John O'Leary PwC

The Organization for Economic Co-operation and Development (OECD) published its Base Erosion Profit Sharing (BEPS) action plan in July 2013 to address perceived flaws in international tax rules. The Plan was endorsed by G20 with implementation to be completed by the end of 2015. spoke with John O’Leary, a Tax Partner in Financial Services at PwC, to gain some insights into the potential impact these tax rules could have on insurers and reinsurers.

According to Mr. O’Leary the G20 does not believe multinational corporations are contributing enough and the OECD was charged with developing a solution. “The OECD identified a number of flaws in the international tax regime including the problem of double ‘non-taxation’ – where companies have income, but are not taxed, in two different jurisdictions. The OECD also identified issues in the “misalignment of profit and substance”, where companies have profits in one country and substance in another.

The OECD’s BEPS has a 15-point action plan to redesign the international corporate tax system, including:

  • Defining a ‘taxable presence’ within a country that a company is doing business,. This will make it more difficult to sell across borders without having a taxable presence.
  • Restrictions on interest deductibility, particularly when it has been paid through other group companies
  • Risk and capital
  • Controlled foreign company rules

Mr. O’Leary believes BEPS, in its current form, will impact international reinsurers doing business across borders. Many reinsurers are “doing business on a ‘freedom of services’ basis, which means they don’t have a presence in countries where they are selling services.” It’s going to be much more difficult going forward.  Other ‘freedom of services’ structures will be affected as well, including: MGAs, Sales Rep offices and sales functions. Companies will have to determine if they have a taxable presence.

With regard to risk and capital, the OECD’s position is that it alone cannot drive the location of profit. Mr. O’Leary says “…risk and capital has to be backed up with substance…and for the insurance industry, substance means underwriters, assumption of risk function, and management of that risk.” According to the OECD “It’s the location of key people around the risk, aligned with risk and capital that is going to drive the location of profits going forward.

Mr. O’Leary says there is talk of a carve-out for the insurance sector, but no decision has been made as yet.

For more World Risk and Insurance News from the 2015 European Insurance Forum (EIF) Conference in Dublin, visit the dedicated EIF 2015 Channel in the On Demand Library.

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