The Global Federation of Insurance Associations (GFIA) has expressed its concerns over the proposal by the United Nations Tax Committee, a group of experts on international cooperation in tax matters that would revise a UN Model Convention and help plan how to address income from cross-border reinsurance and insurance activities.
The Committee is proposing that insurance premiums be taxed in the state of residence of the payee. This would allow the state of residence of the payer or the state in which a permanent establishment that makes the payment is situated, to tax insurance premiums at a rate that shall not exceed an agreed percentage of the gross amount of the premiums.
The draft commentary contains an optional alternative under which the state where an insured risk is situated may tax the premium in certain circumstances.
GFIA has said that insurers are heavily regulated and need to be close to their customers, where insurers typically have a physical presence where they operate, in most cases qualifying as a permanent establishment.
It is being said that insurance premiums are not a good measure of a company’s profit because they’re collected upfront, while expenses are paid later throughout the coverage.
GFIA has more specifically added that the definition of insurance premiums needs some further clarifications by the company, especially the term “insurance enterprise” to offer clarity to the scope of insurance premiums.
“The proposal also introduces the notion of beneficial ownership of premiums to determine the actual recipient of the premiums. The draft commentary considers that an insurer may not be the beneficial owner of premiums which it receives if it cedes some or all of the business by way of reinsurance. This does not seem right in principle and would give rise to significant difficulties in practice,” clarified GFIA.
Another issue arises from the location of risk. Some members of the Committee are concerned that the payment rule may fail in some instances, such as in the case of an insurance policy covering risks in multiple jurisdictions. However, determining the location of a risk insured by an insurance policy is difficult, and there is a concern that this could lead to double taxation as domestic laws are unlikely to be wholly aligned on the location of risks especially so concerning reinsurance.
The proposal would also allow a contracting state to levy a withholding tax on all premiums collected locally except in instances where insurance is provided through a permanent establishment. Although taxing gross premiums may seem the easiest way to collect taxes in the source state, gross premiums cannot serve as a valid proxy for profits since the actual profit of the insurer or the reinsurer, if any, may be considerably lower, says the GFIA.
