk/protection business compared to investment/savings business for insurance companies. However, (capital) investment returns are fully taxable for Life & Health insurers, but tax exempt to 95 % for other insurers.

Policyholders: are subject to taxation with their individual tax rate of income tax plus a solidarity surcharge on the generated income. Insurance proceeds are generally subject to taxation if a profit share is included (thus, no taxation of the insurance proceeds distributed at the occurrence of an insured event with regard to a casualty insurance). With regard to life insurance contracts, proceeds are tax-privileged in certain circumstances (see below).

4. Are policyholders taxed on entry, roll-up or exit? Please provide an overview of the tax. Basically policyholders are taxed on distribution of proceeds (exit) – However, taxable benefits are tax-privileged in certain circumstances. Specific tax provisions may lead to a roll-up or current taxation, i.e. at the end of every fy during the duration of the insurance contract (e.g. an individual investment plan product disguised as an insurance

Page 73 of 176

contract is leading to taxation on a year-to-year basis).


1. Is the Unexpired Risk Reserve (URR) deductible for tax purposes? Expenses in connection with the capitalization of an equalisation reserve are tax-deductible


Claims handling and loss adjustment expenses are principally part of the close-to-reality valuation equal to claims reserve (see above). However, tax audit may lead to a different tax treatment.

3. Is discounting of reserves permitted? In general, reserves have to be discounted for tax purposes at a rate of 5.5 % if the retention period is at least 1 year and the provision is not interest bearing.

Specific rules for the (tax) valuation of reserves exist, e.g.:

-discounting obligation for provision of premium refunds within health and care insurance if covered through so-called pool-contract which is a risk sharing contract between health insurance companies

-discounting obligation for claims reserves according to announcements of the German fiscal authorities

-no discounting obligation, but option with regard to aggregate policy reserves

Sources:

1. Joint HMRC/HMT consultation: Solvency II and the Taxation of Insurance Companies

Research compiled by: Yacoob Jaffar

Page 74 of 176

Switzerland



Item South Africa Switzerland Key Difference




Directive issued by the Financial Services Board on– o the prescribed requirements for the calculation of the value

of the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).



Taxes in Switzerland are levied by the Swiss Confederation, the cantons and the municipalities.

No specific key differences noted.


Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.

The basis for tax in Switzerland is the statutory accounts.

The statutory accounts are based on the Swiss GAAP as set out in the Swiss Code of Obligations. Swiss Accounting and Reporting Recommendations and other international standards are mandatory for quoted companies. Since 2005 IFRS/US GAAP have been mandatory for companies quoted on the trading segment of the SIX. My understanding is that no distinction is made between risk and savings

Swiss tax is based on statutory accounts.

http://en.wikipedia.org/wiki/Swiss_Confederation

http://en.wikipedia.org/wiki/Swiss_Confederation

http://en.wikipedia.org/wiki/Cantons_of_Switzerland

http://en.wikipedia.org/wiki/Municipalities

Page 75 of 176


business of the insurer.



Only a very few mutual insurers. It is not expected that mutual insurers would influence the tax legislation in Switzerland.

N/A

4. Overall comparison of the legislation - N/A N/A

5. Calculation of shareholder taxable income The taxable income of the corporate fund (shareholder interest in the insurer) is determined by applying the general principles of the IT Act and by including the annual ―profit transfers of excess assets from the policyholder funds as income. Expenses incurred for tax purposes by the corporate fund exclude expenses directly or indirectly attributable to business conducted with policyholders.


Policyholders' income is deductible from corporate income.

In SA the policyholders' taxable income is calculated separately from the shareholders' (or corporate fund) income.



Zillmerisations are not allowed. Activation of non-amortised acquisition cost premium for individual business is allowed. The amount is limited to the surrender charge.



N/A N/A



N/A Currency fluctuations are in general tax deductible in Switzerland.

N/A

9. Deductibility of expenses (separately specify acquisition costs, annual costs,

In contrast with the deductible expenses of the corporate fund described in paragraph 5 the individual and company

Acquisition costs: Deductible in full in the year Unrealised losses are deductible for income tax

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insurers general operating expenses, specific investment related costs etc)

policyholder funds may deduct the following amounts:


a formula based percentage of– o expenses directly incurred iro selling and administration of

the relevant policies (acquisitions costs and investment related costs);




which it was incurred;

Loss adjustment expenses on unsettled claims: Allowed as a deduction when provided for by reference to claims reserves, including IBNR;

Experience rated refunds: Credited when earned.

Gains and losses on investments: Realised gains and losses are included in taxable income.

Unrealised losses are deductible for tax. Gains on qualifying investments are eligible for the participation exemption.

purposes in Switzerland.







No distinction is made between policyholders and shareholders for income tax purposes. Policyholders' income is deductible from corporate income.

No distinction is made between policyholders and shareholders for income tax purposes in Switzerland.

11. Timing of taxation of policyholders Policyholders are not directly taxed on investment results achieved by insurer. However the value of their interest in the

Premiums paid by policyholders are deductible No specific key differences

Page 77 of 176


policy or policy benefits may be reduced by the tax payable by the insurer in respect of the policyholder funds.

for tax purposes.

Interest income received is generally not taxed.

The proceeds received during the lifetime of the policyholder are generally not taxed provided certain conditions are met.

Proceeds on death are taxed at special rates.

noted.



The responsibility for paying tax is on the insurer.

Refer to 11 above regarding the taxation of policyholders.


13. Final or withholding tax for policyholders? No tax payable by policyholders, unless the policy is second hand.

No tax payable by policyholders. No specific key differences noted.






Depending on the canton, effective ordinary tax rate is between 12.66% (Cantons of Obwalden and Appenzell Ausserrhoden) and 24% (Canton of Geneva and Vaud).

If mixed company status granted, reduced income (starting at 9%) and reduced annual capital tax rates apply.

Lower effective rates of tax apply in Switzerland.



N/A N/A



N/A Uncertain whether there is such comparison in Switzerland.

N/A

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Amending for Solvency II and SST (Swiss Solvency Test).

N/A


- N/A N/A


N/A N/A


Annual ordinary capital tax rates range from 0.001% to 0.53% depending on the canton, and is paid annually based on the company's equity. Several cantons allow crediting capital tax against CIT.

For Swiss captives special tax treatment may be available.

Insurance and reinsurance business is VAT exempt.

Lower capital tax rates apply in Switzerland.

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Our main objective is to determine what basis is used to determine the tax calculation. If it is accounting, it is useful to know what tax adjustments, if any are made to the accounting profits.

If the profits for tax purposes are based on the regulatory returns (likely to be Solvency I or other regulatory basis), it is important to understand how this will change with the introduction of Solvency II.

If a completely different basis is used for tax purposes, it is important that we understand what it is.

Long-term and Short-term insurers


The tax base is similar to the IFRS profit.


No specific adjustments noted (also refer to note 9 of the Framework for research of LT insurers in comparable jurisdictions_Switzerland).


No, a seperate return must be completed for tax purposes.


N/A


The tax base could potentially change as jurisdiction is amending for Solvency II and the Swiss Solvency Test.


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No information available yet.


Per the information available I conclude that insurers and reinsurers are not taxed in a differnt manner.


For Swiss captives special tax treatment may be available.

Long-term insurers


See above.


Acquisition costs are deductible in full in the year which it was incurred.

3. Is Risk/Protection business taxed on a different basis compared to Investment/Savings business? Consider shareholders and policyholders separately.

My understanding is that no distinction is made between risk and savings business of the insurer.


Tax is levied in the hands of the shareholders.

Short-term insurers

1. Is the Unexpired Risk Reserve (URR) deductible for tax purposes? 2. 3. Are claims handling and loss adjustment expenses included in the outstanding claims reserves and are these deductible for tax purposes? 4.

Page 81 of 176


Research compiled by: Adriaan van Wijk

Page 82 of 176

Luxembourg


Framework for research of LT and ST insurers in comparable jurisdictions : Section 29A (“Four Funds”)

Item South Africa Luxembourg Key Difference





the prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).

the application of SA GAAP to the requirements – differences between the annual financial statements and the long-term insurance return (140.B.iii LT).

disregarding amounts representing negative liabilities in respect of long-term policies when calculating the value of assets according to paragraph 4(iv) of schedule 3 to the Long-Term insurance Act, 1998 (145.A.i LT).

No distinction between ―Long-term insurers‖ and ―Short-term insurers‖

Law of 6/12/1991

Law of 8/12/1994

Several Grand Ducal Regulations


Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with

Regulation of the insurance sector

Safeguarding of the insured person‘s assets

Solvency

Page 83 of 176


individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.



There are mutual insurers, but their proportion is negligible.


-




From a tax perspective, the profits of the company are taxed at the statutory rate of 28.59% (Luxembourg city for 2011). The taxable profits are usually the profits that are determined based on the annual accounts. Some exemptions may apply like the participation exemption. There are also some tax credits available to the company.

In Luxembourg there is substantial reliance on the profits calculated from an accounting perspective, although deductions of expenses are subject to restrictions (for example, expenses relating to exempt income are not deductible).



1) Life assurance provision

The life assurance provision shall comprise the actuarially estimated value of an insurance undertaking's liabilities including bonuses already declared and after deducting the actuarial value of future premiums.

2) Technical provisions for life assurance policies where the investment risk is borne by the policyholders

This item shall comprise technical provisions set up to

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cover liabilities relating to investment in the context of life assurance policies the value of or the return on which is determined by reference to investments for which the policy-holder bears the risk, or by reference to an index.

Any additional technical provisions set up to cover death risks, operating expenses or other risks (such as benefits payable at the maturity date or guaranteed surrender values) shall be shown under 1).

2) shall also comprise technical provisions representing the obligations of a tontine's organizer vis-à-vis its members.

Technical provisions shall be calculated separately for each insurance contract. The use of appropriate approximations or generalizations is allowed, however, where they are likely to give approximately the same result as individual calculations.

The use of such methods for classes of insurance other than reinsurance is dependent on authorization by the Commissariat. The principle of separate calculation shall in no way prevent the establishment of additional provisions for general risks which are not individualized.






expenses and allowances directly attributable to

From a tax perspective generally, costs can be deducted if they relate to the business of the company. Expenses economically related to exempt income are not deductible.

Acquisition costs (such as direct costs, acquisition commissions or the cost of drawing up the insurance

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the income of the fund;






document or including the insurance contract in the portfolio, and indirect costs, such as advertising costs or the administrative expenses connected with the processing of proposals and the issuing of policies)

1 are

tax deductible.

There are no other special deductions.





The allowable deductions of the 3 taxable funds are

The taxation of the shareholder is described under point 5. Luxembourg insurance companies are exempt from tax on the income and gains they make from the investment portfolios

The taxation of the policyholders is dependent on the country where they are located and the form they have i.e. private individual or company. There should be no WHT on payments arising from claims made from the shareholder to the policyholder.

From a Luxembourg point of view, the premium is subject to a premium tax that is usually computed by the insurance company but the cost is ultimately borne by the policyholder (except for fire brigade tax). The Luxembourg premium tax is only computed when the risk is located in Luxembourg. The location of risks rules are

1 International comparison of insurance taxation. PWC publication.

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described in paragraphs 5 and 9.


defined in the Luxembourg Insurance premium tax law. There is no premium tax on life insurance and reinsurance premiums.


For the insurance premium tax, whenever they pay the premium (according to the law, the tax should be paid to the tax authorities within 10 days after the declaration‘s period end).There is however no premium tax on life insurance and reinsurance premiums.

Policyholders are exempt from tax until the end of the policy term.



For the tax on profits on the insurance activity it is the insurance company. For the payment of the insurance premium tax, it is also the insurance company that is responsible for paying the tax.



Please see above.






28.59% (for Luxembourg city in 2011) for the profit taxation at shareholder‘s (insurance company) level and 4% insurance premium tax (+6% if fire risks are covered).


Any type of policy entered by the insurer with the 3 categories of policyholders is to be dealt with in the relevant policyholder fund. However, all annuity contracts in respect of which annuities are being paid are allocated to the untaxed policyholder fund. No difference in

Please see (14) above

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taxation rules for risk and investment policies.





Solvency II is planned on being adopted in 2013, however it is possible that it will be delayed. No specific changes have been made to the tax law.

Solvency II is being adopted and implemented


- N/A


Not solved yet. The Government wants to implement the EU Directive.


Reinsurance companies are also fully taxable companies like normal insurance companies. There is however a deferral mechanism

2

2 Luxembourg: Platform for business. KPMG publication. 2010.

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―Luxembourg reinsurance companies must establish sufficient technical provisions in respect of their entire reinsurance business. The amount of these provisions is determined following rules laid down by the law on the annual accounts. Reinsurance companies must set up an equalization provision to equalize fluctuations in loss ratios in future years. The aim of this provision is to soften the risk throughout the years. When a claim occurs, the technical provisions, including the equalization provision if the other technical provisions are not sufficient, would be reduced accordingly. Luxembourg reinsurance undertakings must at all times hold sufficient assets to cover the technical provisions including the claims equalization provision”

3

The equalization provision is deductible from a Luxembourg tax point of view

4

―To the extent that the ceiling of the equalization provision is not reached, both the technical and financial profits should in full or in part be compensated by the annual allocation to the equalization provision. Through this mechanism, the Luxembourg regime allows the Luxembourg reinsurance companies to benefit from a tax deferral during a long period of time, ie in practice until reversal of the equalization provision or at the latest upon liquidation of the company‖

5

1. Applicable legislation • Section 29A of the Income Tax Act , 1962 (IT Act)





4 International comparison of insurance taxation. PWC publication.


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the prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).

the application of SA GAAP to the requirements – differences between the annual financial statements and the long-term insurance return (140.B.iii LT).

• disregarding amounts representing negative liabilities in respect of long-term policies when calculating the value of assets according to paragraph 4(iv) of schedule 3 to the Long-Term insurance Act, 1998 (145.A.i LT). • No distinction between ―Long-term insurers‖ and ―Short-term insurers‖

Law of 6/12/1991

Law of 8/12/1994



Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer. • Regulation of the insurance sector

• Safeguarding of the insured person‘s assets

• Solvency


Insurance companies with shareholders = 100%. Although the largest insurers were mutual insurers in 1993 a single four funds tax system applicable to all long-term insurers was introduced. No changes were made to the taxation of insurers when insurers demutualised. The distinction between the various policyholder funds and the corporate fund is still in effect. There are mutual insurers, but their proportion is negligible.

4. Overall comparison of the legislation -



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From a tax perspective, the profits of the company are taxed at the statutory rate of 28.59% (Luxembourg city for 2011). The taxable profits are usually the profits that are determined based on the annual accounts. Some exemptions may apply like the participation exemption. There are also some tax credits available to the company. In Luxembourg there is substantial reliance on the profits calculated from an accounting perspective, although deductions of expenses are subject to restrictions (for example, expenses relating to exempt income are not deductible).


Value of liabilities of the insurer in respect of business conducted by it in the relevant policyholder fund as determined by the Chief Actuary of the Financial Services Board in consultation with SARS. Capital adequacy reserves are specifically excluded [and increases are allowed for the value of certain re-insurance assets]. 1) Life assurance provision

The life assurance provision shall comprise the actuarially estimated value of an insurance undertaking's liabilities including bonuses already declared and after deducting the actuarial value of future premiums.

2) Technical provisions for life assurance policies where the investment risk is borne by the policyholders

This item shall comprise technical provisions set up to cover liabilities relating to investment in the context of life assurance policies the value of or the return on which is determined by reference to investments for which the policy-holder bears the risk, or by reference to an index.

Any additional technical provisions set up to cover death risks, operating expenses or other risks (such as benefits payable at the maturity date or guaranteed surrender values) shall be shown under 1).

2) shall also comprise technical provisions representing the obligations of a tontine's organizer vis-à-vis its members.

Technical provisions shall be calculated separately for each insurance contract. The use of appropriate approximations or generalizations is allowed, however, where they are likely to give approximately the same result as individual calculations.

The use of such methods for classes of insurance other than reinsurance is dependent on authorization by the Commissariat. The principle of separate calculation shall in no way prevent the establishment of additional provisions for general risks which are not individualized.



8. Treatment of “negative Rand reserves” (Day 1 gain issue)

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a formula based percentage of–

o expenses directly incurred iro selling and administration of the relevant policies (acquisitions costs and investment related costs);





Acquisition costs (such as direct costs, acquisition commissions or the cost of drawing up the insurance document or including the insurance contract in the portfolio, and indirect costs, such as advertising costs or the administrative expenses connected with the processing of proposals and the issuing of policies) are tax deductible.

There are no other special deductions.






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The taxation of the shareholder is described under point 5. Luxembourg insurance companies are exempt from tax on the income and gains they make from the investment portfolios


From a Luxembourg point of view, the premium is subject to a premium tax that is usually computed by the insurance company but the cost is ultimately borne by the policyholder (except for fire brigade tax). The Luxembourg premium tax is only computed when the risk is located in Luxembourg. The location of risks rules are defined in the Luxembourg Insurance premium tax law. There is no premium tax on life insurance and reinsurance premiums.


Policyholders are not directly taxed on investment results achieved by insurer. However the value of their interest in the policy or policy benefits may be reduced by the tax payable by the insurer in respect of the policyholder funds. For the insurance premium tax, whenever they pay the premium (according to the law, the tax should be paid to the tax authorities within 10 days after the declaration‘s period end).There is however no premium tax on life insurance and reinsurance premiums.

Policyholders are exempt from tax until the end of the policy term.


Insurer pays tax determined for four funds and effectively pays tax of the policyholder funds on behalf of policyholders. Policyholders are not taxed on maturity of original policies with insurers. Second hand policies are subject to taxation. For the tax on profits on the insurance activity it is the insurance company. For the payment of the insurance premium tax, it is also the insurance company that is responsible for paying the tax.


No tax payable by policyholders, unless the policy is second hand. Please see above.


The income tax rates (effective capital gains tax rate in brackets) of the four funds are:

• Corporate fund – 28% (14%)

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• Individual policyholder fund – 30% (7.5%)

• Company policyholder fund – 28% (14%)

Untaxed policyholder fund – 0% (0%) 28.59% (for Luxembourg city in 2011) for the profit taxation at shareholder‘s (insurance company) level and 4% insurance premium tax (+6% if fire risks are covered).


Any type of policy entered by the insurer with the 3 categories of policyholders is to be dealt with in the relevant policyholder fund. However, all annuity contracts in respect of which annuities are being paid are allocated to the untaxed policyholder fund. No difference in taxation rules for risk and investment policies. Please see (14) above




Amendments relating to SAM (if any) should be finalised prior to finalisation of the holistic review of the taxation of long-term insurers. Solvency II is planned on being adopted in 2013, however it is possible that it will be delayed. No specific changes have been made to the tax law. Solvency II is being adopted and implemented

18. Status of amendments arising from review (once-off/staggered)? - N/A


No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilised selling expenses. Not solved yet. The Government wants to implement the EU Directive.

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20. Other

Capital gains / losses are determined for the taxable transferor fund when assets are transferred to another fund. Reinsurance companies are also fully taxable companies like normal insurance companies. There is however a deferral mechanism

―Luxembourg reinsurance companies must establish sufficient technical provisions in respect of their entire reinsurance business. The amount of these provisions is determined following rules laid down by the law on the annual accounts. Reinsurance companies must set up an equalization provision to equalize fluctuations in loss ratios in future years. The aim of this provision is to soften the risk throughout the years. When a claim occurs, the technical provisions, including the equalization provision if the other technical provisions are not sufficient, would be reduced accordingly. Luxembourg reinsurance undertakings must at all times hold sufficient assets to cover the technical provisions including the claims equalization provision‖

The equalization provision is deductible from a Luxembourg tax point of view

―To the extent that the ceiling of the equalization provision is not reached, both the technical and financial profits should in full or in part be compensated by the annual allocation to the equalization provision. Through this mechanism, the Luxembourg regime allows the Luxembourg reinsurance companies to benefit from a tax deferral during a long period of time, ie in practice until reversal of the equalization provision or at the latest upon liquidation of the company‖

Framework for research into comparative jurisdictions : Section 28 (“Short-term insurers”) – Luxembourg

Item Section 28 Luxembourg Key Difference

1. Applicable legislation S28 of Income Tax Act, 58 of 1962 (―the Act‖);

General provisions of the Act – for e.g. general deduction etc;

S32 of the Short-Term Insurance Act, No 53 of 1998 (―the STI Act‖),

Board Notice No 27 of 2010 (FSB, Registrar of Short-term Insurance)

No distinction between ―Long-term insurers‖ and ―Short-term insurers‖

Law of 6/12/1991

Law of 8/12/1994




- Liability in respect of premiums on re-insurance (S28(2)(a));

- Actual claims incurred (S28(2)(b));

- Liabilities contemplated in S32(1)(a) and (b) of STI Act.

Regulation of the insurance sector

Safeguarding of the insured person‘s assets

Solvency

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The taxable profits are usually the profits that are determined based on the annual accounts. Some exemptions may apply like the participation exemption. There are also some tax credits available to the company.




The amount of technical provisions must at all times be such that an undertaking can meet any liabilities arising out of insurance contracts as far as can reasonably be foreseen. Technical provisions are generally tax deductible as per statutory accounts.



(iii) Prescribed formula; or

(iv) Own approved formula.

S28(2)(cA) of the Act- allows a deduction, subject to discretion of Commissioner (S28(9) of the Act). This deduction to be added to taxable income in next year of assessment (S28(5) of the Act. Provisions of s23(e) (disallowance of creation of reserves) of the Act do not apply to this provision for liabilities (S28(6)(b)).

―The provision for unearned premiums shall comprise the amount representing that part of gross premiums written which is to be allocated to the following financial year or to subsequent financial years‖

6

The provision also includes the amount of the provision for unexpired risks, the description of the item shall be "Provision for unearned premiums and unexpired risks". ―Where the amount for unexpired risks is material, it shall be disclosed separately, either in the balance sheet or in the notes on the accounts‖

1

―The provision for unearned premiums shall be computed separately for each insurance contract. However, statistical methods may be used, and in particular proportional and flat-rate methods, where they may be expected to give approximately the same results as individual calculations. The use of such methods for classes of insurance other than reinsurance is dependent on authorization by the regulator‖

1


Similar to 4.1 above. Audit: A provision for claims outstanding should be made.

This provision shall also allow for claims incurred but not reported by the balance sheet date; its amount shall be determined having regard to past experience as to the number and magnitude of claims reported after balance

6 International comparison of insurance taxation. PWC publication. 2011.

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sheet date.

Tax : Should be tax deductible if booked in the accounts.


Only created where insurer incurs an underwriting loss and insurer and auditor considers it necessary to create a reserve for claims costs and costs to carry on business.

Deductible – same principles as in 4.1 and 4.2 above.

―The provision for unexpired risks shall be computed on the basis of claims and administrative expenses likely to arise after the end of the financial year from contracts concluded before that date, in so far as their estimated value exceeds the provision for unearned premiums and any premiums receivable under those contracts‖

7



―The provision for claims outstanding shall be the total estimated ultimate cost to an insurance undertaking of settling all claims arising from events which have occurred up to the end of the financial year, whether reported or not, less amounts already paid in respect of such claims‖

2

A provision shall be computed separately for each case on the basis of the costs still expected to arise. Statistical methods may be used if they result in an adequate provision having regard to the nature of the risks. The use of such methods for classes of insurance other than reinsurance is dependent on authorization by the regulator.

This provision shall also allow for claims incurred but not reported by the balance sheet date; its amount shall be determined having regard to past experience as to the number and magnitude of claims reported after balance sheet date.

Claims settlement costs shall be included in the calculation of the provision irrespective of their origin.

Recoverable amount arising out of the acquisition of the rights of policy-holders with respect to third parties (subrogation) or of the legal ownership of insured property (salvage) shall be conservatively estimated.

Where benefits resulting from a claim must be paid in the form of annuity, the amounts to be set aside for that purpose shall be calculated by recognized actuarial


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methods.

Both explicit and implicit discounting or deductions, whether resulting from the placing of a present value on a provision for an outstanding claim which is expected to be settled later at a higher figure or otherwise effected, are prohibited.

By way of derogation from the point immediately above, a Grand-Ducal Regulation may provide that explicit discounting or deductions to take account of investment income may be carried out by those undertakings carrying out only reinsurance activities.

This Grand Ducal Regulation shall lay down the categories of claims to which the discounting or deduction can be applied, as well as the conditions under which the discounting or deduction shall take place. Furthermore, the Regulation may provide for the submission to the Commissariat, for its prior authorization, of the methods used for the discounting or deduction.





Deduction for these reserves disallowed under S23(e) of the Act.

Not tax deductible.


No. Refer 12 below.


Expenses actually incurred (other than claims and re-insurance premiums specifically provided for in section 28) deductible in terms of general deduction formula (s 11(a) read with 23 of the Act).



12. Applicable tax rates 28%. Capital gains: 14% 28.59% (for Luxembourg city in 2011) for the profit taxation at shareholder‘s (insurance company) level and 4%

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insurance premium tax (+6% if fire risks are covered).


Solvency II is planned being adopted in 2013, however it is possible that it will be delayed. No specific changes have been made to the tax law.


N/A

15. Treatment on transition Not solved yet. The Government wants to implement the EU Directive.

16. Other

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The valuation and accounting rules applicable to commercial accounts (Luxembourg GAAP) should also be applied for tax purposes, except in those cases, where the tax accounting and valuation principles differ explicitly from accounting valuation principles. Please note that the Luxembourg GAAP rules differ from the IFRS standard. It follows from the above that the Luxembourg tax result may differ from the LuxGAAP result as well as the IFRS result (see point 4).


See point 4


No, the tax basis does not follow the regulatory return. The taxable basis is calculated on the basis of the tax law and a tax return is filed with the tax authorities.


The taxable result is determined by the difference between the net assets invested at the end of the accounting period and the net assets invested at the start of the accounting period, increased by drawings made during the period and decreased by capital contributed during the period.

In most cases, this corresponds to the LuxGAAP accounting result. Difference may for instance derive from diverging valuation rules (e.g. diverging valuation of asset value, diverging depreciation rules, etc…)


We do not see at this stage how solvency 2 could impact on the calculation of the tax basis. However, there is no information available at this stage.


No visibility at this stage.

7. Are reinsurers taxed in a different manner to direct insurers? Reinsurance companies are fully taxable companies like normal insurance companies. There is however a deferral mechanism that applies under certain circumstances (i.e. equalization provision, see point 8).


Luxembourg resident reinsurance companies are fully taxable in Luxembourg and are thus liable to corporate income tax as well as municipal business tax at the standard rates (combined tax rate of 28.80% in Luxembourg City).

As any provision constituted in compliance with the regulatory as well as tax applicable principles, the equalisation provision is deductible from the taxable profit in Luxembourg. As a consequence, to the extent that ceiling of the equalisation provision is not reached, both the technical and financial profits should be in full or in part compensated by the annual allocation to the equalisation provision. The taxable profit should therefore be limited to the non-deductible expenses during the first years after the incorporation of the reinsurance companies.

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Through this mechanism, the Luxembourg regime allows the Luxembourg reinsurance companies to benefit from a tax deferral during a long period of time, i.e. in practice at the latest upon liquidation of the company.

In the event of a claim, the actuarial reserves, including the equalisation provision, will decrease what should increase the company‘s taxable income. This usually occurs when the reinsurance company is being wound up.

Luxembourg resident reinsurance companies are liable to net wealth tax (i.e. 0.5% levied on the company‘s unitary value). The equalisation provision is, however, deductible in such a way that the unitary value of a Luxembourg reinsurance company is generally reduced to the equity plus the unrealised capital gains existing on the portfolio held by the company.

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Same than previously.

2. Is there special treatment of upfront acquisition costs? Generally tax follows accounting:

Acquisition costs should be tax deductible provided that recognized as expense for LuxGAAP accounting purposes.

Acquisition costs should be recognized as asset and depreciated over time provided that recognized as asset for LuxGAAP accounting purposes


Risk/protection business:

A tax of 4% is applicable on the premiums for all types of insurance, provided that the risk insured or the policyholders are located in Luxembourg.

An additional tax of 6% on premiums for fire insurance policies is applicable provided that the risk insured or the policyholders are located in Luxembourg.

Life insurance and reinsurance premiums are tax exempt.

Investment/saving business:

According to Luxembourg rules, dividends paid are generally subject to 15% WHT, subject to the exemption provided further to the EU parent-subsidiary directive or to exemption/reduction provided by the applicable double tax treaties.

In addition, the provisions of the EU Savings Directive (i.e. withholding tax or disclosure of interest payments) may apply under certain circumstances.



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The provision for unexpired risks shall be computed on the basis of claims and administrative expenses likely to arise after the end of the financial year from contracts concluded before that date, in so far as their estimated value exceeds the provision for unearned premiums and any premiums receivable under those contracts – technical provisions, including the URR are tax deductible.

Generally, tax follows accounting; thus, provions should be tax deductible provided that recognized as expense for LuxGAAP accounting purposes.


Claims handling and loss adjustment expenses are included in the outstanding claims provision and are tax deductible as per the accounts.

3. Is discounting of reserves permitted? Generally not foreseen under LuxGAAP.

Sources

1 Information provided by Sebastien Labbe and Michele Kimmel (KPMG Tax – Luxembourg).


3 KPMG Solvency II readiness survey. November 2010.


5. Luxembourg: Country Fact File. KPMG publication. July 2011.

6. Joint HMRC/HMT consultation: Solvency II and the Taxation of Insurance Companies


http://webarchive.nationalarchives.gov.uk/20100407010852/http:/www.hm-treasury.gov.uk/consult_eusolvencydirective.htm

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Czech Republic



Item South Africa Czech Republic Key Difference




Directive issued by the Financial Services Board on– o the prescribed requirements for the calculation of the value of the

assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).



- Insurance Act (Act No. 277/2009 Coll.) with two implementing decrees (Decree No. 433/2009 Coll., on reporting; Decree No. 434/2009 Coll., implementing some stipulation of the Insurance Act – mostly prudential rules)

- Act on Insurance Contract (Act No. 37/2004 Coll. – mostly for conduct of business rules)

- Act on Accounting (Act No. 563/1991 Coll.)

- Act on Income Taxes (Act No. 586/1992 Coll.)



The Insurance Act stipulates that the key objective of this act is protection of policyholders (from prudential point of view).

The key objective of Act on Insurance Contract is to set the market conduct rules (e. g. information that the policyholder receives from the insurance undertaking).

The Act on Income Taxes provides for tax deductions for policyholders of life insurance (under certain conditions) whose objective is to support life insurance as part of voluntary pension saving.

3. Indicate the proportion of mutual insurers versus companies with shareholders.

Insurance companies with shareholders = 100%. Although the largest insurers were mutual insurers in 1993 a single four funds tax system applicable to all long-term insurers was introduced. No changes were made to the taxation of insurers when insurers demutualised. The

The traditional form of providing life insurance was through mutual societies. Although the majority of life insurers have moved from a mutual society owned by the policyholders to distributable companies with shareholders, mutual society

In the Czech Republic, although there has been a move away from mutual societies to companies with

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Does the presence of mutual insurers influence the tax legislation, and if yes, what aspects and how is the tax impacted?

distinction between the various policyholder funds and the corporate fund is still in effect.

insurers do still occupy a significant portion of the market. The current tax system for life companies is still strongly influenced by the legacy issues which applied when all life insurers were mutual societies.

shareholders, the former is still common in the Republic and the current tax system appears to be based on mutual companies but adapted for application to companies with shareholders.


-




The shareholder profit is calculated in accordance with Czech Accounting Standards, as implemented by the Act on Accounting (i. e. no particular calculation is exercised, the profit comes from accounting statements).

The tax on shareholder profits is calculated using the applicable accounting standards. Policyholders bear a final withholding tax of 15% on policy proceeds.



The Act on Accounting stipulates that the technical provisions should be valued at their fair value. It further defines the fair value of the technical provisions as the value determined in accordance with the requirements of the Insurance Act.

The Insurance Act requires that reserves in life insurance have to be calculated using ―sufficiently prudent prospective actuarial valuation taking into account all future liabilities as determined by insurance conditions for each insurance contract‖ (including all benefits, bonuses, options and expenses connected to the contract). That means that the assumptions used for valuation of TPs are fixed and cannot be changed.


The Insurance Act stipulates that the technical provisions should be calculated in a prudential manner – i. e. an implicit prudential margin is included in the reserves.

Discretionary margins are included in reserves – as stipulated in applicable legislation, and are not discretionary for tax purposes as such.

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Negative reserves are in fact treated as zero and therefore there are no tax consequences.

There are no tax consequences on negative reserves in the Czech Republic.




a formula based percentage of– o expenses directly incurred iro selling and administration of the

relevant policies (acquisitions costs and investment related costs); o all other expenses of the insurer which are attributable to the

business conducted with the relevant policy holders (general operating expenses), excluding expenses directly incurred to produce exempt amounts.



Yes, these expenses are treated as tax deductible (acquisition costs, annual costs, insurers general operating expenses, specific investment related costs).

All the expenses included in the broad categories are treated as tax deductible expenses. There is also no distinction between direct, indirect, and selling and administration / administrative expenses.






Transfers from the corporate fund to any of the policyholder funds and

Policyholders are taxed at maturity of the insurance contract and pay no tax during the duration of the contract. If the contract is surrendered / terminated early then the policyholder will be subject to taxation using similar rules as to when a contract matures or expires.

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the return of those amounts to the corporate fund do not affect the taxable income of any of the funds. Losses in a fund may not be set off against taxable income in another fund.



Policyholders are taxed when capital value of policy is paid out.

Timing of taxation of policyholder is different – in SA the policyholder bears tax on investment returns (paid by insurer) whereas in the Czech Republic the policyholder is taxed when the policy proceeds are paid.



The insurer is responsible to withhold and pay the tax on behalf of the policyholder. The amount of the capital value that exceeds the contributions made by the policyholder is taxed at 15%

Policyholders are only taxed at maturity of the policies. Tax is withheld by the insurance company.


No tax payable by policyholders, unless the policy is second hand. This is a final tax withheld by the insurance company.






Tax of 15% is tax withheld by the insurance company on the difference between capital value and contributions made.

The corporate income tax rate in the Czech Republic is 19%, and is applicable to the insurance company.



Payments from personal insurance policies are generally tax exempt, except for any sum insured from an endowment policy (on attainment of a certain age, or on death) and lump-sum payments from retirement annuity policies. Other income from personal insurance where such income is not the sum insured (settlement amount) and does not result in the termination of

Termination of the insurance policy gives rise to tax on the policyholder.

Proceeds from endowment policies and lump sum payments from retirement

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the insurance policy in question is also taxable.

There are not separate tax dispensations for savings business and risk business as such.

annuity policies are also taxed in the hands of the policyholder.



Income from life wrapped products is taxed by withholding tax at the rate of 15%. Income from selling a security is tax exempt (under certain conditions) six months after its purchase (applicable for individuals). Dividends are taxed by withholding tax at source.

If an investor invests directly in a mutual fund, and sells its units in that mutual fund after 6 months, then the profit on the sale, if any, will be exempt. If a policyholder were to hold an investment in a life wrapper, the surplus over the contribution made, at maturity, will be taxed at 15% (tax withheld by the insurance company).



There are some minor particular areas of the Insurance Act under review in addition to SII implementation, but not as large to describe it as a holistic review (e. g. governance which may be more harmonized with legislation in other sectors of the financial markets).

The implementation of SII will likely only lead to limited changes to the Czech Republic Insurance Act, and not an overall review of the insurance industry.


- N/A


No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilised selling expenses.

N/A

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Item Section 28 Czech Republic Key Difference

1. Applicable legislation

- S28 of Income Tax Act, 58 of 1962 (―the Act‖);


- S32 of the Short-Term Insurance Act, No 53 of 1998 (―the STI Act‖),


- Insurance Act (Act No. 277/2009 Coll.) with two implementing decrees (Decree No. 433/2009 Coll., on reporting; Decree No. 434/2009 Coll., implementing some stipulation of the Insurance Act – mostly prudential rules)

- Act on Insurance Contract (Act No. 37/2004 Coll. – mostly for conduct of business rules)

- MTPL Act (Act. No. 168/1999 Coll.) – for MTPL providers [ MTPL – motor third party liability].

- Act on Accounting (Act No. 563/1991 Coll.)

- Act on Income Taxes (Act No. 586/1992 Coll.)






The Insurance Act stipulates that the key objective of this act is protection of policyholders.

The key objective of Act on Insurance Contract is to set the market conduct rules (e. g. information that the policyholder receives from the insurance undertaking).


4. Reserving valuation General note: Short-term insurers are The Act on Accounting stipulates that the technical provisions should be All technical reserves are calculated and

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method (value of liabilities)

required to provide for liabilities (as listed below) in accordance with the provisions of the STI Act.


valued at their fair value which should be determined in accordance with the Insurance Act. The Insurance Act regulates some general assumptions for valuation of TP in non-life insurance; however, the specific methods are up to the undertakings to decide.

determined with reference to the Act on Accounting. If the technical reserves are calculated in accordance with the Act on Accounting then those reserves are tax deductible.

Essentially the technical reserves are based on the statutory accounts.



(v) Prescribed formula; or

(vi) Own approved formula.


This reserve represents tax deductible expense / taxable income


Similar to 4.1 above. This reserve represents tax deductible expense / taxable income






S 28(2)(b): claims actually incurred (whether paid or not) allowed as a deduction. Amount to be reduced with any amounts recoverable under re-insurance,


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guarantee, security etc. Normal tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.






Contingency reserve has been treated as tax deductible expense / taxable income since 2010.

Discretionary reserve represents tax non-deductible expense / non-taxable income


No. No.




Yes, these expenses are treated as tax deductible. Expenses are based on statutory accounts and are generally tax deductible.


28%. Capital gains: 14% Corporate income tax 19%.


There are some minor particular areas of the Insurance Act under review in addition to SII implementation, but not as large to describe it as a holistic review (e. g. governance which may be more harmonized with legislation in other sectors of the financial markets).

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N/A


N/A

16. Other

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The shareholder profit is calculated in accordance with Czech Accounting Standards, as implemented by the Act on Accounting (i.e. no particular calculation is exercised, the taxable income is calculated based on the accounting statements).

2. If yes, are there any significant adjustments made for tax purposes? (Please specify) n/a


Tax base is calculated based on accounting profit according to Czech Accounting Standards.


Not applicable – see responses above.


There are some minor particular areas of the Insurance Act under review in addition to Solvency II implementation, but the changes should not be significant (e.g. governance which may be more harmonized with legislation in other sectors of the financial markets).


Generally speaking, IFRS has no impact on calculation of tax base.

7. Are reinsurers taxed in a different manner to direct insurers? No

8. Are captive insurers and/or cell insurers taxed differently from traditional insurers? No

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The shareholder profit is calculated in accordance with Czech Accounting Standards, as implemented by the Act on Accounting (i.e. no particular calculation is exercised, the taxable income is calculated based on the accounting statements).

2. Is there special treatment of upfront acquisition costs? Upfront acquisition costs are deductible under Czech Republic tax laws.


Investment, mutual and pension funds are taxed at the 5 % rate. For pension funds, there are special rules for tax base calculation. Risk/protection business is taxed at the 19 % tax rate similarly as banks and other corporations.

4. Are policyholders taxed on entry, roll-up or exit? Please provide an overview of the tax. Policyholders are taxed on exit (when capital value of policy is paid out). There is withholding tax of 15 %.


1. Is the Unexpired Risk Reserve (URR) deductible for tax purposes? The URR is deductible for tax purposes in the Czech Republic.


The reserves created in accordance with the Czech Act on Insurance are tax deductible for Czech tax purposes.

3. Is discounting of reserves permitted? Current legislation is silent about discounting of reserves. However Solvency II legislation explicitly permit discounting of reserves.

Sources:

1. Information provided by Radek Halicek and Ladislav Malusek (KPMG Tax – Czech Republic). 2. KPMG Horizons Quarterly Publication – November 2011.


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France



Item South Africa France Key Difference




Directive issued by the Financial Services Board on– o the prescribed requirements for the calculation of the value of

the assets, liabilities and capital adequacy requirements of Long-Term insurers (140.A.ii LT).



In French law, there is no distinction between long-term insurers and short-term insurers but differentiated in terms of life and non-life business.



For life insurance, health insurance, and retirement insurance there is both individual insurance policies and group insurance policies.

There are two types of life insurance in France:

Life assurance for saving – (Assurance vie)

This is a specialized form of life assurance arrangement that allows a policyholder to hold his/her own choice of assets as the investment content of the policy. It is mainly a savings schemes for the living (savings for retirement), but it also contains a death policy, if ever the policyholder deceases before using his/her

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savings.

These policies offer a right to make withdrawals during the life of the policy

There is no income tax or capital gains tax if the income and gains are accumulated within the policy and no withdrawals are made.

If a withdrawal is made, the capital gains of the amount withdrawn is taxable. The capital gains of the amount withdrawn is liable to personal income tax at a progressive rate or the policyholders can opt for withholding taxes.

The withholding taxes are charged to the policyholders and the insurance company collects and pays the tax to the State.

Assurance décès

Assurance décès are death policies that pay out a sum to the beneficiary on the death of the insured.



The types of insurance institutions in France are as follows:

Limited companies ("Sociétés Anonymes")

These are insurance companies that make use of remunerated intermediaries. They are subjected to corporate tax at the standard rate of 33.3% for all it activities. In addition, corporation tax payers are liable to a social contribution equal to 3.3% of the tax calculated on their taxable profits at the standard rate (33.3%).

Companies under mutual form

Before 1993 these companies were liable on corporate tax at rate of 10% or 24% by source of income, provided:

to be administered for free

to share excess revenues between members,

to present a character regional or professional

Since this date they lost their tax exemption.

Mutual companies

They are Partnerships or non-profit making organizations. Excess revenues must be shared between members, without remunerated intermediaries. Mutual companies are liable for tax at

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24% or 10% by source of income. As of 1 January 2012, these companies will be progressively subjected to corporate tax of common law (up to 40% in 2012, 60% in 2013 and fully in 2014).


-




―Taxable income corresponds to accounting income from French local statutory books, subject to specific adjustments‖.

8

The corporate tax rate applicable to a Sociétés Anonymes is 33.33% + (33.33% x 3.3%) = 34.43%



Actuarial reserves and acquisition expenses are tax deductible.

Life insurance for saving – Assurance-vie

1) Mathematical reserves

These are reserves computed on an actuarial basis and they take into account reserves in life assurance business that represent the difference between the insurers commitment at the reporting date and the policyholders paid-up cover. The valuation is carried out policy by policy according to the methods particular to each product, having regard to its characteristics and the risks covered. A separate reserve is made for future management expenses not covered by product margins or by deductions from investment income.

2) Bonus reserve (life)

According to the "Code des Assurances", a minimum of 90% of

Reserves calculated according to French law are deductible for corporate tax purposes. Discretionary reserves are however not deductible for corporate tax.

8 International comparison of insurance taxation. PWC publication. October 2011.

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underwriting result and 85% of net income (including financial and capital realised gains) have to be attributed to policyholders. These attributions are usually added to the mathematical reserves (see above). When these attributions are added indirectly to mathematical reserves, they are recorded in a bonus reserve and may be distributed to policyholders within a period shorter than 8 financial years.

3) Capitalisation reserve

This reserve is designed to ensure that investments are sufficient to cover technical reserves and that the return on investments becomes stabilized, by taking into account the interaction between capital and interest rates. Profits realised on depreciable bonds and other fixed rate investments are allocated to this reserve so that bonds and other fixed rate investments acquired later in replacement may produce a profit equal to that of sold or reimbursed securities.

4) Provision pour aléas financier

This is a reserve for financial risks or provision pour aléas financiers (life) - when the rate of interest used in the valuation exceeds 80% of the rate of return of the assets of the company, a reserve is booked for the difference between the mathematical reserves recalculated with the real rate of return of the assets of the company, reduced by a fifth, and the mathematical reserves at the time of the valuation.


Discretionary reserves are not deductible for the purposes of calculating the corporate tax of the insurance company.



The deductibility of the reserve for negative margins due to inadequate performance of investment is not approved by the French Tax Authorities.

9. Deductibility of expenses (separately specify acquisition costs, annual costs, insurers general


expenses and allowances directly attributable to the

Profits allocated to policyholders and policyholder bonuses are tax deductible.

Acquisition expenses are tax deductible and the ―taxable income corresponds to accounting income from French statutory local

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operating expenses, specific investment related costs etc)

income of the fund;

a formula based percentage of– o expenses directly incurred iro selling and administration

of the relevant policies (acquisitions costs and investment related costs);




books subject to specific adjustments‖.9







―There is no income tax on interest build-up during the contract. Interest build-up is subject to social security taxes during the contract including unit-linked component of a mixed insurance contract.

Proceeds received in excess of premiums paid are taxable at various fixed rates depending on the contract duration. Social security taxes are due upon contract termination for unit linked contracts. Alternatively, a taxpayer may include proceeds in his income tax return where applicable marginal rate is lower than the fixed rates.

Gains (proceeds received in excess of premiums paid) are taxable at various fixed rates depending on the contract duration and social security taxes are due upon contract termination.

Premiums are deductible in very limited instances‖.10



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If a withdrawal is made, the capital gain of the amount withdrawn is taxable in the hands of the policyholder. Proceeds on maturity of a policy in excess of premiums paid are taxable at various fixed rates depending on the duration of the contract.



In the instance where a withdrawal is made from a policy, the policyholder is liable for tax on the gain on the amount withdrawn. If the policyholder elects to pay the withholding tax (instead of being liable for personal income tax the progressive rate).

Gains on policies (proceeds received in excess of premiums paid) is taxed at a fixed rate – ―a taxpayer may include proceeds in his income where the applicable marginal rate is lower than fixed rates…‖.

11



Final tax – if withholding tax is elected for the gain on withdrawal.






―There is one standard rate and three reduced rates:

Standard rate: 33.33% + (33.33%*3.3%) = 34.43%

Reduced rate: 19% + (19%*3.3%) = 19.60%

Reduced rate: 15% + (15%*3.3%) = 15.49%

Reduced rate: 0%‖12



Refer (2) above.

11

International comparison of insurance taxation. PWC publication. October 2011.


Page 120 of 176







-




Page 121 of 176


Item Section 28 France Key Difference

1. Applicable legislation - S28 of Income Tax Act, 58 of 1962 (―the Act‖);









Property, liability, casualty, health Insurance

Eg: Auto Insurance / Home Insurance / Health/ Legal access/ Agricultural Insurance/Insurance for not-for-profit enterprises, individuals & small businesses/Construction/Marine & Transport.

These kinds of insurance policies support taxes on insurance premiums. It is charged to the policyholders and the insurance companies collected and paid the taxes to the State.

The rates are between 7% and 30% except the agricultural insurances that are exempted from tax. The rate of the tax is depending of the risk (i.e. fire: 30 %, health 7% or 9%, motor vehicle 18 %, yachting 19 %).






For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI

The unearned premium is the pro-rata of the premium applicable to the non-expired period of the policy. This reserve is calculated on a prorata temporis basis, contract per contract or statistically, and is

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Act. Two methods:

(vii) Prescribed formula; or

(viii) Own approved formula.


―tax deductible if it satisfies the claim by claim methodology‖.13


Similar to 4.1 above. As per 4.1 above.




This reserve is booked to provide commitments in the period between the most recent valuation and the next premium maturity date. The basis for the calculation of the reserve is the amount by which claims and administrative expenses likely to arise after the end of the financial year from contracts concluded before that date exceed the reserve for unearned premiums and any premiums receivable on those contracts.

The reserve is calculated contract per contract or statistically for each class of business. It takes into account the claims and administrative expenses related to the last two financial years compared with the earned premiums related to the last two years. When the ratio is over 100%, the difference between 100% and this ratio is applied to the amount of unearned premium reserve. The result is laid in reserve for unexpired risks.

This reserve is tax deductible.


S 28(2)(b): claims actually incurred (whether paid or not) allowed as a deduction. Amount to be reduced with any amounts recoverable under re-insurance, guarantee, security etc. Normal tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally

The reserve is calculated contract per contract as statiscally when the risks occur on a regular basis, and is ―tax deductible if it satisfies the claim by claim methodology‖.

14

13



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entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.






Increased risk factor reserve

Increased risk factor reserve (provision pour risques croissants): non-life insurers book such a provision when a fixed level of premium is received for cover in which the risk factor increases with time (for example, sickness and accidents).

Equalisation reserve (provision pour égalisation)

The equalisation reserve is an annual appropriation of part of the underwriting result and is a provision against the cost of infrequent natural disasters, or of atomic risk, general liability linked to pollution and credit risk.

These reserves are not tax deductible.


No.




―Taxable income corresponds to accounting income from French statutory local books subject to specific adjustments‖.

15

Acquisition expenses are tax deductible.

12. Applicable tax rates 28%. Capital gains: 14% ―There is one standard rate and three reduced rates:

Standard rate: 33.33% + (33.33%*3.3%) = 34.43%

Reduced rate: 19% + (19%*3.3%) = 19.60%

Reduced rate: 15% + (15%*3.3%) = 15.49%

Reduced rate: 0%‖16

15



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16. Other



Taxable income corresponds to accounting income from French local statutory books, subject to specific adjustments. Please note that there are significant differences between statutory accounting and IFRS.


There are adjustments between statutory results and taxable income:

• non deductible items such as definitively not allowed charges (excessive charges, taxes, ...) being permanent differences,

• non taxable items (income attributable to foreign permanent establishments, dividends and certain capital gains in relation to substantial holdings),

• timing differences : e.g. non allowed reserves provided for tax deductible risks or charges (e.g. reserve de capitalisation and others), taxable unrealised gains on forex and investment funds.


No.


Not applicable.


Tax rules may be revisited in the future to take into account Solvency II changes with respect to new computation rules for reserves, inclusion of mark to market on investments.

Discussions in progress, at this stage no precise idea on possible evolutions.

Page 125 of 176


IFRS is not considered for the computation of the taxable income in France.


No.


No.

Page 126 of 176



Life and non life are taxed according to the same basic rules. There are however differences in the computation of tax deductible reserves reflecting differences in potential risks.


Acquisition costs are tax deductible but amortised over the residual life of the contract.

3. Is risk/protection business taxed on a different basis compared to investment/savings business? Consider shareholders and policyholders separately. \

Both risk/protection and investment/savings business are taxed on the basis of the statutory books. Adjustments are different as reserves are computed with respect to specific rules applicable to each business (contingency for risk/protection and financial performance and contingency of the termination date (death, repurchase, investment/savings business).


Indirect taxes are applicable upon subscription of risk/protection contracts by the insured policy holder (life insurance and investment/savings not taxable).

For policy holders, risk/protection give rise to an indemnity (except for disability coverage annuities generally tax free for individual and taxable for corporate) and investment /savings give rise to a taxable financial income (i.e taxed on exit) except when paid to heirs as this is part of the estate subject to inheritance duties.

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In practice there are two main types of reserves: reserves for Risks to be paid (occurred risk for which the indemnity has not been paid) and reserve for undisclosed event. Tax deductibility of these reserves follow general rules: the risk must be evaluated in order to provide a fair estimate of the exposure. This can be done on file by file basis or on the basis of a statistical analysis according to general rules governing tax deductibility of reserves.


claims handling and loss adjustment expenses are included in the tax deductible outstanding claim reserve for their actual cost


Please specify. We do not see the concept in our environment.

Sources:

1. Information provided by Denis Fontaine-Besset and Annick Bombardier (Sarrau Thomas Couderc – Paris). 2. KPMG Horizons Quarterly Publication – November 2011. 3. International comparison of insurance taxation. PWC publication. 2011.


Page 128 of 176

Sweden

Long-term insurance


Item South Africa Sweden Key Difference








Life companies in Sweden are subject to two types of taxes namely corporate income tax (―CIT‖) and a yield tax. Which tax is applicable depends on the nature of the product (see description in 2 below).

CIT is a tax on profits and is calculated as income less expenses. The calculation therefore includes premiums and reinsurance claims received as income and allows a deduction for claims and reinsurance premiums paid as well as certain technical provisions.

Yield tax is a flat rate tax calculated as the capital value (i.e. premiums received) at the beginning of the year (this is subject to amendment – going forward actual capital levels during the year will be used as the basis) multiplied by the average Swedish bond rate (this is a deemed return on the capital invested) multiplied by a flat tax rate of 15% in the event of pension policies and 27% in the event of saving policies. No deduction for expenses incurred is permitted in the calculation.



A distinction is drawn between pension policies (P-policy), saving policies (K-policy) and risk business. In the case of pension business, a deduction is given in respect of contributions made to pension policies, investment returns are subject to the yield tax at a rate of 15% and the policy pay out at the end of the

Swedish tax draws a distinction between risk and savings business. Savings business is subject to a yield tax whereas risk business is subject to income tax (with a few anomalous exceptions).

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The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.

period is taxable in the individual‘s hands.

Investment business (K-policy business) is subject to the yield tax in the life company. This is considered a tax payable by the company on behalf of the policyholders. No deduction is given to the policyholder for contributions and the policy pay out at the end of the period is exempt.

Pure risk policies are subject to CIT. An exemption from this is100% life insurance policies (without saving elements) which also are subject to yield tax. Normally no deduction is given to the policyholder for premiums paid and the policy pay out (due to a loss) is exempt This approach to 100 % life insurance risk business appears counter intuitive – one would expect where there is a distinction between risk and savings that the pure risk business would be subject to CIT. Based on discussions, this is an anomaly in the Swedish tax system.

Pension policies assets are also subjected to a yield tax.



The traditional form of providing life insurance was through mutual societies. Although the majority of life insurers have moved from a mutual society owned by the policyholders to distributable companies with shareholders, mutual society insurers do still occupy a significant portion of the market. The current tax system for life companies is still strongly influenced by the legacy issues which applied when all life insurers were mutual societies.

Mutual societies are still prevalent in the Swedish market. The insurance tax system is still very much influenced by the mutual societies‘ concept.


- The following comments (covered in more detail elsewhere) provide an overall comparison of the legislation:

Risk and investment business is separated and taxed on different bases;

Investment business is subject to a flat rate yield tax calculated utilizing a notional risk free return on the assets and giving no expense deductions;

Risk business is subject to a corporate income tax and full

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deduction is permitted for all expenses;

Shareholder surplus generated from the policyholder funds is not subject to tax.




The shareholder is subject to CIT on the investment returns earned on its assets as well as fees earned in respect of external services. Any surplus realized in the policyholder funds, although distributable to the shareholders, is not subject to tax in their hands. This exemption from taxation of surplus funds in the shareholders hands is confirmed by a ruling in June 2011 from the Supreme Administrative Court. However it is likely that the tax authorities will put the Governments attention to the exemption and demand a change of the legislation.

Shareholder surplus generated from the policyholder funds is not subject to tax.



Since the surplus policyholder funds are not subject to tax, the reserving valuation method for liabilities is not relevant to the determination of tax payable.

No surplus calculated in the policyholder funds.


Since the surplus policyholder funds are not subject to tax, the discretionary margins are not relevant to the determination of tax payable.




Since the surplus policyholder funds are not subject to tax, the treatment of day 1 gains is not relevant to the determination of tax payable.


9. Deductibility of expenses In contrast with the deductible expenses of the When calculating the income subject to yield tax, the Since the yield tax is a flat rate tax,

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(separately specify acquisition costs, annual costs, insurers general operating expenses, specific investment related costs etc)

corporate fund described in paragraph 5 the individual and company policyholder funds may deduct the following amounts:







starting point is to identify the assets which are subject to yield tax. These assets are in essence ―assets which are managed on behalf of the policyholders‖.

However to identify these assets start with the company‘s overall assets and then deduct all assets which are not hold to support the ―yield business‖ for example assets corresponding to technical reserves for CIT risk business and financial debts. Since the surplus in the yield tax business is not subject to CIT, no deduction for expenses related to the yield tax business are allowed, that includes acquisition costs and operating expenses.

All costs related to the CIT business are deductible.

there are no expenses deductible against the deemed yield generated.

All expenses attributable to business subject to corporate income tax are deductible.





The allowable deductions of the 3 taxable funds are

In the case of risk and investment business, the life company pays either CIT or yield tax (depending on the nature of the policy) on the return on policyholders‘ assets. This is effectively seen as a tax paid on behalf of the policyholders. The policyholders themselves therefore do not pay tax on policy maturity proceeds.

Pension policy maturity proceeds are taxed in the hands of the policyholders as a deduction was granted to such policyholders on contributions made to such policies. The return on the assets underpinning these policies is also subject to a yield tax in the life company.

As noted above, shareholders are only subject to tax on the investment returns on their assets as well as income from business which does not relate to business with policyholders. The excess generated by the policyholders

No notable differences in where the tax is levied – i.e. the life company pays the taxes on behalf of the policyholders and policy maturity proceeds are exempt in the hands of the policyholders.

Page 132 of 176


described in paragraphs 5 and 9.


is not subject to tax.


Although policyholders are not directly taxed on investment returns, the value of their interest in the policy or policy benefits would be reduced by the tax payable by the life company in respect of the policyholder funds.

The timing of the taxation is similar, i.e. payable by the life company during the course of the investment.



The life company pays the policyholder tax over the period of the policy. Policy maturity proceeds are exempt except pension policy maturity proceeds which are taxable.

Similar treatments in the two jurisdictions



No tax payable by policyholders unless the policy is a pension policy in which case the policyholder is liable to pay the tax.

In respect of the payment of pension policy maturity proceeds, the life company must withhold ―indicative income tax‖ on payments from the insurance. If the policyholder is non-resident in Sweden withholding taxation is dependent of the applicable tax-treaty.

All pension policy maturity proceeds are subject to a withholding tax.






CIT 26,3 %

Yield tax 27 % or 15 %.

Individual taxation:

Capital gains 30 %

Earnings from work 30 – 57 %.


Any type of policy entered by the insurer with the 3 categories of policyholders is to be dealt

Refer comments in 2 above.

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with in the relevant policyholder fund. However, all annuity contracts in respect of which annuities are being paid are allocated to the untaxed policyholder fund. No difference in taxation rules for risk and investment policies.



It is acknowledged that the yield tax basis of taxation provides an advantage for life insurance companies above equivalent investment vehicles. Consideration is therefore currently being given to extending this basis of taxation to other investment vehicles.

The yield tax basis of taxation granted to life companies is considered more favourable than other investment vehicles.



It is the view that Solvency II should not have any impact on the taxation regime for long-term insurers.

Solvency II should not impact on the insurance tax regime. However various aspects of the regime are under consideration namely:

The exemption of surplus policyholder funds in the shareholder‘s hands;

The asset base used in the calculation of the yield tax; and

Extending the yield tax regime to other investment vehicles.


- N/A N/A

19. Treatment on transition No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the

No requirement for transitional measures anticipated as no impact expected

N/A

Page 134 of 176


corporate fund was reduced by assessed losses, certain remaining special transfers and unutilised selling expenses.


Research compiled by: Marlene Jordaan

Canada


Framework for research of LT insurers in comparable jurisdictions: Section 29A (“Four Funds”)

Item South Africa Canada Key Difference








Insurance Companies Act – both federal and in many provinces – regulation both by legislation and regulatory guidelines and directives

2. Key objectives of the legislation (differentiate

Four funds are established for income tax purposes and policyholder funds are taxed

―The major role of federal legislation and regulation is to ensure the financial soundness

136


between Risk and Savings, if relevant)

on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.

of federally registered insurers so that their future obligations can be met. Similarly, provinces monitor the financial condition of the provincially incorporated insurers, although some provinces contract this function to the usually better equipped federal government‖

17



Proportion is unknown at this time, although there are a limited number of sizeable mutuals, with a larger number of smaller Farm mutuals. The tax legislation is not influenced.

―In the last century, most of Canada‘s largest stock life insurance companies (shareholder owned) changed to the mutual form of ownership to avoid being taken over by competitors‖

18


-


The taxable income of the corporate fund (shareholder interest in the insurer) is determined by applying the general principles of the IT Act and by including the annual ―profit transfers of excess assets from the policyholder funds as income.

―With regard to the allocation of income between shareholders and policyholders, this is only significant for specific calculations involving participating policyholders‖

19

17

An overview of the financial and insurance industry. Combined Insurance Company of America. June 2007.

18 An overview of the financial and insurance industry. Combined Insurance Company of America. June 2007.


137


Expenses incurred for tax purposes by the corporate fund exclude expenses directly or indirectly attributable to business conducted with policyholders.




―The tax reserves for ordinary life insurance policies will be the less of the statutory liability and the policy liability. The policy liability, as defined for tax, is the liability calculated in accordance with accepted actuarial practice, but excluding projected income and capital taxes)‖

20




Negative reserves for life insurers are immediately taxable.

9. Deductibility of expenses (separately specify acquisition costs, annual

In contrast with the deductible expenses of the corporate fund described in paragraph 5 the individual and

Acquisition expenses are generally deductible immediately.

20


138


costs, insurers general operating expenses, specific investment related costs etc)

company policyholder funds may deduct the following amounts:


a formula based percentage of– o expenses directly incurred iro selling

and administration of the relevant policies (acquisitions costs and investment related costs);








Refer 5 above. Policyholders are taxed based on the type of policy they hold, and the income earned (some policies provide for a deferral on some investment income). Death benefits are generally tax free.

―Interest build-up is generally not taxable in the hands of policyholders, except for policies that are a savings vehicle in which case the policyholder is taxed annually. In addition, a proxy tax of 15% of the investment income accumulating in certain policy reserve of the life company must be paid by the life insurer.

Excess of proceeds (including policy dividend and loans) over cost basis is taxable. Proceeds on death is generally tax-free except where the

139




policy is a savings vehicle‖. 21



Some policies allow for a deferral on some investment income, whereas others may require annual income inclusions

See above – a 15% withholding tax is paid by the life insurer on investment income accumulating in policy reserves of the insurance company.



Some policies allow for a deferral on some investment income, whereas others may require annual income inclusions



Generally-Death Benefits are non taxable.




Company policyholder fund – 28%

Tax rates are based on the proportion of business which is written in each of the various provinces and range from 10% to 16% for 2011 and same for 2012. The federal tax rate is equal to 16.5% in 2011 and 15% in 2012. The main provinces Ontario, BC and Alberta have a 10% tax rate and next largest Quebec has a 12%

21


140


(14%)


rate. Overall effective rate for 2011 would generally be approximately 27 to 28% and for 2012 approximately 25 to 27%



The taxation of savings products is distinguished from risk products – see 10, 11 and 12 above.





No – The Office of the Superintendent of Financial Institutions (OSFI) is defining its own needs with respect to solvency regulation taking into account actions from around the world.


-

19. Treatment on transition No transitional rules have been proposed yet by the working group dealing with legislative proposals required by the implementation of SAM by long-term insurers. Transitional rules were available

141


on implementation of the four fund system in 1993. On the change from prescribed valuation basis to financial soundness valuation basis in 2000 limited transitional relief was available when the ―reduction‖ in value of liabilities to be transferred to the corporate fund was reduced by assessed losses, certain remaining special transfers and unutilised selling expenses.


Sources

1 Information provided by Nunzio Tedesco (KPMG Tax - Canada). 2 Combined Insurance Company of America – An overview of the financial and insurance industry. June 2007. 3 International comparison of insurance taxation. PWC publication. 2011.

142

Framework for research into comparative jurisdictions : Section 28

Item Section 28 Canada Key Difference


- S28 of Income Tax Act, 58 of 1962 (―the Act‖);




Insurance Companies Act – both federal and in many provinces – regulation both by legislation and regulatory guidelines and directives.






Key objective of federal legislation tends to be solvency.





Reserves in accordance with accepted actuarial practice as defined in Canadian actuarial standards of practice.

4.1 Unearned Premium Reserve

For accounting and regulatory return purposes to be determined in

Must be sufficient to cover future claims and expenses.

143


(UPR) accordance with the provisions of the STI Act. Two methods:

(ix) Prescribed formula; or

(x) Own approved formula.


―Generally the same as accounting and calculated net of reinsurance‖

22


Similar to 4.1 above. Reserves in accordance with accepted actuarial practice as defined in Canadian actuarial standards of practice – reserves must be sufficient to cover known and unknown claims (incurred but not reported) – both pure IBNR as well as future development on reported claims – claims are discounted for future investment income and have a provision for adverse deviation.

―95% of the lesser of the statutory reserve and the claim liability as defined for tax, net of reinsurance‖

23




Must be sufficient to cover future claims and expenses.

4.4 Unpaid claims (outstanding

S 28(2)(b): claims actually incurred (whether paid or not) allowed as a

Reserves in accordance with accepted actuarial practice as defined in Canadian actuarial standards of practice –

22



144


claims reserve) deduction. Amount to be reduced with any amounts recoverable under re-insurance, guarantee, security etc. Normal tax principles applied to determine claims ‗actually incurred‘ as well as ‗unconditionally entitled‘ to claim recoveries. For regulatory purposes: only approved re-insurance taken into account.

reserves must be sufficient to cover known and unknown claims (incurred but not reported) – both pure IBNR as well as future development on reported claims – claims are discounted for future investment income and have a provision for adverse deviation.

―95% of the lesser of the statutory reserve and the claim liability as defined for tax and calculated net of reinsurance‖

2






Not allowed


No.



Investment related costs: normal principles apply. For e.g. if directly linked to exempt income (for e.g. dividends), or of a capital nature, no

Property and casualty acquisition costs are required to be deferred and amortized. Some general costs related to underwriting for P&C companies have been included by tax authorities as acquisition costs where they have not been deferred for accounting purposes.

―Expenses incurred on account of the acquisition of an insurance policy are capitalized and amortised. Accounting write downs of the capitalized costs from the overall recoverability test are not deductible for tax‖

24

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deduction.


28%. Capital gains: 14% Tax rates are based on the proportion of business which is written in each of the various provinces and range from 10% to 16% for 2011 and same for 2012. The federal tax rate is equal to 16.5% in 2011 and 15% in 2012. The main provinces Ontario, BC and Alberta have a 10% tax rate and next largest Quebec has a 12% rate. Overall effective rate for 2011 would generally be approximately 27 to 28% and for 2012 approximately 25 to 27%


No – The Office of the Superintendent of Financial Institutions (OSFI) is defining its own needs with respect to solvency regulation taking into account actions from around the world.


Not applicable


Not applicable

16. Other

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Long- and short-term insurers

Notes: in 2011, insurers moved to IFRS, however there have not been any changes to the determination of reserves in Canada. These changes are to be implemented in a few years once IFRS4 Phase II is adopted. The terminology under IFRS4 Phase II such as unexpired risk provisions and margins is not terminology which is currently used in Canada. The tax legislation has not been changed as of this date for the impacts of IFRS4 changes.

1, Does the tax basis follow accounting, that is, is the tax base the same or similar to the IFRS profit?

Tax is based on IFRS profit.

4. If yes, are there any significant adjustments made for tax purposes (please specify)

Significant adjustments include reserving for short-term insurers and some A&S policies is generally equal to 95% of book reserves. Unrealised gains on shares and bonds and certain other investments are taxed immediately, even if they are included in Other Comprehensive income. The other typical adjustments are to reverse book depreciation and use tax prescribed rules, Pension expense is only deductible for amounts paid and dividends from taxable Canadian corporations are generally received tax free.


Tax follows regulatory return. Solvency II is not being considered in Canada. Solvency and capital requirements are separately considered as part of the regulatory return in Canada

6. If the tax basis is not based on either accounting or regulatory, please set out the basis for the calculation of profits/ taxable income for tax purposes.

N/A

7. Is the tax basis expected to change in any way with the introduction of Solvency II?

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No – see 3 above

8. What will be the expected impact of the introduction of IFRS4 Phase II and are transitional measures planned? (e.g. once off increase in earned profits to e taxed over [x] number of years).

Not clear at this time. Based on the introduction of fair value accounting in 2007, it would be expected that any change in reserve would be allowed as a deduction or included in income over a period of time (expect 5 years).


No

10. Are captive insurers and/ or cell insurers taxed differently from traditional insurers?

Controlling domestic taxpayer is taxable immediately on captive insurance income from insuring Canadian risks and, under specific circumstances, from insuring non-Canadian risks.

148




Acquisition expenses are generally deductible immediately, however to the extent that they are included in the determination of reserves, they may be treated differently.


The taxation of savings products is distinguished from risk products – see 10, 11 and 12 of the previous research report.


For policies that are a savings vehicle, the policyholder is taxed annually on interest income. A proxy tax of 15% of the investment income accumulating in certain policy reserves of the life company must be paid by the life insurer. Some policies allow for a deferral on some investment income, whereas others may require annual income inclusions

Excess of proceeds (including policy dividend and loans) over cost basis is taxable on exit. Proceeds on death is generally tax-free except where the policy is a savings vehicle.


For policies that are a savings vehicle, the policyholder is taxed annually on interest income. A proxy tax of 15% of the investment income accumulating in certain policy reserves of the life company must be paid by the life insurer. Some policies allow for a deferral on some investment income, whereas others may require annual income inclusions

Excess of proceeds (including policy dividend and loans) over cost basis is taxable on exit. Proceeds on death is generally tax-free except where the policy is a savings vehicle.

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Short-term Insurers only


Currently UPR and claims reserves are generally deductible at 95% of the book reserve. Not clear what treatment will be until final Phase I is considered.



Yes

Sources:

1. Information provided by Nunzio Tedesco (KPMG Tax - Canada). 2. Combined Insurance Company of America – An overview of the financial and insurance industry. June 2007. 3. International comparison of insurance taxation. PWC publication. 2011.


Hong Kong


Framework for research of LT insurers in comparable jurisdictions: Section 29A (“Four Funds”)

Item Section 29A/Four Funds Hong Kong Key Difference


Section 29A of the Income Tax Act , 1962 (IT Act)







Insurance Companies Ordinance (Cap41) regulates all aspects regarding the Insurance industry in Hong Kong.

The Insurance Companies (General Business) (Valuation) Regulation ("Valuation Regulation") made under section 59(1)(a) of the Insurance Companies Ordinance (Cap.41) provides a standard and prudent basis for the valuation of the assets and liabilities of an insurer carrying on general business, other than a captive insurer

Section 22 of CAP 41 confirms how assets and liabilities in Long-term Insurance must be separated and which accounts must be opened.

2. Key objectives of the legislation (differentiate between Risk and Savings, if

Four funds are established for income tax purposes and policyholder funds are taxed on the trustee principle, i.e. funds are held and administered by insurers on behalf of policyholders, premiums and claims are disregarded in the calculation of taxable income and tax rates are based on the nature of

The relevant legal framework for the regulation of insurers is provided by the Insurance Companies Ordinance (Cap.41), and its subsidiary legislation including Insurance Companies (Determination of Long-term Liabilities) Regulation, Insurance Companies

http://www.oci.gov.hk/redirect/index.html?OpenAgent&Chapter=41


http://www.oci.gov.hk/framework/index08_01.html




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relevant) the relevant group of policyholders. The policyholder funds reflect the assets (receipts or receivables), expenses and liabilities of business conducted with individual, corporate and tax exempt policy holders. The fourth fund represents the shareholders‘ interest in activities of the insurer. No distinction is made between risk and savings business of the insurer.

(Margin of Solvency) Regulation and Insurance Companies (General Business) (Valuation) Regulation. The same Ordinance also provides a legal backing for the self-regulatory system of insurance intermediaries. The Commissioner of Insurance, in his role as the Insurance Authority, is responsible for the regulation of the insurance industry

The principal function of the IA is to regulate the insurance industry for the protection of existing or potential policy holders and the promotion of the general stability of the insurance industry. He is however not involved with the daily operations of an insurer, including determination of the terms and conditions of insurance policies or the fixing of premium rates. The IA works closely with the insurance industry to encourage the provision of better services to the insuring public and greater transparency in an insurer's operations. For example, the IA has been working closely with the insurance industry to implement the Insurance Intermediaries Quality Assurance Scheme with a view to enhancing the professional standard of insurance intermediaries. Under the Scheme, insurance intermediaries, their responsible officers/chief executives and technical representatives are required to pass the Insurance Intermediaries Qualifying Examination conducted by the Vocational Training Council, unless otherwise exempted, before they can be registered or authorized as such. Thereafter, they are required to attend continuing professional development programmes.

3. Indicate the proportion of mutual insurers versus companies with shareholders. Does the

Insurance companies with shareholders = 100%. Although the largest insurers were mutual insurers in 1993 a single four funds tax system applicable to all long-term insurers was introduced. No changes were made to the taxation of insurers when insurers demutualised. The distinction between the various policyholder funds and the corporate fund is

There is no special treatment in Hong Kong for Mutual insurers where the profits are returned to the members.

In insurance companies where there are shareholders the taxation will be at the Corporate tax rate which is 16.5%.



http://www.vtc.edu.hk/

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presence of mutual insurers influence the tax legislation, and if yes, what aspects and how is the tax impacted?

still in effect.


-




Shareholders are exempt from paying taxes on dividends that are paid.

Incorporated and Unincorporated companies will be liable to Taxes at the corporate tax rate (16.5% & 15%).



The amount of liabilities of an insurer in respect of long-term business shall be determined in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate for insurers.

Section 5-16 of Chapter 41E of CAP 41 will be applied to calculate the liabilities.



8. Treatment of ―negative Rand

Dependant on treatment for regulatory purposes. If policyholder liabilities for regulatory purposes are

153


reserves‖ (Day 1 gain issue)

reduced with negative rand reserves the value of liabilities for income tax purposes will automatically be reduced.












The income taxable in the corporate fund is the returns on assets in that fund, the transfers from the 3 policyholder funds and income from business conducted which does not relate to business with

A Corporation tax of 16.5% is levied on Incorporated companies; however the dividends that are paid to shareholders are not subject to taxes. In Hong Kong dividends are free of taxes and no taxes will be levied thereon. There are no statutory participating policyholder's interest (i.e. blocked surplus) requirements in Hong Kong. Surpluses can generally be allocated at Management‘s discretion. Assessable profits shall be: (i) deemed to be 5% of onshore premium (premium receivable in Hong Kong or premium

154


policyholders or administration of policyholder assets.



receivable outside Hong Kong from Hong Kong residents where the proposals are received in Hong Kong) less corresponding reinsurance premium or (ii) on election, based on adjusted surplus calculated by reference to actuarial-based statutory accounts. Such election once made is irrevocable and applies to future years.



Policyholders are not directly taxed on investment results achieved by the insurer.



The Insurer will pay corporation taxes at the rate that is applied, depending on whether the Corporation is Incorporated or not. There are no statutory participating policyholder's interest (i.e. blocked surplus) requirements in Hong Kong.

Surpluses can generally be allocated at management's discretion.



There are no domestic withholding taxes on dividends, interest or royalties.


The income tax rates (effective capital gains tax rate in brackets) of the four funds are:





Corporate tax rate of 16.5% will apply to Incorporated Companies and 15% to Unincorporated companies. Hong Kong does not levy Capital Gains taxes. A tax rate at 50% of the normal profits tax rate applies to offshore business of professional reinsurance companies. Life insurance businesses are assessed at 5% of the value of the premiums arising in Hong Kong. Assessable profits shall be: (i) deemed to be 5% of onshore premium

155


(premium receivable in Hong Kong or premium receivable outside Hong Kong from Hong Kong residents where the proposals are received in Hong Kong) less corresponding reinsurance premium or (ii) on election, based on adjusted surplus calculated by reference to actuarial-based statutory accounts. Such election once made is irrevocable and plies to future years.



No





Amendments for Solvency II


-

156





157

Framework for research into comparable jurisdictions : Section 28 (“Short-term insurers”)

Item Section 28 Hong Kong Key Difference





The regulatory framework applicable in Hong Kong to insurers and insurance intermediaries is set out in the Insurance Companies Ordinance (Cap. 41) (the ―ICO‖).

The Insurance Authority (the ―IA‖) is the regulatory body responsible for protecting the interests of policyholders or potential policyholders and promoting the general stability of the insurance industry. The OCI, which is headed by the Commissioner of Insurance, was set up by the IA in 1990 to administer the ICO.

2. Key objectives of the legislation Determine taxable income of short-term insurers. Regulates the following specific matters(i.e. deviations from general tax rules):




The IA has the following major duties and powers:

(a) Authorization of insurers to carry out insurance business in or from Hong Kong;

(b) Regulation of insurers, primarily through the examination of annual audited financial statements and business returns submitted by the insurers;

(c) Regulation of insurance intermediaries; and

(d) Liaison with the insurance industry.

To assist in achieving its objectives and enhance transparency, the IA issues numerous guidance notes and circulars to provide general guidance for insurers and insurance intermediaries on minimum standards and criteria that the IA will consider in connection with the applicable regulations. It seeks to maintain high standards of supervision to facilitate market development and, working alongside the insurance industry,

158


has introduced various major initiatives1 to

better protect the interests of the insuring public.





The valuation of insurance liabilities of each class of business must comprise :

(a) a best estimate of the premiums liabilities;

(b) a best estimate of the outstanding claims liabilities; and

(c) where considered appropriate by the actuary, risk margins that relate to the inherent uncertainty in each of these best estimate values.

For the above purpose, the following terms are so defined :

―Premiums liabilities‖ refers to unearned premiums and additional amount for unexpired risks, and includes liabilities for all benefits, claims and expenses, acquisition costs, and maintenance costs to be incurred after the valuation date.

―Outstanding claims liabilities‖ refers to the obligation whether contractual or otherwise, to make future payments in relation to all claims that have been incurred as at the valuation date, and includes reserves for claims reported, incurred but not reported (IBNR) and incurred but not enough reported (IBNER), as

well as direct and indirect

(1)

claims expenses.

―Best estimate‖ refers to the mean value in the range of possible values for the future outcome. It is made with assumptions regarding the future experience, and is made using judgement and experience, and are

159


neither deliberately overstated or understated.

The premiums liabilities shall be valued on a net of reinsurance basis whilst outstanding claims liabilities shall be valued on both gross basis and net of reinsurance. The actuary shall comment where there is a known material risk that one or more reinsurers will fail to meet their obligations, and the presence of non-reinsurance recoveries such as salvage and subrogation.

It shall be stated in the report the general principles, details of the methods adopted, and analysis in the valuation of premiums liabilities and outstanding claims liabilities of each class of business, including the following matters:

(a) assumptions used in the valuation process and the justifications therefore;

(b) definition of terms and expressions used in the report that may be ambiguous or subject to wide interpretation;

(c) data available, a view as to its appropriateness, steps taken by the actuary to validate the data and material adjustment to the data;

(d) grouping of risks;

(e) methods used (if these are different from the preceding report, to justify the change and to quantify the financial implication arising from the change in methods); and

(f) analysis.


For accounting and regulatory return purposes to be determined in accordance with the provisions of the STI Act.

Required to be calculated by a method no less accurate than the monthly pro rata method. Hong Kong Financial reporting standard No. 4 ―Insurance Contracts‖ does not specify the bases of measurement of insurance contracts.

160


Two methods:

(xi) Prescribed formula; or

(xii) Own approved formula.


The Insurers are allowed to follow accounting policies that existed pre HKFRS conversion, subject to certain requirements. Taxation follows accounting.



Generally calculated using statistical bases.

For returns in accordance with the Insurance Companies Ordinance, an actuarial review of the Motor and Employees Compensation claims reserves

is required if those reserves exceed specified thresholds on the level of reserves. Accounts provision is allowed in full.

4.3 Unexpired Risk Reserve (URR) Only created for accounting and regulatory return purposes where an insurer incurs an underwriting loss and insurer and auditor considers it necessary to create a reserve for claims costs and costs to carry on business.

No deduction is allowable under section 28(2)(cA) as liabilities consisting of the unexpired risk provision as contemplated in section 32(1)(d) of the Short-term

The portion of unexpired risk reserve for non-life insurance estimated at the end of the current period based on an actuarial calculation exceeding the unexpired risk reserve carried forward from the previous period can be deducted for EIT purposes. If the unexpired risk reserve estimated at the end of the current period is less than the unexpired risk reserves accrue brought forward from the previous period must be recognized as taxable income of the current period. The notice came into effect 1 January

161


Insurance Act are not covered. 2007 and abolishes a 1999 notice, which stipulated that unexpired risk reserve estimated based on 50% of self-retained insurance premiums of the current period could be deducted for EIT (enterprise income tax) purposes. For accounts created under the Companies Ordinance, the need for premium deficiency provisions can be considered in aggregate across all classes of business. For returns in accordance with the Insurance Companies Ordinance, the need for premium deficiency must be considered on a class-by class basis. An actuarial review of the Motor and Employees Compensation claims reserves is required if those reserves exceed specified thresholds on the level of reserves.



Calculated on a case-by-case basis. For returns in accordance with the Insurance Companies Ordinance, an actuarial review of the Motor and Employees Compensation claims reserves is required if those reserves exceed specified thresholds on the level of reserves






General contingency/solvency reserves are not permitted/recognised. For returns in accordance with the Insurance Companies Ordinance, solvency is monitored on a required excess of total eligible assets over total insurance liabilities. Assets are required to be valued in accordance with statutory regulations, which can give rise to negative valuation reserves Insurers are required to maintain an excess of assets over liabilities of not less than a required solvency margin. The objective of this requirement is to provide a reasonable safeguard against the risk that the

162


insurer‘s assets may be inadequate to meet its liabilities. The following rules apply: (a) A general business insurer must maintain a solvency margin determined on whichever is the greater of (i) one fifth of the relevant premium income up to HK$200 million, plus one-tenth of the amount by which the relevant premium income exceeds HK$200 million; or (ii) one-fifth of the relevant claims outstanding up to HK$200 million, plus one-tenth of the amount by which the relevant claims outstanding exceeds HK$200 million, subject to a minimum of HK$10 million for those insurers carrying on non-statutory classes of business and HK$20 million for those carrying on statutory classes of business; (b) A captive insurer must maintain a solvency margin determined by the greater of 5% of the net premium income or 5% of the net claims outstanding, subject to a minimum of HK$2 million. For accounts made up under the Companies Ordinance, equalisation/catastrophe reserves are permitted, but rarely occur. For returns in accordance with the Insurance Companies Ordinance, equalisation reserves are permitted Under Section 25A of the ICO, an insurer carrying on general business (other than a professional reinsurer and a captive insurer) is required to maintain assets in Hong Kong of an amount which is not less than the aggregate of 80% of its net liabilities and the solvency margin applicable to its Hong Kong general business. The Insurance Companies (General Business) (Valuation) Regulation governs the valuation of the assets and liabilities of an insurer carrying on general business.


No.

7. Deductibility of expenses (separately Expenses actually incurred (other Generally, acquisition costs are deductable

163


specify acquisition costs, annual costs, insurers general operating expenses, specific investment related costs etc)

than claims and re-insurance premiums specifically provided for in section 28) deductible in terms of general deduction formula (section 11(a) read with section 23 of the Act).


when charged to the profit and loss (P&L)account. For returns in accordance with the Companies Ordinance, deferral of acquisition costs are not allowed. Claims handling expenses are allowed as per accounting practices which allows insurers to follow accounting policies existing pre-HKFRS conversion, subject to certain requirements.

12. Applicable tax rates 28%. Capital gains: 14%

The capital gains tax rates are as follows:

Individual Policyholder Fund 7.5%;

Untaxed Policyholder Fund 0%;

Company Policyholder Fund 14%;

Corporate Fund 14%.

The capital losses can only be set off against capital gains.

Corporate tax of 16.5% Increase in authorised share capital in a Hong Kong incorporated company attracts ad valorem capital duty of $1 per $1,000, subject to a maximum of HK $30,000. Offshore risk reinsurance business of professional reinsurer (non-life only) is taxed at 8.75%.


Solvency II



16. VAT NO VAT applicable

17. Other

164

165


1. Does Tax Follow Accounting?

Short Term

Insurance business other than life business is treated as non-life business for tax purposes. Taxation generally follows accounting treatment with adjustments for non-taxable investment income and offshore underwriting income (derived from insurance policies where contracts are made and proposals are received overseas). Realised/unrealised gains and losses are generally included in taxable income. Exception: dividend income and offshore sourced investment gains/losses, together with attributable expenses, are excluded from taxation.

Long Term

For companies incorporated in Hong Kong, financial statements should be prepared under the Hong Kong Companies Ordinance and accounting principles generally acceptable in Hong Kong (GAAP).

Assessable profits shall be:

(i) deemed to be 5% of onshore premium (premium receivable in Hong Kong or premium receivable outside Hong Kong from Hong Kong residents where the proposals are received in Hong Kong) less corresponding reinsurance premium or (ii) on election, based on adjusted surplus calculated by reference to actuarial based statutory accounts. Such election once made is irrevocable and applies to future years.

2. Is IFRS profits the starting point of the tax base?

Short Term

The starting point for the calculation of Hong Kong profits tax, as confirmed by the Court of Final Appeal in 2000 in Commissioner of Inland Revenue v Secan Limited & Ranon Limited (5 HKTC 266) is the profits per the financial statements, subject to any adjust-ments required by the provisions of the Inland Revenue Ordinance. Until recently the Inland Revenue Department‘s stance, and the commonly accepted position among practitioners, was that fair value gains or losses recorded in the accounts on the basis of the IFRS standards would be given tax effect as long as they were Hong Kong-sourced and not capital in nature.

Long Term

Assessable profits shall be:

(i) deemed to be 5% of onshore premium (premium receivable in Hong Kong or premium receivable outside Hong Kong from Hong Kong residents where the proposals are received in Hong Kong) less corresponding reinsurance premium or

166

(ii) on election, based on adjusted surplus calculated by reference to actuarial based statutory accounts. Such election once made is irrevocable and applies to future years. (iii)

3. Does the tax basis follow regulatory return?

Short Term

No, it generally follows accounting.

Long Term

No, it generally follows accounting.

4. Is the tax basis expected to change with the introduction of Solvency II?

Short Term

No.

Long Term

No. The tax basis is Capital and not risk-based, rule-based regulation, lower transparency on disclosure. From research that was conducted by Ernst & Young it was found that Hong Kong was not too focused on Solvency II.

5. Expected impact of introduction of IFRS 4 Phase II?

Short Term

Not known at this stage. Expected to be implemented from January 2013.

Long Term

Not known at this stage. Expected to be implemented from January 2013.

167

Sources:

1. Price Waterhouse Cooper: International insurance Taxation Comparison, March 2009 (Rex Ho);

2. Price Waterhouse Cooper: International insurance Taxation Comparison, 2011 (Rex Ho & Jeanette Ho);

3. Price Waterhouse cooper: Delivering Regional Insights in insurance Taxation in Asia Pacific, November 2010 (Rex Ho);

4. Commissioner of Insurance: Hong Kong website;

5. Insurance Companies Ordinance 1997(CAP41


Australia


Framework for research into comparable jurisdictions : Section 28 (“Short-term insurers”)

Item Section 28 (South Africa) [Australia] Key Differences


- Section 28 of Income Tax Act, 58 of 1962 (―the Act‖);




- S321 A, B and C of the Income Tax Assessement Act of 1997 (―the Act‖) http://law.ato.gov.au

- Insurance Act 76 of 1973 - General Insurance Prudential reporting Framework GRF

210.0, http://www.apra.gov.au - Institute of Actuaries of Australia – Professional Standard

300 (valuation of general insurance claims)

Question: Is there any other legislation that I need to bear in mind in determining the reserves for taxation purposes?






In terms of the ATO S321 of the Act have specific provisions that deal with short-term insurance companies.

- Outstanding claims (S321-10, S321-15 and S321-20) - Claims paid (S321-25) - Gross premium (321-45) - Unearned premium reserve (S321-50, S321-55 and S321-

60)

Question: Where in Act does it allow for deduction of ―reinsurance premiums paid‖ and where does it disallow claims handling fees?


The reserving methodology used by APRA is applied in the Annual financial statements. These reserves for outstanding claims and IBNR are then applied in the tax calculation. The ATO however use a specific formula to calculate the UPR and hence the reserving methodology used in the financials is not applicable.

http://law.ato.gov.au/

http://www.apra.gov.au/

169





Short-term insurers are required to provide for liabilities in accordance with the provisions of the General Insurance Act.

Australia do not distinguish approved and non-approved for taxation purposes.



(xiii) Prescribed formula; or

(xiv) Own approved formula.


S321 B of the Act allows a deduction for the increase in the value of a UPR and inclusion in income a reduction in the UPR. The value of the UPR must be worked out in the following way:

Step1:Add up the gross premiums received or receivable by the company, in relation to *general insurance policies issued in the course of carrying on *insurance business, in that or an earlier income year.

Step 2: Reduce the step 1 amount by so much of the costs incurred by the company in connection with the issue of those policies as relate to the gross premiums, including, for example, costs such as:

(a) commission and brokerage fees; and

(b) administration costs of processing insurance proposals and renewals; and

(c) administration costs of collecting premiums; and

(d) selling and underwriting costs; and

(e) fire brigade charges; and

(f) stamp duty; and

(g) other charges, levies and contributions imposed by governments or governmental authorities that directly relate to general insurance policies.

Step 3: Reduce the step 2 amount by any premiums (the relevant reinsurance premiums) paid or payable by the company, in that or an earlier income year, for the reinsurance of risks covered by those policies, except:

(a) reinsurance premiums that the company cannot deduct because of subsection 148(1) of the Income Tax

The UPR calculation used by the ATO is limited according to the calculation prescribed by the legislation, and ensures that a loss relating to future periods is not accelerated to the current period.

What is the logic behind this specific formula used by the ATO for the deduction/addition of the reserve? If I look at the formula ―cold‖ then the ATO are basically taking the gross premium less reinsurance for a current period and comparing this to a prior period? I am a bit unsure of this reserve if you can maybe provide some insight that would be great.

http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19360027/148(1)'#148(1)

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Assessment Act 1936 (about reinsurance with non-residents); and

(b) reinsurance premiums that were paid or payable in respect of a particular class of *insurance business where, under the contract of reinsurance, the reinsurer agreed to pay, in respect of a loss incurred by the company that is covered by the relevant policy, some or all of the excess over an agreed amount.

Step 4: Add to the step 3 amount any reinsurance commissions received or receivable by the company that relate to the relevant reinsurance premiums.

Step 5: The value, at the end of an income year, of the unearned premium reserve is so much of the step 4 amount as the company determines, based on proper and reasonable estimates, to relate the risks covered by the policies in respect of later income years.



Section 321-15 and 321-20 cater for outstanding claims liability, this liability includes the IBNR.

The only parts of the outstanding claims liability that are not deductible for tax are the provision for claims handling costs and the risk margin pertaining to the provision for claims handling costs.

In Australia a portion of the IBNR includes a risk margin which is included in the tax calculation. Current SA practice does not include such a risk margin.




The unexpired risk reserve is treated as part of the total UPR. Therefore, it is subject to the same tax treatment as explained in item 4.1.

171




Outstanding claims reserves are measured as the central estimate of the present value of expected future

payments net of recoveries from third parties against claims incurred at the end of the financial period under general

insurance contracts issued. Expected future payments include payments relating to claims reported but not yet paid,

claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER) together with estimated claims handling costs to be incurred in settling such claims.

A risk margin is applied to the central estimate, net of reinsurance and other recoveries, to reflect the inherent uncertainty in the central estimate.

Per the ATO S321 A, a deduction is allowed for the increase in the value of a outstanding claims reserve and inclusion in income, of a reduction in the outstanding claims reserve. The value of the outstanding claims can be worked out in the following way:

Step 1: Add up the amounts that, at the end of the income year, the company determines, based on proper and reasonable estimates, to be appropriate to set aside and invest in order to meet:

(a) liabilities for outstanding claims under those policies; and

(b) direct settlement costs associated with those outstanding claims.

Step 2: Reduce the step 1 amount by so much of it as the company expects at the end of the income year to recover:

(a) under a contract of reinsurance; or

(b) in any other way;

other than under a contract of reinsurance to which subsection 148(1) of the Income Tax Assessment Act 1936 (about reinsurance with non-residents) applies.

Included in the outstanding claims is a risk margin, this is seen as part of the estimate of the liability. However, the risk margin pertaining to the provision for handling costs on outstanding claims is not deductible as the provision for claims handling costs are not allowed as a deduction.

Not sure how claims handling is not allowed when the Act allows ―direct settlement costs associated with those outstanding claims‖

5. Contingency and capital adequacy


- Contingency: 10% of gross premiums

Australia do not have contingency reserves or capital reserves. APRA regulates the capital requirements in Australia but this is expressed as the available capital to be held in the form of


172


reserves less approved re-insurance premiums;



equity etc. There is not a requirement to provide specific reserves to cover the capital requirement. No deduction would be allowed for any capital reserves that may arise.


No. No




- S321-25 allows for claims paid during a period to be deducted.

- S321-45 includes gross premiums received and receivable. - Chapter 1 Part1.3, division 8, S8-1 of the Income Tax

Assessment Act of 1997 allows for the deductibility of expenses incurred in carrying on a business.

Are there any sections that allow for the deduction of acquisition costs,investment costs and any other related insurance costs


28%. Capital gains: 14% 30% for general and capital gains tax for companies.


14. Status of amendments arising from review (once-

173


off/staggered)?


Australia at this stage are not following Solvency II, however APRA is already a risk based regime.

16. VAT The GST implications on claims for insurers are highly complex in Australia. It will not be possible to discuss it in this format

17. Other Premiums in Australia are subject to insurance duty ( a form of stamp duty) Which legislation covers this?

Is there any specific legislation for cell captives?

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1. Does the tax basis follow accounting that is, is the tax base the same or similar to the IFRS profit? No please see differences below

Accounting (IFRS) Taxation

Unearned premium reserve (UPR)

The UPR for accounting purposes is simply the unearned premium calculated on a time apportionment basis, therefore, it is assumed that premium revenue is earned evenly over the term of the contract.

The deductible UPR for tax purposes is calculated in accordance with tax legislation (pro rata of premiums per accounts net of acquisition costs). The formula applied by the ATO ensures that where new business is written at a loss (therefore, the gross written premium is not more than the reinsurance costs, expected claims costs plus acquisition costs on the business), this loss is not fully deductible when the business is written but rather in the period over which the loss is incurred. For accounting purposes, reserves ensure that where business is written at a loss, the loss is fully provided for at the date on which the business is written.

Outstanding claims reserve Calculated on a case-by-case basis. Discounted for future years payments. Statistical estimates may be used.

Outstanding claims reserves are measured as the central estimate of the present value of expected future payments net of recoveries from third parties against claims incurred at the end of the financial period under general insurance contracts issued. Expected future payments include payments relating to claims reported but not yet paid, claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER) together with estimated claims handling costs to be incurred in settling such claims.

A risk margin is applied to the central estimate, net of reinsurance and other recoveries, to reflect the inherent uncertainty in the central estimate.

Case-by-case basis or statistical estimate accepted. Discounting required.

Per the ATO S321 A, a deduction is allowed for the increase in the value of a outstanding claims reserve and inclusion in income, of a reduction in the outstanding claims reserve. The value of the outstanding claims can be worked out in the following way:

Step 1: Add up the amounts that, at the end of the income year, the company determines, based on proper and reasonable estimates, to be appropriate to set aside and invest in order to meet:

(a) liabilities for outstanding claims under those policies; and

(b) direct settlement costs associated with those outstanding claims.

Step 2: Reduce the step 1 amount by so much of it as the company expects at the end of the income year to recover:

(a) under a contract of reinsurance; or

(b) in any other way;

other than under a contract of reinsurance to which subsection 148(1) of the Income Tax Assessment Act 1936 (about reinsurance with non-residents) applies.


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Provision for the claims handling costs is not allowed for tax purposes.

Claims incurred but not reported (IBNR)

Calculated on experience and or statistical method. Discounted for future years payment. See above (outstanding claims).

Deductible based on statistical estimate. Discounting required. See above (outstanding claims).

Unexpired risk reserve IFRS reporting companies are required to assess unexpired risks and if applicable to establish an unexpired risk reserve after writing off deferred acquisition costs and related intangible assets

Not allowed for taxation

Equalisation reserves Reserves may be established as an appropriation of funds Not allowed

Acquisition expenses Portion relating to unearned premium is deferred to the extent that it is recoverable.

Deductible immediately, but see calculation of UPR above.

Reinsurance premiums and claims

Premiums paid/payable and claims received/receivable are shown gross in income statement and balance sheet

Local reinsurance premiums are deductible and recoveries are assessable.

Same treatment applies for reinsurance with non-resident reinsurers, provided election made.

Election requires corporate tax to be paid by non-resident on 10% of gross premiums paid or credited.

Claims handling expenses Included with claims provision Direct claims expenses allowed as part of claims provision. Indirect claims handling expenses only allowed as incurred.

Premium taxes State premium tax of between 2% and 11%, depending on the state and depending on the type of insurance. No GST is payable on the stamp duty component of premium.


See above

3. What will be the expected impact of the introduction of IFRS 4 Phase II and are transitional measures planned? e.g. once off increase in earned profits to be taxed over [x] years?

No expected changes at this stage.

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4. Is the tax basis expected to change in any way with the introduction of Solvency II? (Please specify) Australia may not introduce solvency II as they are already on a risk based model (APRA) 5. IBNR: Please confirm that claims handling expenses may not be added to the outstanding claims reserve calculations. Can you ascertain the rationale behind this? Is this consistent across all outstanding claims type reserves(e.g. INF,IBNR, IBNER)?

The provision for claims handling costs relating to outstanding claims cannot be deducted. This applies to INF, IBNR and IBNER consistently. See table in 1 above.


Discounting will apply equally to the reserves calculated for tax purposes as it applies when the calculations are done for accounting purposes


No special treatment is given to captive insurance companies


Not sure cannot find any information on this 9. Is the Unexpired Risk Reserve (URR) deductible for tax purposes? No, See table in 1 above

Research compiled by: Antoinette Rudman

Documents

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