Given the accounting differences for global insurance companies in different jurisdictions, a new global minimum tax on certain multinational companies creates the potential for double taxation for some insurance companies, according to an AM Best commentary.

The Organization for Economic Cooperation and Development (OECD) announced on Oct. 8, 2021, that 136 out of 140 countries and jurisdictions agreed that certain multinational enterprises (MNEs) will be subject to a minimum tax rate of 15 percent, beginning in 2023.

The OECD proposal would apply to companies, including insurers, with revenue above €750 million (US$870.1 million).

The application of this new stipulation could be challenging for insurers with longer-duration coverages, as profits may not be realized at the point of sale, unlike other industries,” said the AM Best commentary titled “OECD Announces Agreement Toward Global Minimum Tax.”

The use of deferred tax balances by insurers allows for timing differences between accounting regimes, AM Best said.

The impact will depend on the final nature of the laws passed by respective governments, exemptions that some protective governments may seek to sustain their competitive advantage and accounting interpretations.

AM Best explained that the focal point of such action is to base taxes on where the profits emerge, even if companies have no physical presence in a particular country or jurisdiction and is a response to the digitization of the global economy.

The agreement consists of a two-pillar solution, which was presented to G20 foreign ministers in Washington, D.C. on Oct. 13 and will be discussed by G20 leaders in Rome at the end of October.

AM Best then explained the two pillars.

Under Pillar 1 of the proposal, MNE’s with global sales of more than €20 billion ($23.2 billion) and profitability above 10 percent would be covered. Pillar 1 is not applicable to regulated financial services companies. Profits of up to 25 percent above the 10 percent threshold would be reallocated to market jurisdictions. OECD estimates that up to $125 billion of profits will be reallocated to jurisdictions each year.

Under Pillar 2, which will have insurers under its scope, there will be a global minimum tax rate of 15 percent. The minimum tax rate will apply to companies with revenue above €750 million. OECD estimates that Pillar 2 will generate $150 billion of additional global tax revenue annually.

Double Taxation a Possibility

AM Best said insurers globally are subject to numerous accounting regimes, which makes it difficult to apply the Pillar 2 requirements to the industry.

“Profits may not be realized at the point of sale, as with other industries. While short-term insurance coverages may fit into Pillar 2, longer duration coverages will be very difficult when applying Pillar 2 revenue and profit measures,” said the commentary.

Life insurance, for example, has very long periods during which revenue and profits are realized, AM Best said, noting that the use of deferred tax balances allows for some of the timing differences between accounting regimes.

The insurance industry has sent comments to the OECD recommending that such deferred taxes be taken into account when determining an MNE’s effective tax rate, said the commentary. “Without this, insurers could see double taxation and will not treated on a par with other industries.”

The ultimate impact of the rules will depend on the final version of the laws passed by the various governments, exemptions that some protective governments may seek to sustain their competitive advantage and accounting interpretations.

“We think the low-tax regimes have been resilient thus far in the face of the BEAT implementation in 2017, and places like Bermuda and Ireland are also seen as centers of excellence with respect to underwriting, capital management, and mature regulatory environments,” concluded the AM Best commentary. (Editor’s note: The reference to “BEAT” is the base erosion and anti-abuse tax, adopted as part of U.S. tax reform in 2017, which reduced Bermuda’s tax advantage.).

*This story ran previously in our sister publication Insurance Journal.