A Global Minimum Tax - Are Insurers Ready?

Ensuring appropriate levels of corporate tax are paid by multi-national companies in a digital world has increasingly preoccupied governments over the last decade. We have all seen media stories of world-leading digital technology companies under fire over how much tax they pay relative to their revenue in countries like the UK. Since the financial crisis, pressure has also grown on low-tax jurisdictions that have attracted significant amounts of business by creating tax levels that larger countries cannot compete with.

In July 2021, leaders of 130 countries under the OECD’s Base Erosion and Profit Shifting project approved an outline framework for a global minimum tax regime created by the OECD and called “Pillar 2” for short. Implementation of this regime is now becoming urgent for many firms, including insurers.

We have identified the key areas to focus on ahead of Pillar 2 commencing on 1 January 2024.

Pillar 2 of BEPS will impose a global minimum tax of 15% on large multinational enterprises (MNEs). The UK intends to implement by 1 January 2024, the EU Directive requires implementation by the same date and others including Japan, Switzerland and Australia intend to follow. The US is not expected to implement the OECD version of the rules but has implemented its own, and different, Minimum Tax. This article explains how the introduction of Pillar 2 rules will affect insurers, why it is more than just a tax issue and what KPMG can offer insurers looking to tackle this new compliance challenge.  

The Pillar 2 regime ensures large multi-national companies (MNEs) with a global turnover of over EUR 750 million pay a minimum effective tax rate (ETR) of 15% in each jurisdiction they operate in. This is determined through a standardised calculation of the ETR governed by OECD prescribed model rules. Companies with ETRs below the minimum 15% rate in any particular jurisdiction will be liable to top-up tax on the difference (bar a reduction in the amount subject to top-up to reflect genuine substance).

Many insurers have operations in jurisdictions such as Bermuda, Isle of Man and Hong Kong where ETRs are consistently below 15%. Insurers within the scope of Pillar 2 will therefore be likely to face significant top-up taxes in respect of these jurisdictions. The rules are complex and top-up tax can arise in a range of situations, including in onshore locations.

Pillar 2 tax returns and tax payments will stem from the reporting standards used for the group’s consolidated financial statements. Gaining an understanding and modelling the adjustments from local GAAP accounting standards to the consolidated group GAAP/IFRS is therefore going to be a hugely important to ensure compliance for insurers. Performing these calculations in time to meet reporting deadlines will also mean data driven automated solutions may be needed.

Adjustments and treatments required in the model rules also present their own unique challenges. Key examples of this for insurers include:

• Dividend income on short term portfolio investments (equities held for under 12 months).
• Complex rules for consolidated investment funds.
• Deferred tax is reversed in some cases and always capped at the minimum tax rate of 15%. Plus, all deferred tax assets are recognised, regardless of non-recognition or valuation allowances.
• Pillar 2 provisions on mergers and acquisitions will mean deal structures may need to change, and M&A could cause entities to fall above or below the €750m revenue threshold for Pillar 2 to apply. 

Although Pillar 2 rules relate to taxation, the consequences will influence broader strategic decisions and may require significant budgets to ensure compliance. Top-up tax in current low/no tax jurisdictions and exclusions of investment funds mean that insurers may wish to re-evaluate their corporate structures.

The compliance burden and complex legislation will require whole new processes and enhancements to current finance functions. Accounting and Tax functions should consider any other processes that could be improved at the same time. Preparations for Pillar 2 should therefore be high up on the CEO, Group CFO and board of directors’ ‘to do’ lists. This is not just a job for the Head of Tax.

Pillar 2 may also impact M&A and commercial pricing especially for reinsurance, speciality business and offshore life assurance. Furthermore, it is being implemented at a time of both accounting and regulatory change for the sector including IFRS 17 going live.

There is less than a year before Pillar 2 commences. Insurers will need to be ready for quarterly reporting as early as Q1 2024, not just for the first Pillar 2 return due 30 June 2026.  

The rules are complex and therefore considerable efforts are needed to comprehend the tax and compliance costs of Pillar 2.

If you have any questions or would like to discuss what implications Pillar 2 of BEPS has for your organisation, please contact us to arrange a discussion or workshop.