The Art of Taxation for Multinational Insurance Programs LGL008

Transcription

1 The Art of Taxation for Multinational Insurance Programs LGL008 Speakers: Peter Paternostro, Senior Vice President & Tax Counsel, Multinational, AIG Erin Scott, Vice President, Global & Enterprise Risk Management, Hewlett Packard Enterprise The information presented herein represents the views of the speakers only, and does not necessarily represent the views of their employers. 1

2 Why Taxes? Understanding basic tax issues of multinational insurance can make you more effective Know how to better structure programs to minimize tax exposures Create awareness of multinational insurance tax issues that may be unfamiliar to your company s tax department Avoid tax adjustments, interest and penalties Help your tax department manage tax reporting and filing obligations 2

3 Learning Objectives Understand important tax considerations for multinational insurance programs Insurance premium taxes Premium allocations Non-admitted insurance Transfer pricing Learn about: Federal Excise Tax Foreign Accounts Tax Compliance Act Multinational tax trends 3

4 Hewlett Packard Enterprise Hewlett Packard Enterprise (HPE) was formed on November 1, 2015 when Hewlett-Packard Company split into two independent publicly traded companies. HPE is an industry leading technology company that enables customers to go further, faster. With the industry s most comprehensive portfolio, spanning the cloud to the data center to workplace applications, HPE s technology and services help customers around the world make IT more efficient, more productive and more secure. Company Profile: FY15 global revenue of approximately $55 billion 65% of revenue outside US 200k employees 4

5 Multinational Insurance Programs Locally Admitted Policies Issued to parent s subsidiaries by locally licensed carriers Insures local offices, operations, assets, directors and officers, etc. Global Policy Issued to parent by carrier licensed in its home country Insures parent s global offices, operations, assets, directors and officers, etc. Controlled Master Program (CMP) Both local policies and global policy DIC/DIL Coverages Backstop for local policies 5

6 HPE Insurance Portfolio Aircraft Hull & Liability Auto Liability Aviation Products Liability Directors & Officers Liability Errors & Omissions Fidelity/Crime General Liability Marine/Transit Property Political Violence/Terrorism Umbrella/Excess Liability Workers Compensation 6

7 HPE Insurance Portfolio Insurance portfolio includes a variety of program structures: CMP, non-admitted and locally admitted policies Insurance programs with locally admitted policies: Global Property International General Liability Directors & Officers Liability Errors & Omissions Marine/Transit Bermuda Captive High Tech Services Insurance, LLC Global Property International General Liability Errors & Omissions Umbrella/Excess Liability 7

8 Premium Taxes Various Taxes Apply to Insurance Policies Reinsurance Withholding Taxes Goods and Services Taxes Country, State, Province Premium Taxes Premium Taxes Value Added Taxes Stamp Duties Fire Brigade, Insurance Levies and Fees Over 25 different calculation methods and more than 24,000 different rates apply to premium taxes May be imposed on insured or insurer Incorrect calculations can result in tax liabilities/penalties Increased focus by tax authorities 8

9 Premium Taxes Risk location determines where tax due US, Canada and Australia require risk location specific to state/province and even postal code Rates vary widely by country and line of business Premium taxes in US imposed on insurer and rates relatively low (2% to 3%) Most jurisdictions impose premium taxes on insured at rates considerably higher - Brazil 7.38% - UK 9.5% - Italy France 9% - Germany 19% - Argentina 21% VAT - Australia: Fire Brigade Tax up to 36% and GST 10% 9

10 Premium Allocations Drives tax allocation among coverage jurisdictions Must be just and reasonable Determines both local insurance taxes and local subsidiary s income tax deduction Premiums on non-us master/global policies covering DIC and DIL may pose allocation issues Recommend DIC/DIL premiums allocated on same basis as global premium for the underlying coverage Double taxation may result if home country taxes entire premium and tax must also be paid on premiums allocated to other jurisdictions 10

11 Premium Allocations Recommend written policies on allocation methodologies ensuring consistent, defensible company-wide approach Core principles of allocation methodology Just and reasonable Premium charged on given policy commensurate with risk covered Reflect countries litigiousness and loss experience Examples of premium allocation Property/Energy where risk located Auto/Marine/Aviation where vehicle registered Casualty location of insured benefitting from coverage 11

12 HPE Program Design Significant self-insured retentions/deductibles at the business level Local Liability policies issued in 70+ countries; policy limits vary depending on jurisdiction Local Property policies issued in 50+ countries; property limits based on assets in country E&O policies issued in select countries depending on contract requirements and local regulations D&O policies issued in select countries Marine/Transit policies issued in select countries 12

13 Non-Admitted Insurance Policy issued in one country, often domicile of parent, to insure exposures in other countries May be single global policy or part of controlled master program Frequently, premium taxes paid only in parent s jurisdiction, but recently local tax authorities look to local insured for local premium taxes UK, Germany, Italy, Luxembourg, Belgium, Chile and Switzerland are some of the countries which may impose premium taxes for risks within their jurisdiction Important to identify if insurer, insured or broker responsible for calculating, collecting and remitting taxes to local authorities 13

14 Non-Admitted Insurance: Potential Income Tax Issues US Parent Negotiates and purchases global program with no local policies Brazilian Subsidiary Insurance Company Brazilian subsidiary incurs $30 million loss Parent has no loss to offset income from claims payment Claim payment results in $10.5 million tax liability for parent Parent may need to contribute additional funds to subsidiary which may be considered taxable income 14

15 Independently Procured Insurance Independently procured insurance is purchased directly from non-admitted insurer without broker Most states impose tax on resident purchaser US subsidiaries covered under non-us parent s global/master policy must consider these taxes when paying parent allocable cost of insurance US companies purchasing insurance from affiliated captives must also consider these taxes 15

16 Transfer Pricing Tax authorities look at intercompany transactions to ensure income and expenses are properly apportioned among jurisdictions Basic principle behind any intercompany transaction is establishing an appropriate and reasonable price with documentation that supports arms-length pricing OECD Arms-Length Standard: Transaction results consistent with results of independent parties engaging in same transaction under same circumstances Tax authorities motivated to increase taxable income and reduce expenses in their jurisdictions 16

17 Transfer Pricing Example Insurance Unrelated Parties Proper Arms- Length Pricing Insurance Related Parties Incorrect Pricing US Insured Premium $100 Irish Insurer US Insured Premium $200 Irish Captive Results $100 income in Ireland subject to a 12.5% tax or $12.50 $100 deduction in the US at a 35% tax rate or $35 tax benefit Results $200 income in Ireland subject to a tax of 12.5% or $25 tax $200 deduction in the US at a 35% rate or $70 tax benefit US tax authorities likely to challenge 17 17

18 Transfer Pricing Issues may arise in a number of situations involving multinational insurance programs: Captives in low tax jurisdictions paid premiums by affiliated companies located in higher tax jurisdictions US parent purchases: Global policy covering subsidiaries in jurisdictions where no local policy needed, or Master policy insuring DIL/DIC which overlays local policies, and Parent company has intercompany chargebacks for allocable portion of premiums Essential to document every major aspect of transfer pricing including: Methodology demonstrating reasonable premium allocation Actuarial analysis or other evidence demonstrating arms-length pricing Very difficult when return audited years later, to justify and defend transfer prices without good contemporaneous documentation 18

19 Federal Excise Tax Gross basis tax on (re)insurance policies written by foreign insurer to US insured covering US source risks Policy Type Non-Life Life, Sickness and Accident Reinsurance Tax Rate 4% 1% 1% Excise tax does not apply to: Premiums paid to foreign insurers electing to be treated for US tax purposes as a domestic insurer [Section 953(d) election] Exemptions specified in US income tax treaties Foreign sourced premium 19

20 Federal Excise Tax Tax applies to entire premium if coverage for both US and non-us risks May want to bifurcate coverage so separate policies issued for US and non-us risks Excise tax imposed on gross premiums without reduction for agents commissions and other expenses For funds withheld reinsurance, premium cannot be reduced for underwriting expenses or because net amount paid 20

21 Foreign Account Tax Compliance Act (FATCA) Response to 2009 banking scandal where Americans evaded taxes on funds concealed in Swiss accounts Helps US tax authorities obtain information about offshore accounts and investments of US taxpayers Triggered by withholdable payments to a non-us entity Withholdable payment defined as any payment of US source fixed or determinable annual or periodic income including interest, dividends, rents, royalties and (re)insurance premiums 21

22 Foreign Account Tax Compliance Act Treatment of (re)insurance premiums as withholdable payment requires US companies to identify and document FATCA status of foreign (re)insurers to which premiums paid Foreign (re)insurers receiving premium subject to 30% US withholding tax on premium, unless its FATCA status certified in advance to person making premium payment Most foreign insurance companies certify FATCA status by completing Form W-8BEN 22

23 Multinational Tax Trends Greater transparency Increased anti-tax avoidance legislation Taxation by embarrassment 23

24 Greater Transparency Base Erosion and Profit Shifting (BEPS) Country by Country Reporting Organization of Economic Cooperation and Development s project to combat BEPS requires companies to submit documentation providing tax authorities global blue print of their business operations Companies with revenues of 750 million or more must submit country by country reporting template to the government of their parent company That government will send the information to local jurisdictions where company has presence US country by country reporting required beginning in

25 Greater Transparency BEPS Ramifications Tax authorities will apply greater scrutiny around the level of substantive business operations conducted in low tax countries High profits, low tax and low headcount is likely to trigger investigation Increased scrutiny invariably leads to increased audits and administrative burden Reputational impact can occur due to unforeseen or misunderstood data arising from global transparency initiatives 25

26 Anti-Tax Avoidance Legislation UK Diverted Profits Tax (DPT) Effective April 1, 2015, at rate of 25% on profits considered artificially diverted from UK Intended to apply to large multinational companies with activities in UK entering into contrived (lacking economic substance) arrangements to divert profits from UK by avoiding UK permanent establishment and/or by other contrived arrangements between affiliated companies Rules under this tax drafted very broadly and potentially capture certain (re)insurance transactions 26

27 Anti-Tax Avoidance Legislation Australian Multinational Anti-Avoidance Law (MAAL) Similar to DPT, applies when profits are booked offshore when they should have been booked in an Australian entity Principal purpose must be to obtain tax benefit, not just in Australia, but anywhere Penalty of up to 100% of the tax benefit Australian Taxation office examining 200 multinational companies to see if they are subject to MAAL 27

28 Anti-Tax Avoidance Legislation Belgium Withholding Tax Recent legislation imposes 16.5% withholding tax on income paid from Belgium to a company residing in country not effectively taxing income Income includes (re)insurance premiums Exceptions from tax for payments to companies located in treaty countries 28

29 Taxation by Embarrassment Headlines have appeared all over Europe naming and shaming multinationals for not paying their fair share of taxes In December 2015, Australian tax authorities published records of hundreds of companies showing they paid little or no taxes on their earnings intending to embarrass the companies In recent hearings before European lawmakers questioning multinationals about their tax structures and not paying a fair amount of taxes, a Dutch lawmaker asked a Google executive, Does this activity embarrass Alphabet? 29

30 Taxation by Embarrassment US business community has lost global public relations battle on international tax planning The combination of outdated US laws and European tax competition has created a perfect storm of tax dysfunction and disharmony. Robert Stack, Deputy Assistant for International Tax Affairs, US Treasury Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one s taxes. Judge Learned Hand; Helvering v. Gregory, 69 F.2 nd 809, (2 nd Cir, 1934) 30

31 Questions & Answers 31

32 Disclosure AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds. Insurance coverage is account specific and is governed by actual policy language. This presentation does not constitute an offer to sell any of the insurance coverage or other products or services described herein. We do not provide legal, credit, tax, accounting or other professional advice, and you and your advisors should perform your own independent review with respect to such matters as they relate to your particular circumstances and reach your own independent conclusions regarding the benefits and risks of any proposed transaction or business relationship. American International Group, Inc. All rights reserved. American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 100 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. Additional information about AIG can be found at YouTube: LinkedIn: 32