There are a few upcoming regulatory tax projects which will affect the Swiss insurance industry. On a global level these include the latest tax risks facing the industry in light of the OECD’s base erosion and profit shifting (BEPS) reports. Among others, BEPS will affect the following fields:
- Permanent establishment considerations: The new standard is broader and potentially increases the tax risk for permanent establishments. Especially in today’s digital world, the use of new technology and the direct selling of insurance products via internet could lead to an increased number of tax jurisdictions in which an insurance company is exposed to taxation.
- Transfer pricing: Insurance companies must look at the actual risks assumed, the services offered and whether a transaction would have a commercial rationale if it were performed between unrelated companies. Further guidance is still expected on what “arm’s length” means for insurance, and especially, reinsurance transactions.
- Country-by-country reporting: BEPS focuses on where people are adding value. This can be quite different from how regulated and capital-intensive businesses such as insurance companies earn income. This divergence could create tax risks. If the location of employees is considered to be the leading indicator of where value is added, then the traditional approach of taxing insurance companies based upon location of the capital and insurance risk could be a thing of the past.
BEPS is designed to give the tax authorities the tools to combat inappropriate tax planning strategies and increase the transparency of insurance groups’ global tax affairs. All these developments will lead to greater controls, disclosures and challenges in managing their global tax risk and reporting requirements.
The international tax initiatives will materially affect Switzerland’s taxation landscape over the next few years. These challenges and their impact on Swiss insurance companies need to be analyzed carefully to transform them into opportunities. These opportunities are further explored in this year’s KPMG issue of Clarity on Non-Life Insurance.
- Developments in the Zurich insurance tax practice: In November 2015, the tax practice regarding recording of lump-sum provisions on securities has been strengthened. Insurance companies are recommended to address the details of the new practice upfront with the cantonal tax authorities, under consideration of the company’s general loss situation and business projections and, more notably, the upcoming Swiss Corporate Tax Reform III.
- Swiss Corporate Tax Reform III (CTR III): CTR III is an important reform package with the aim of retaining and enhancing Switzerland’s competitiveness as a business location in the light of international developments. The Swiss public will vote on the CTR III in February 2017. If accepted by the Swiss public, CTR III will be effective as of 1 January, 2019. As from that date, privileged tax statuses as e.g., holding company or mixed company will be abolished and new internationally accepted tax incentives will be implemented. These aspects will potentially be interesting for Swiss insurance companies:
- Step-up: The step-up is a transitional measure and will allow insurance companies to continue the low tax regime on future releases of hidden reserves and goodwill. As several step-up possibilities are available, each company needs to decide which option is best tailored to its business needs.
- Notional Interest Deduction (NID): NID accounts for the fact that interest payments on debt are tax deductible, but not dividend payments on equity, by granting a deemed interest expense on certain equity.
- Reduction of cantonal corporate income tax rates: The draft of the CTR III law also mentions the possibility for cantons to lower their income tax rates. Almost every second canton has already started to work in this direction. The Zurich cantonal government suggests a target income tax rate of 18.2% (currently 21.1%). This will be beneficial to all Zurich insurance companies. As soon as the proposed tax rate is enacted, all insurance companies will have to apply the new tax rate not only for current, but also deferred, tax calculations – probably resulting in a substantial one-off tax impact.
- BEPS and CBCR: Switzerland will implement CBCR in 2018. It’s important to tailor the compliance process to gather data and prepare the CBCR. However, it’s even more important to anticipate how the tax administrations in all countries concerned will interpret the information they receive. To reduce the overall risk, it is imperative to assess how the CBCR aligns with the transfer-pricing documentation.
- BEPS and ruling exchange: As from 2018 onwards, Switzerland will conduct a (spontaneous) exchange of information with other countries concerning tax rulings. This is applicable to tax rulings that were approved from 2010 onwards and are still in force in 2018. Many Swiss insurance companies have tax rulings in place. Careful analysis regarding the potential impact of the information exchange needs to be conducted and decisions need to be made on whether a tax ruling should be withdrawn.
The OECD BEPS project is one of the most significant developments in international tax in the last 50 years and the trend towards more complex and restrictive tax rules is likely to continue. The BEPS project impacts local tax legislation in Switzerland and also EU tax legislation (e.g. EU draft Anti-Tax Avoidance Package) as well as a tax authority’s behavior in performing tax audits. All these changes need to be anticipated early by the Swiss insurance industry in order to accurately avoid tax and reputational risks. Entire insurance company boards, not only their global tax directors, may need to devote greater time to discussing tax issues than they have done in the past. Failure to properly prepare could result in unexpected tax assessments, reputational risk and a competitive disadvantage.