Regulatory and Tax Impact on Global Programs: How to Avoid Unbudgeted Costs GRM010

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2 Regulatory and Tax Impact on Global Programs: How to Avoid Unbudgeted Costs GRM010 Speakers: Julia Graham, President, FERMA Praveen Sharma, Global Practice Leader, IRT Consulting, Marsh

3 Learning Objectives At the end of this session, you will understand: Expectations of a risk manager What are they: both internal and external Unbudgeted costs experiences of the risk manager What are the regulatory and tax challenges Insurance regulations and tax rules and why they exist Possible unbudgeted costs for multinational companies How should risk managers address such issues No silver magic bullet but a disciplined process Resources available and how to access them

4 FERMA's Credentials

5 Expectations of a Risk Manager COST OF RISK CONSISTENCY CLAIMS SETTLEMENT The C6 Conundrum CONTRACT CERTAINTY COMPLIANCE COMPREHENSIVE COVER

6 Why Is Compliance Important? INSURANCE REGULATORS INTERNAL FINANCE DEPARTMENT INTERNAL TAX DEPARTMENT COMPLIANCE PRESSURE INTERNAL & EXTERNAL CORPORATE GOVERNANCE INCOME TAX AUTHORITIES PREMIUM TAX AUTHORITIES

7 Implications of Non-Compliance Evidence/Certificate of Insurance? Premium Payment and Recharges? Licensing & Reputation for insurers NON COMPLIANCE ISSUES Premium Taxes who pays and when? Income Tax & Corporate Finance on Premium Deductibility and Claims Interest and Penalties

8 Shifting Regulatory Landscape European Union Second Non-Life Directive: Freedom of Services, Location of Risk Africa Generally restrictions on fronting, reinsurance, and exemptions Asia General focus on risk-based solvency for local insurers United States of America Introduction of Non-admitted & Reinsurance Reform Act NRRA 2011 Foreign Account Tax Compliance Act effective from 1 July 2014 Argentina, Brazil, Russia, India, China Strictly prohibit non-admitted insurance Reinsurance and Foreign Exchange control restrictions in all of these countries IAIS: Memorandum of Understanding 43 signatories

9 Shifting Taxation Landscape Technical developments Kvaerner European Courts of Justice precedent Tax rates Income tax rates reducing due to economic circumstances Premium tax rates increasing or new rates being introduced Tax authorities want their pound of flesh Increasing number of IPT audits being conducted EU, US, Canada, Switzerland, New Zealand South Africa, Chile, Peru, Australia, New Zealand, US, and Canada Premium tax rules generally misunderstood Taxes payable by INSURED directly to tax authorities on non-admitted insurance premiums Income/corporate tax implications Premium deductibility may be denied in certain territories Claims from insurers may be taxed twice!

10 Shifting Taxation Landscape Premium tax rates 2008 Netherlands: 7.5% Finland: 22% Hungary: NIL India: 12.36% Mexico: 15% Ireland: 2% UK: 5%/17.5% Premium tax rates 2015 Netherlands: 21% Finland: 24% Hungary: 10% India: 14% Mexico: 16% Ireland: 5% UK: 6%/20%

11 Unbudgeted Tax Cost Profit & Loss Account Overseas Subsidiary (Non-admitted not permitted) Ultimate US Parent Loss suffered by the overseas subsidiary (10,000,000) Claims received from non-admitted insurer may be treated as Taxable Income by the local tax authorities 10,000,000 Tax may be suffered by Ultimate Parent on Claims avg. income tax rate 25% (2,500,000) Transfer of net cash by Ultimate Parent to Overseas Subsidiary may be treated as income and suffer additional income tax locally 7,500,000 Potential risk of Double Taxation: Tax liability by the Overseas Subsidiary on the amount received from the Ultimate Parent say at 25% (1,875,000)

12 What Should Risk Managers Do? Coverage Cost Compliance

13 A Disciplined Process Understand your risks Evaluate your needs? Establish & challenge insurers approach? Premium allocation? Premium recharge? Premium related taxes? What are the insurable risks? Where are the insurable risks located? Who has an insurable interest in the loss? Awareness of regulatory and tax risks particularly in the MAJOR countries Determine appropriate level of cover locally and group-wide Establish how the risk could be covered Clarify where claims need to be paid by insurer? Cost/Benefit analysis of potential options Regulatory and Tax risks Compliance with insurance and tax regulations Policy wording/ Endorsements Where will the insurer pay the claim? Just and reasonable basis? Simple allocation methodology may not be equitable Use of appropriate underwriting factors? Agreement of all parties? DOCUMENT Premium deductibility? Premium recharge consistent with allocation? Transfer pricing connected parties Potential double taxation on claims? Premiums that are not recharged? Premium taxes unpaid where insurer unlicensed? Insured s tax liability Federal Excise Tax, Income Tax, Direct Procurement Tax, etc.?

14 Premium Allocation N th Layer 2 nd Layer Master Policy DIC/DIL (allocated using all relevant underwriting factors) 1 st Layer Local Policy A B C D E F Countries

15 In Conclusion: An I D E A I D E A dentify etermine stablish dopt group exposure and location of risk regulatory and tax rules for major territories various options for an efficient global program a disciplined and consistent approach