GLOBAL INSURANCE POLICIES OVERCOMING THE REGULATORY & TAX CHALLENGES

Transcription

1 GLOBAL INSURANCE POLICIES OVERCOMING THE REGULATORY & TAX CHALLENGES 18 September 2014 IRMSA, South Africa Praveen Sharma Global Practice Leader - Insurance Regulatory & Tax Consulting Practice London

2 Agenda WHAT is the issue? WHY is it at an issue? WHO could be affected by such issues? WHAT should multinational companies consider and do? WHAT are the solutions offered by global insurers? MARSH 18 September 2014

3 WHAT are the most important issues at present for Multinational Companies when arranging global programmes?

4 Important issues for Multinational Companies COST OF RISK CONSISTENCY CONTRACT CERTAINTY The C6 Conundrum CLAIMS SETTLEMENT COMPLIANCE COMPREHENSIVE COVER

5 WHY has compliance of global programmes become such an important issue in recent years for Multinational Companies?

6 WHY compliance is an issue? INSURANCE REGULATORS INTERNAL FINANCE DEPARTMENT INTERNAL TAX DEPARTMENT COMPLIANCE PRESSURE INTERNAL & EXTERNAL INCOME TAX AUTHORITIES PREMIUM TAX AUTHORITIES CORPORATE GOVERNANCE

7 WHO can be affected by non-compliance with insurance regulations and tax rules?

8 WHO can be affected Mainly for Insureds and Insurers Licensing & Reputation for insurers and Brokers Evidence/Certificate of Insurance? Premium Payment and Recharges? NON COMPLIANCE ISSUES Premium Taxes who pays and when? Income Tax & Corporate Finance on Premium Deductibility and Claims Interest and Penalties

9 What Should Multinational Companies Consider

10 Issues for consideration Fundamentals of insurance programme structure and design Regulatory issues Taxation issues MARSH 18 September 2014

11 Fundamental issues that must be addressed first Insurable Risk? Insurable Interest? Risk Location?

12 Location of Risk Rules Generally Drives Programme Structure and Premium Tax Liabilities The ruling clarified definition of location of risk - generally: EU Second Non- Life Directive & ECJ ruling - Kvaerner plc v Staatssecretaris van Financien (2001) Property risk is located in the country in which the property is situated Liability risk is located where the establishment to which the policy relates is situated Establishment includes subsidiaries and branches Tax authorities in the EU can request payment of unpaid IPT if risk is located in their territory Irrelevant if total premium paid by the ultimate parent and not recharged to the subsidiary

13 Premium Allocation General Approach N th Layer 2 nd Layer Master Policy DIC/DIL (allocated using sales/tiv/headcount) 1 st Layer Local Policy A B C D E F Countries

14 Regulatory Issues

15 Regulatory Issues Diverse, Inconsistent and Frequently Unclear European Union Second Non-Life Directive: Freedom of Services, Location of Risk United States of America Insurance codes vary from state to state Introduction of Non-admitted & Reinsurance Reform Act NRRA 2011 Foreign Account Tax Compliance Act FATCA effective 1 st July 2014 Argentina, Brazil, Russia, India, China, ( ABRIC ) strictly prohibit nonadmitted insurance Reinsurance restrictions in all of these countries Memorandum of Understanding amongst Regulators 42 signatories

16 Regulatory Environment in Africa CIMA Legislation Insurers are required to either collect outstanding premiums or write off premium arrears by 31 December 2014 Algeria Compulsory third party liability for mining activities Namibia All insurance intermediaries advising on Namibian policies have to be registered All Namibian intermediaries advising on South African products have to be registered in accordance with South African regulations Uganda sponsors of clinical trials must insure against injuries and to indemnify the principal investigator against claims arising from the trial MARSH 18 September 2014

17 Regulatory Environment in Africa Kenya IRA introduced requirement for standardised wording for Goods-intransit, All risks, Fidelity Guarantee, Carrier s Liability, Products Liability with effect from 1 January 2014 Approval required for overseas cover particularly in the Oil & Gas sector Nigeria Introduction of no premium no cover Fines/penalties for insurers and brokers if insurance provided on credit Approval for reinsurance with offshore reinsurers harmonised Republic of Congo Premium tax increase from 8% to 10% Zambia Temporary measure to arrange and pay premiums in US$ MARSH 18 September 2014

18 Regulatory Environment in Africa - Continued Tanzania TIRA is considering major changes to the insurance laws such as increasing capital requirements and credit rating for insurers Angola New rules to be introduced to insure imports with a local insurer Monetary transfers to overseas countries, without National Bank of Angola approval, has been increased from USD 300,000 to USD 1mn South Africa Direct placement of insurance with offshore insurers approval process Proposal to prohibit insurers to charge fees Ghana Cash before cover and all premiums paid to insurers, rather than brokers VAT on insurance premiums at 15% MARSH 18 September 2014

19 Regulatory risk: are they real? Case 1: Regulator in Argentina imposed fines in respect of unauthorised (non-admitted) life insurance transaction insured fined 8 times insurance spend, broker 15 times the premium. Case 2: Swiss insurance broker purchased a compulsory PI policy from a foreign insurer not admitted ins Switzerland. Swiss regulator didn t accept it as a valid contract, and prohibited the broker from practising in Switzerland. Case 3: Regulator in Mexico reminded the market of violating the local insurance laws and that potential penalties could be prison sentence of between 3 and 10 years. Case 4: Regulator in Brazil issued fines of US$6.2 billion to a US insurer for selling life insurance in Brazil on a non-admitted basis. Case 5: On 15 April 2014 Kenya IRA issued a circular to insurance companies and brokers reminding them of authorisation rules before any non-admitted placements MARSH 18 September 2014

20 Taxation Issues

21 Taxation Issues General Overview Technical developments Kvaerner ECJ precedent Mutual Assistance Directive in the EU 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 South Africa, Australia, Chile, Peru, New Zealand, USA and Canada 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! May create double taxation implications

22 Income Tax Paradox

23 Potential Income Tax Paradox An example Profit & Loss Account Overseas Subsidiary (Nonadmitted not permitted) Ultimate South Africa Parent Premium expense paid to insurer centrally premium taxes may not be paid correctly (1,000,000) Premium recharged may not be tax deductible at subsidiary level (500,000) 500,000 Insurance Premium Tax average rate of 11% 55,000 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)

24 WHAT should multinational companies do? Pragmatic and Practical Approach

25 C3 Concept Pragmatic and Practical Design of Global Insurance Programme Coverage Cost Compliance

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27 What Should Multinational Companies Do? A recommended process Degree of compliance? Evaluate your needs? Establish & challenge insurers approach? Premium Allocation? Other Taxes on premiums/ claims? 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 the 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? Tariff Rates Agreement of all parties? 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 Premium taxes, Federal Excise Tax, Income Tax, Direct Procurement Tax etc? DOCUMENT

28 An example: Possible Structure for a Global Programme Manhattan Skyline EU freedom of services policy Master Policy/DIC/DIL Local Policy Local Policy Local Policy Local Policy Local Policy Local Policy Local Policy Local Policy EU A B C D E F G Countries

29 Premium Allocation Suggested Approach 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

30 WHAT are the solutions offered by global insurers to address compliance issues for multinational companies?

31 Financial Interest Cover Clause EU freedom of services policy Master Policy/DIC/DIL subsidiary insured Master Policy/DIC/DIL with financial interest cover overseas entity not insured Local Policy Local Policies in countries where non-admitted is permitted Local Policies in countries where nonadmitted is permitted Local Policies in countries where nonadmitted is permitted Local Policies in countries where con-admitted is NOT permitted Local Policies in countries where Nonadmitted is NOT permitted Local Policies in countries where Nonadmitted is NOT permitted Local Policies in countries where Nonadmitted is NOT permitted EU N A P B R I C Countries MARSH September

32 Financial Interest Cover Clause MARSH September

33 Tax Warranty/Indemnity Clause in Master Policy Loss payment due under this Clause = C A B C A - local tax benefit received where the loss occurred. B - 1 minus the effective tax rate in the country where loss payments are received. C - actual loss otherwise payable under this policy, except for the operation of this clause.

34 In Conclusion An I D E A I dentify group exposure and location of risk D etermine regulatory and tax rules for major territories E stablish various options for an efficient global program A dopt a disciplined and consistent approach MARSH 18 September 2014

35 Questions and Answers? Contact Details: Praveen Sharma, Senior Vice President Insurance Regulatory & Tax Consulting Practice Global Leader Direct Tel: Mobile: This PowerPoint presentation is based on sources we believe reliable and should be understood to be general risk management and insurance information only. Statements concerning tax, accounting, and legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as tax, accounting, or legal advice, which we are not authorised to provide. All such matters should be reviewed with the client s own qualified tax, accounting, and legal advisors in these areas. Depending upon an organisation's facts and circumstances, certain tax or accounting benefits may be associated with this product. Organisations should consult with their tax, accounting, and legal advisors to determine whether such benefits would be applicable. Registered in England and Wales Number: , Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU In the United Kingdom Marsh Ltd is authorised and regulated by the Financial Conduct Authority for insurance mediation activities only. Marsh Ltd conducts its general insurance activities on terms that are set out in the document "Our Business Principles and Practices". This may be viewed on our website Copyright 2014 Marsh Ltd All rights reserved