2015 Withholding Tax Guidance Note

Transcription

1 2015 Withhlding Tax Guidance Nte

2 1 Withhlding Tax Guidance Nte Cntents Table f Cntents 1. Intrductin Tax asset under Slvency II... 3

3 Withhlding Tax Guidance 2 1. Intrductin In Nvember 2009 the Central Bank f Ireland ( the Central Bank ) issued a letter t all life assurance cmpanies that had pted int the Italian Withhlding Tax regime. This set ut guidance n the methds and discunt rates that culd be used t value the tax recveries available in respect f that regime (the tax asset ), as well as guidance n liquidity cnsideratins, reserving fr future prepayments and disclsures t the Central Bank. In December 2012 new legislatin, Italian Law n. 228 f 24 December 2012 (the s-called Legge di Stabilità r Stability Law), was passed t increase the prepayment rate t 0.45% p.a. (with a ne ff rate f 0.5% fr 2012). A cap n the ttal amunt f the prepayment f 2.5% f the fund value was als intrduced with this cap reducing by 0.1% p.a. until it reaches 1.25%. In April 2013 the Central Bank issued a survey requesting varius details and asking fr a number f stresses t be tested. The review highlighted: A variety f legal interpretatins f hw and when recveries f the tax asset can be made; A variety f appraches and justificatins t using the asset t back technical reserves; and Varius cnsideratins with regard t liquidity and the prprtin f available assets cming frm these tax recveries. Cnsequently in 2014, the Central Bank released further guidance and requirements against the treatment f the tax asset. The Central Bank s main cncerns remain that: An apprpriate value is placed n the tax asset recveries; Cmpanies make prvisin fr adequate recgnitin f the illiquid nature f the tax asset; and Cmpanies make prvisin fr adequate recgnitin f any cncentratin risk. The Central Bank als wishes t ensure cmpanies adpt cnsistent practices, where apprpriate, in relatin t the tax asset held with a view t ensuring a level playing field. The purpse f this paper is t set ut hw the Central Bank expects cmpanies t take the tax asset int cnsideratin in a Slvency II envirnment. Please nte guidance issued in 2009 and 2014 has been incrprated int this paper.

4 3 Withhlding Tax Guidance Nte 2. Tax Asset under Slvency II Slvency II remves all quantitative restrictins n what assets insurers may invest in. Hwever, all investments must be subject t the Prudent Persn Principle 1. Undertakings must develp an apprpriate investment framewrk as part f the Risk Management System and further cnsider the Guidelines n systems f gvernance 2. These particular areas are further discussed and illustrated thrughut this guidance nte. In summary, Slvency II fcuses n ensuring that apprpriate capital is held fr the assets invested in and accrdingly requires apprpriate risk management systems t supprt the apprpriate management f assets. 2.1 Prudent Persn Principle Slvency II remves all quantitative restrictins n the type f assets insurers can hld, but in return it requires firms t invest all their assets in accrdance with Slvency II investment rules. Slvency II investment rules require undertakings t invest all their assets, including a tax asset, in accrdance with the prudent persn principle. T cmply with the prudent persn principle, undertakings must: Invest all their funds, including thse used t cver the capital requirements and the technical prvisins, in assets whse risks the undertaking can prperly identify, measure, mnitr, manage, cntrl, reprt and take int accunt in their Own Risk and Slvency Assessment (ORSA); Invest all assets, particularly thse cvering the MCR and the SCR, in such a way as t ensure the whle prtfli f assets security, quality, liquidity and prfitability; Invest the assets held t cver its technical prvisins in a manner apprpriate t the nature and duratin f the undertaking s technical prvisins; Ensure that wherever the assets are lcated, these are available; Ensure that the assets are prperly diversified; Ensure that, when derivative instruments are held, these cntribute t a reductin f risks r facilitate efficient prtfli management, and; Ensure that excessive risk cncentratin is avided. This underpins the Central Bank s cncerns that prvisin is made fr adequate recgnitin f the illiquid nature f the tax asset and any cncentratin risk. 1 Article 132 f the Slvency II Directive. 2 Article 260 f the Delegated Regulatin and Guidelines f the EIOPA guidelines n system f gvernance.

5 Withhlding Tax Guidance Gvernance & Reprting Undertakings are required t dcument aspects f the investment framewrk as part f their risk management system 3. This includes plicies n assetliability management, investment risk management, liquidity and cncentratin risk management. As part f such plicies, undertakings are required t cnsider the actins they take t ensure that they cmply with the prudent persn principle, including with regard t a tax asset. The key cnsideratins include: The level f security, quality, liquidity, and prfitability the undertaking is aiming fr with regard t the whle prtfli f assets and hw it plans t achieve this 4 ; Quantitative limits n assets and expsures, including ff-balance sheet expsures, that are t be established t help the undertaking achieve its desired level f security, quality, liquidity, prfitability and availability fr the prtfli 5 ; Ttal liquidity needs in the shrt and medium term including an apprpriate liquidity buffer t guard against a liquidity shrtfall 6 ; Level and mnitring f liquid assets, including a quantificatin f ptential csts r financial lsses arising frm an enfrced realisatin 7 ; The level f diversificatin f the prtfli as a whle 8 ; Identificatin and assessment f different natures f mismatches between assets and liabilities, tgether with a descriptin f mitigatin techniques t be used 9 ; and Identificatin and assessment f the factrs r circumstances that culd impair the availability f assets, in particular f the assets held t cver capital requirements Article 44 f the Slvency II Directive. 4 Guideline 25 Guidelines n systems f gvernance. 5 Guideline 25 Guidelines n systems f gvernance. 6 Guideline 26 Guidelines n systems f gvernance. 7 Guideline 26 Guidelines n systems f gvernance. 8 Guideline 29 Guidelines n systems f gvernance. 9 Guideline 24 Guidelines n systems f gvernance. 10 Guideline 29 Guidelines n systems f gvernance.

6 5 Withhlding Tax Guidance Nte 2.3 Risk Appetite & Liquidity Plicy Reflecting the abve cnsideratins, with regard t the tax asset the Central Bank wuld expect at a minimum Undertakings establish and maintain the fllwing: A Risk Appetite Statement (RAS) addressing the illiquid nature f the tax asset and ptential cncentratin risk that that asset prvides. The RAS shuld be apprved by the bard f directrs f a cmpany in accrdance with the Crprate Gvernance Cde fr Credit Institutins and Insurance Undertakings; Quantitative limits set ut in the RAS shuld be infrmed by the ORSA and be reviewed and updated n a regular basis. A Liquidity Plicy Assessing the illiquid nature f the tax asset, and the ptential cncentratin risk that the asset gives rise t; Dcumenting liquidity needs in the shrt and medium term including an apprpriate liquidity buffer, reflecting the abve assessment; In determining an apprpriate liquidity buffer Undertakings shuld subject liquidity prjectins t a sufficiently wide range f stress tests cnsistent with a Slvency II standard; Setting ut an apprpriate valuatin apprach and full justificatin f the apprach adpted; Highlighting the level f mnitring f liquid assets and prtfli diversificatin; Addressing hw and when the Undertaking expects t make the tax asset liquid and any measures that may be available t realise that asset in times f stress; If the Undertaking assumes that it can transfer the asset within the grup r makes use f ther lines f credit, it must demnstrate hw these liquidity channels will be available in times f stress;

7 Withhlding Tax Guidance 6 As infrmed by the ORSA prcess, the Liquidity Plicy shuld include a full justificatin f any prpsed use f the tax asset t cver the capital requirements and the technical prvisins and an assessment f whether any restrictins are required. This shuld cnsider the term f the asset and any liabilities and r capital requirements it is used t back; The justificatin shuld als cnsider the illiquid nature f any negative technical prvisins; This justificatin shuld be set ut in the cntext f the verall liquidity requirements f the Undertaking and the nature and liquidity prfile f the ther assets held by the Undertaking fr these purpses; Undertakings shuld expect rigrus supervisry engagement where the tax asset is used t cver the capital requirements and the technical prvisins. Additinally, undertakings must cmply with certain reprting requirements in relatin t their investments. Specifically regarding the tax asset, quantitative reprting n the abve cnsideratins shuld be develped and included with the Regular Supervisry Reprt (RSR), the Slvency & Financial Cnditin Reprt (SFCR) and/r ORSA as apprpriate.

8 7 Withhlding Tax Guidance Nte 2.4 Own Risk & Slvency Assessment ( ORSA ) Under the ORSA prcess Undertakings hlding a tax asset shuld cnsider the impact that this asset has n their liquidity and the ptential impact n their slvency needs. Explicit cnsideratin shuld be given t the degree f mismatch f Assets and Liabilities (in additin t ther illiquid assets) n the balance sheet, as well as significant cncentratin risk. As part f this assessment material risks identified shuld be subject t a sufficiently wide range f stress tests r scenari tests in rder t prvide an adequate basis fr the assessment f the verall slvency needs f a cmpany. These shuld be sufficiently brad as t ensure that the bard f directrs f a cmpany is fully infrmed f all the risks assciated with making the prepayments and hlding the resulting asset. As a minimum these tests shuld cver variatins in the fllwing assumptins, individually and cmbined, cnsistent with a Slvency II standard: i. Future investment cnditins; ii. Levels f new business, where this is being written; iii. Expenses; iv. Exercising f ptins by plicyhlders; v. Persistency; and vi. Taxatin. The prjectins shuld be cnsistent the Liquidity Plicy and highlight situatins under which quantitative limits, under the RAS r therwise, are breached. Actins t be taken when these limits are breached shuld be dcumented.

9 T F insurance@centralbank.ie Bsca PO 11517, Duga Spencer, Baile Átha Cliath 1, Éire PO. Bx N 11517, Spencer Dck, Dublin 1, Ireland