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The G7 tax agreement and what it means for multinational insurers

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Recent media reports of the G7 tax agreement have essentially given the go-ahead for OECD “Pillar One” and “Pillar Two” proposals to be taken to the G20 and then back to the OECD/Inclusive Framework for finalisation. We have outlined below what this means for multinational insurers and what you should do next.

Overview

Broadly, Pillar One proposes a new approach towards allocation of taxing rights of the ‘super’ profits of the largest MNEs (above a revenue threshold – yet to be determined – but speculated to apply to the “world’s largest companies” and 20% of profits redistributed above a 10% margin).  Pillar Two focuses on implementing a new global minimum tax, to apply to collect top-up taxes related to all jurisdictions in the group where the effective tax rate is below the minimum threshold, now widely expected to be 15%.

The G7 agreement was to some extent largely expected and does not really change anything at this stage since this simply gives the green light to take the proposals to the G20 and for discussions to continue at the OECD/Inclusive Framework level.  However, the recent press statements indicate that the political stance of the major countries are not aligned, with the US focusing on pushing forward Pillar Two and wanting to protect its tech giants from Pillar One, whereas the UK is heavily focused on pushing Pillar One and seemingly not wholly convinced on Pillar Two.

This all implies that it is critical that both Pillars are accepted as a package.  However, there seems to be an expectation gap as to the effectiveness of Pillar One given the thresholds (and whether a certain online retailer will or will not be caught) which will need to be worked through.  On Pillar Two the mechanics are still far from resolved.  It is therefore important to monitor developments and to start work on impact assessments to ensure that the detailed mechanics of the Pillar Two rules are both appropriate and workable.

Ireland’s stance is still that any final deal on reforming global corporation tax rules must accommodate legitimate tax competition within certain boundaries and meet the needs of both small and large countries with Minister Donohoe tweeting;

“I look forward now to engaging in the discussions at OECD. There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing.”

We do not expect insurers generally to be impacted by Pillar One given the proposed thresholds and the fact the industry has lobbied hard for a financial services carve-out which we understand is still hoped to be accepted.

Pillar Two and the key points for multinational insurers

In principle, the global minimum rate is expected to have a significant impact on multinational insurers as compared to other industries.  This is because in the current OECD blueprint the calculation of the effective tax rate when compared to the global minimum threshold does not include deferred tax, so would not include timing differences which are typically very large for the insurance industry.

The impacts of implementing Pillar Two will be significant wherever insurers are headquartered:

  • For insurers headquartered in jurisdictions that adopt the proposals (broadly expected to be at least the 33 OECD Member States including the UK, EU and Canada), this may lead to significant additional taxes payable in the HQ location in relation to operations in low tax countries, particularly where the HQ jurisdiction either does not currently have CFC rules or has CFC rules with substance and capital carve-outs.
  • For insurers headquartered in the US, there is a question as to how the existing US rules (which themselves are currently going through reform) will align with the new proposals.
  • For insurers headquartered in jurisdictions that do not adopt the proposals (Bermuda), it appears likely that profits are taxed in another jurisdiction, with different territories potentially having taxing rights each year leading to significant uncertainty and additional cost.

The rules as currently drafted do not properly address the fact that there may be top-up tax for insurance groups with operations in jurisdictions that would ordinarily be regarded as high tax and these rules need further development.  Some modelling has shown that due to the quirks in the rules, territories ordinarily seen as high tax (e.g. US, Australia, Germany) can appear low tax in the calculation resulting in significant additional tax on operations in “high tax” jurisdictions.

Furthermore, there are likely to be significant regulatory obstacles to operating entities being required to pay taxes related to another entity in a different jurisdiction.

What should you do next?
  • Monitor developments – the proposals will next go to the G20 in July and to the OECD Inclusive Framework for consensus later in the Summer / Autumn.
  • Impact assessments – in particular, determining the impacts of using deferred tax.  Consider contingency plans.  We can help with this.
  • Engage with governments in discussions – implementation is potentially 2023 onwards and in many countries, this will require significant legislative change.

For more information on the G7 tax agreement, you can read the EY Global Alert here. If you want to discuss this in further detail, or if you have any questions, please do not hesitate to get in touch.

Sandra Dawson

FS Associate Partner, Tax
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