The Asia Pacific region embodies a multitude of different tax systems, ranging from the highly sophisticated to the less developed. Nevertheless, it is possible to discern trends as countries modernise their tax structures and defend their fiscal borders through a combination of base erosion and profit shifting-inspired developments and unilateral actions. EY APAC insurance tax leader Dale Judd provides some insights.
For multinational insurers, the increased scrutiny on tax risk is set against a background of increasing regulation and sophisticated risk-based models. We discuss the trends from around the region and provide insurers operating in the Asia Pacific area with practical recommendations on how to mitigate tax risk.
The most obvious tax development is in transfer pricing and a tightening of rules, particularly around documentation requirements for multinational groups. Countries such as Australia have been operating rigorous regimes for some time, but for others such as Singapore, transfer pricing vigilance has increased and documentation has shifted from ‘nice to have’ to ‘must have’. Enhanced documentation standards are a key part of the base erosion and profit shifting (BEPS) actions, but it seems likely that even without BEPS, governments would protect their international borders — and tighter transfer pricing rules are an obvious part of the solution.
Lack of uniformity in approach
Although many Asia Pacific countries are not members of the G20 or OECD, they watch BEPS closely. In contrast to the EU, there is little uniformity in their approach to BEPS. Countries balance their own interests with the need to be good global citizens. Many are adopting the OECD’s common reporting standard framework. Others in non-OECD member countries are likely to be signatories to the multilateral instrument that will introduce the OECD’s recommendations on treaty abuse directly into their own double-tax treaties.
Insurers will continue to undertake further work on financial services issues, including the definition of taxable permanent establishments and risk transfer in intragroup reinsurance. Regulatory and tax authorities are expected to scrutinise intragroup reinsurance arrangements and build their understanding of how they operate and ensure the taxation of the transaction is coherent.
Another key premise of the OECD’s work has been transparency. Naming and shaming already exists in the region. The Philippines lists the top companies who pay little or no tax, and insurers are often featured.
Multinationals held to account
Australia also has rules requiring tax authorities to publish information on taxable income and tax paid by large companies. The country-by-country reporting (CBCR) framework, which is part of Action 13 of the BEPS framework, requires large multinationals to provide an annual return that breaks down key elements of the financial statements by jurisdiction. This is already being adopted in Asia, and several multinational insurers are undertaking dry run exercises to identify jurisdictions that might attract attention because their balance of revenues, tax paid and headcounts are out of line with expected industry norms. The OECD intends for tax authorities to use their reporting tool in assessing the risk of a group’s transfer pricing.
The global context of the insurance business naturally leads to tax controversy, dispute resolution and managing uncertainty as part of the tax life cycle across: planning, controversy, compliance and financial reporting.
With these risks expected to grow — what can be done to mitigate them? Conversations with EY Financial Services transfer pricing partner Justin Kyte and EY Asia-Pacific financial services tax leader Ian McNeill indicate that controversy is on the rise for financial institutions, including insurers of all shapes and sizes. However, the risk rises significantly for those displaying following characteristics:
- Large insurer with multiple lines of business across life and general insurance. Asian regulators tend to target the largest enterprises for tax and especially transfer pricing audits around head office allocation charges. This makes sense, said Mr McNeill, ‘because naturally for financial institutions, this is where the cash flows are greater and more value is at stake, so it warrants further investigation with greater resources and focus’.
- The business has extensive cross-border flows between affiliates. Authorities are laser-focused today on transfer pricing. As Mr Kyte said, for tax authorities, ‘it’s a lot easier to make a transfer pricing adjustment than to deal with complex technical issues, such as intra-group reinsurance arrangements, which require further sophistication from regulators in Asia’.
Further, as tax authorities gain greater access to data, for example, via BEPS-driven master files and CBCR, their efforts are becoming more targeted. Consequently, transfer pricing is becoming the tool of choice for most revenue authorities. It may be a blunt but effective instrument.
Tax jurisdictions are becoming much more active in sharing taxpayer data with one another, which is increasing the frequency of simultaneous audits across multiple jurisdictions.
Tax controversy solutions
What can insurers do to mitigate tax risk? Tax authorities have the right to demand that businesses apply tax and regulatory rules appropriately. But at the same time, that means businesses themselves must become better prepared to prevent, manage and resolve tax controversy.
Appropriate preparation requires attention to the myriad ways to manage tax risk better including connecting tax to the business and having a systemic approach to achieving greater ‘certainty’. The following are some suggested strategies:
- Get the tax ecosystem better connected with the risk and finance function. One of those most critical issues, said Mr McNeill, ‘is making certain that the C-suite and board are connected into the conversation and are keenly aware that we’ve entered an era of greater tax transparency’. Accordingly, should controversy arise – it becomes absolutely essential that tax policies and practices are ready for closer scrutiny.
- Adopt a risk management approach. Tax should no longer be treated as a mere compliance issue sitting with the local business unit. Insurers should assess the current state of their tax function and diagnose what the optimal model is in the new operating environment. Any gaps identified should be mitigated by a plan of action via solutions, including technology that could streamline business as usual reporting and highlight risks on a proactive basis across direct and indirect taxes. In other words, insurers need to begin thinking strategically about their tax risk. This means a more robust, clearly discernible and defensible strategy that cascades through the business.
- Consider options for greater certainty. A growing number of nations are today offering more options and more streamlined application and approval processes for tools, such as advance pricing agreements. Businesses hoping to reduce their tax uncertainty, said Mr Kyte, should give such instruments a closer look.
Overall, insurers in Asia need to establish a formal and comprehensive tax controversy risk management framework. They will be better equipped to track, monitor and learn from their controversy matters, as their model for managing tax risk becomes better aligned with their overall business and enterprise risk framework. A
Disclaimer: This article contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organisation cannot accept responsibility for loss to any person relying on this article.
This feature is part of a series developed for the Asian Insurance CFO Summit, jointly organised by AIR and EY.