Insurance industry share concerns on UN tax proposals

16 April 2024

The Global Federation of Insurance Associations (GFIA) has commented on a proposal by the UN Tax Committee – a group of experts on international cooperation in tax matters – that would revise a UN Model Convention and offer guidance on 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. It would also 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 insurance premiums. The draft commentary contains an optional alternative under which the state in which an insured risk is situated may tax the premium in certain circumstances.

GFIA shared the following comments in responding to the draft proposal by the UN Tax Committee:

  • Insurance companies are heavily regulated and need to be close to their customers, the insured. They typically have a physical presence where they operate, in most cases qualifying as a permanent establishment;
  • Insurance premiums are not a good measure of a companies’ profit because they're collected upfront, while expenses are paid later over the duration of the coverage (e.g. general expenses, claims);
  • Reinsurance is a way for insurance companies to diversify risk and to have access to larger capital pools, it is not a mean to shift profit.

GFIA also made the following, more specific points about the proposal:

  • Definition of insurance premiums needs some further clarifications, especially about the term “insurance enterprise” to give more clarity to the scope of insurance premiums. Indeed, it is not clear whether the definition would cover life insurance premiums that include an investment element;
  • Introduces the notion of beneficial ownership of premiums for the purpose of determining 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.
  • Issues arising from the location of risk. The proposal provides for a payment rule which considers that premiums arise in the jurisdiction where the payer is a resident or has a permanent establishment. Some members of the Committee are concerned that the payment rule may fail in some instances, for instance 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. This could lead to double taxation as domestic laws are unlikely to be wholly aligned on the location of risks and especially so concerning reinsurance.
  • Taxation on gross premiums. The proposal would 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. There is also a risk of double taxation on the same insurance risk through the application of a withholding tax on gross insurance and reinsurance premiums.

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