2020 Financial services tax conference FS-TaxCon… · Today’s presenters Name Title Firm name...

2020 Financial services tax conference

Adapting to the new normal

Insurance

July 15, 2020

2© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDP100923-3C

The following information is not intended to be “written advice

concerning one or more Federal tax matters” subject to the

requirements of section 10.37(a)(2) of Treasury Department

Circular 230.

The information contained herein is of a general nature and

based on authorities that are subject to change. Applicability of

the information to specific situations should be determined

through consultation with your tax adviser.

3© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDP100923-3C3

Today’s presenters

Name Title Firm name Email

Enrique Martin Director, EVS KPMG LLP [email protected]

Philip Jacobs Principal, Insurance Tax KPMG LLP [email protected]

Tal Kaissar Partner, Insurance Tax KPMG LLP [email protected]

Transfer pricing developments

July 15, 2020

© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDP100923-3A5


OECD final guidance on Financial Transactions:

— Released February 11, 2020. First time the OECD produced final definitive guidance on

financial transactions.

— The Paper now becomes Chapter X of the OECD Guidelines.

— Focus on captive insurers and reinsurance potentially leading to more aggressive

challenges by tax authorities.

BEPS 2.0

— Pillar 1 will have transfer pricing implications.

— Potential carve out for FS groups from Amount A

— Amount B still relevant and potentially challenging for FS groups

Business model developments

— Technology changes to insurance business model

— Impact of COVID-19 disruption on TP models



Financial transactions guidance

Captive insurance and reinsurance

— The final guidance tones down some of the language on possible re-characterization of

captive insurance transactions, as compared to the draft guidance, but such arrangements

are still subject to multiple challenges.

— While the OECD guidance also covers intra-group reinsurance within insurance groups, it

focuses heavily on captives and there is little additional guidance on reinsurance

companies.

- There is, however, a clear statement that the principles of Chapter I regarding accurate

delineation and allocation of risk apply equally to intra-group reinsurance.

— Pricing ceded and retained risk considerations need to be taken into account by insurance

groups

Other considerations relevant for insurance groups

— Intra-group loans

— Treasury Function

— Hedging




Business model developments

Changes in business models

— Technology increasingly driving transformation and disruption in financial services

— Other aspects of BEPS review also important: role for brand? Other intangibles?

Relative assessment of different drivers of value?

— All taxpayers need a clear value creation narrative, such as a Value Chain Analysis,

to underpin the principles of the transfer pricing model

Regulatory considerations

Pressure on transfer pricing models – allocations of income (service versus intangible)




COVID Impact – TP policy considerations Transfer pricing developments

Other TP factors:

— Treatment of (head

office) mitigation costs

— Changes to management

fee charge outs?

— Whether and how much

of a mark-up should be

applied.

Related considerations:

— Financial transactions/

liquidity management

— TP risk management: It

may be necessary to

separate out the periods

of (1) fully-Covid-19

impacted, (2) transition,

and (3) business as

usual.

— Review of any APA

critical assumptions.

Allocation of

losses/profits:

— Profit split methods in

practice: sharing ‘system’

losses.

— Adjust re-charges?

— Remote employees and

considerations for PE

and TP.

— Change in value drivers?

Contractual analysis:

— What are the terms of

intercompany

agreements? Does the

intercompany agreement

contain a “force-majeure”

clause and will related

parties be able to rely on

this clause?

— What behaviours are

observed among

unrelated parties?

Regulatory Requirements and Third Party Risk Management

Operational Aspects

BEPS 2.0

July 15, 2020



BEPS 2.0

Amount A

Accuracy & tax certainty Simple & administrable Avoid double tax taxation

Amount B Amount C

Go beyond arm’s length principle/

permanent establishment

Impose minimum taxes on

cross-border income

Coordination

rules

Income

inclusion

rule

Tax on base

eroding

payments

1st Pillar

Address Nexus and profit allocation issues

2nd Pillar

Address broader BEPS issues/Low taxation



OECD’s BEPS 2.0 Project

Financial Services companies, including insurance companies, are primarily focused on Pillar 2

— Pillar Two – Proposal for a set of global minimum taxes with four potential rule-sets:

- Income Inclusion Rule – tax CFC income at a minimum tax rate

- Undertaxed Payments Rule – deny deductions/impose tax on payments not subject to a minimum

tax rate

- Switch-Over Rule – switch from a treaty exemption to a credit method for profits not subject to tax

at a minimum tax rate

- Subject to Tax Rule – adjust or deny treaty benefits on income not subject to a minimum tax rate.

Details are currently being discussed, including the minimum tax rate and extent of

“substance-based” exemptions

— A GILTI-type exemption, based on tangible assets, is expected to provide relatively small relief to

financial services companies

To implement Pillars One and Two, governments would separately implement OECD proposals in

local legislation and amend existing tax treaties, which could push implementation to 2023+

U.S. is highly unlikely to implement changes to GILTI or BEAT as a result of Pillar Two, subject to

possible political changes after the election

BEPS 2.0



OECD’s BEPS 2.0 Project – U.S. participation

In June, U.S. Treasury Secretary Steve Mnuchin sent a letter to certain EU counterparts regarding

BEPS 2.0.

— Specifically, the letter calls for temporarily suspending the negotiations regarding a “Pillar 1” proposal to

allow market jurisdictions to tax a greater share of a multinational’s profits.

The letter seems to make it much less likely that countries will reach agreement on Pillar 1 by the

agreed year-end deadline. However, the potential impact of the letter on Pillar 2 is unclear

To this point, many countries have insisted that a deal on Pillar 1 is contingent on a deal on Pillar 2,

and vice versa

— Additionally, the United States has been insisting that any deal on Pillar 2 would carve U.S. groups out of

Pillar 2 due to the existence of the U.S. GILTI regime

— Achieving that goal may be more difficult if the U.S. is viewed as slowing the discussions on Pillar 1

Secretary Mnuchin’s letter states that reaching a deal on Pillar 2 is possible even while the talks on

Pillar 1 are suspended

The OECD has made it clear that not all member countries will be required to adopt Pillar 2

— A recommendation on Pillar 2 could be issued without all countries committing to adopt, and then

countries could implement as they see fit.

BEPS 2.0

IFRS 17

July 15, 2020



Tax impacts of IFRS 17

IFRS 17 gives rise to a number of tax-related effects. Some of these potential impact key

performance metrics. Not all impacts will be seen in all jurisdictions.

IFRS 17



Initial stepsIFRS 17

Tax functions can take action to contribute:

— What confidence do we have that we know how retained earnings will move

on transition for our business? (It may vary product by product)

— How should we collaborate to extract more insight from initial findings and

better inform the assessment of tax impacts?

— How can we develop an intuitive picture of our future tax profile and

understand the potential flexibility and challenges around maximizing relief

for interest and group-wide losses, and maximizing recognition of deferred

tax assets?

Seek to share insights with tax functions

— Awareness training/briefings

— Ensure tax is embedded in any high level impact assessments for key products/

entitles/jurisdictions

— Start to evaluate the impacts on the business to inform dialogue with Tax Authorities

— Alert the wider business on the impacts that tax may have on Solvency II capital ratios,

liquidity, distributable reserves, cash-flow modelling and systems requirements



Tax work programIFRS 17

Identify new

profit profiles

Awareness

training

Tax effects in financial

impact assessment

Identify potential

drivers of profit

volatility

— Designed by tax

people for tax people.

— Ability of CSM at inception (or transition) to

absorb losses Movements in economic

variables (e.g., market discount rate)

— Mismatches with reinsurance

— Deferred tax on internally-generated and

acquired insurance intangibles

— Assumptions on taxation of transition and

DTA recognition

— Pragmatic simplifications for products with

special tax rules

— Losses on onerous contracts

— New business strain (indirect acquisition

costs expensed).

— Double hit possible: loss at transition and

lower annual profits in short term

Apply a tax lens to

pre-tax results

Identify tax impacts

of accounting

choices

Identify impact on

regulatory capital

ratios

Make

representations to

Tax Authorities

Data and

systems and

reporting

!— Cash tax timing

— Can CSM (implied

future profits) be used

to support deferred tax

assets?

— Interaction with legacy

tax rules for old

business

— Loss and interest

restriction rules

— Is use of other

comprehensive income a

credible option?

— Tax considerations to inform

accounting policy choices

— Degree of alignment with

regulatory capital important

— Deferred tax assets re-

measured and may be lower

quality capital

— Loss absorbency of deferred

taxes impacted

— Immediate impacts may be

mitigated if no cash tax

impacts

— Direction and scale of

transition (by product)

— Sensitivity to choice of

transition methods

— Preferred basis for taxing

transition

— Interaction with local

policyholder/product taxes

— Reform of local tax bases

— Thresholds for certain tax rules

may be crossed if “revenue” is

materially different

— For each reporting GAAP,

capture new differences for

deferred tax purposes

— Taxes in fulfilment cashflows

— Impact on reported value of tax

synergies

Technical work on tax matters Implementation planning

Initial work Detailed evaluation of pre-tax results

Questionsand answers

Thank you

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individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon

such information without appropriate professional advice after a thorough examination of the particular situation.

© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved. NDP100923-3C

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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