1 KPMG Meijburg & Co FS insurance seminar Branche expertise verzekerd 27 mei 2014
2 Welkom en introductie
3 Welkom en introductie crisis transparantie provisieverbod digitalisering AIFMD Solvency II consolidatie OESO leadgeneration toezicht & regelgeving FATCA tax fairness debat SEPA IFRS IV woekerpolissen kostenefficiëntie EU outsourcing
4 Programma Onderwerp Spreker Welkom en introductie Gert-Jan van Norden Internationale ontwikkelingen binnen de EU en OESO en de impact hiervan voor verzekeraars Fiscale aspecten van Solvency II en IFRS IV Vinod Kalloe Frank van den Wildenberg & Bart Jimmink Longevity risk management Ing Tai Ching (AEGON) EU-claims Niels van der Wal Afsluiting & borrel
5 Internationale ontwikkelingen binnen de EU en OESO en de impact hiervan voor verzekeraars
6 Recent developments 2013 going forward to 2015 Letterbox companies No substance No risks, no functions, no activities Bermuda Tax Havens British Virgin Islands Cayman Islands Others OECD fight against base erosion, profit shifting: 15 points Paying too little corporate income tax Relative to total turnover Fair share Eroding fair share in developing countries EU fight against base erosion profit shifting: 15 points International mismatches Hybrid entities Hybrid financial instruments Country specific Unilateral anti-abuse measures Transparency Lack of corporate tax transparency Lack of effective exchange of tax information
7 Tax and morality on a sliding scale Term Legal basis Regimes Yardsticks Tax fraud Criminal law Deliberate false or misleading statements (EC) Tax evasion Tax law Illegal arrangements by hiding income or information (EC) Legally wrong Legally wrong Tax avoidance EU case law Tax incentives Legally wrong State aid Tax avoidance EU code of conduct 200+ decisions Politically wrong OECD forum on harmful tax competition Rules and practices
8 Tax and morality on a sliding scale Term Legal basis Regimes examples Yardsticks Tax avoidance, aggressive tax planning Could strictly be legal but in contradiction with the spirit of the law (EC) Mismatches/hybrids Using tax havens Politically wrong? Shifting profits without real economic reality Tax optimization Holding company to reduce withholding taxes Morally wrong? Tax efficiency Value chain: manufacturing, procurement, R&D, sales and logistics Tax compliance Using regular tax deductions (R&D, depreciation, etc.)
9 EU 15-point action plan? (1) EU institution Action point Objective Timing European Parliament Resolutions on aggressive tax planning Advisory to Commission and Council 2014 European Commission 1. Communications on aggressive tax planning Tax havens 3. Digital economy expert group Coordinated blacklisting Recommendations EU platform on good governance (CSR) Influencing taxpayer behaviour EU state aid task force aggressive tax planning Review public debate and companies, country survey, patent boxes EU joint transfer pricing forum Model instruction for spontaneous exchange of information 2014
10 EU 15-point action plan? (2) EU institution Action point Objective Timing Code of conduct group 7. Anti-hybrids Switzerland Guidance notes for tax regimes EU political agreement Patent boxes 2014 Working group 11. Parent subsidiary directive amendment Anti-hybrid and GAAR EU law 2014 Working group 12. EU common consolidated corporate tax base (CCCTB) Negotiations? 2036? 13. EU financial transaction tax (FTT) Enhanced cooperation? EU mutual assistance directive Proposal for automatic exchange of information 2015 European Council 15. EU country-by-country tax reporting (CbCR) Public disclosure 2016
11 OECD base erosion, profit shifting 15-point action plan (1) Action 1 Address the tax challenges of the digital economy (Sept. 2014) Action 2 Neutralise the effects of hybrid mismatch arrangements (Sept. 2014) Action 3 Develop recommendations regarding the design of CFC rules (Sept. 2015) Action 4 Limit base erosion via interest deductions/other financial payments (Dec. 2015) Action 5 Counter harmful tax practices Include compulsory spontaneous exchange of rulings (Sept Dec. 2015) Action 6 Prevent treaty abuse (Sept. 2014) Action 7 Prevent artificial avoidance of PE status (Sept. 2015)
12 OECD base erosion, profit shifting 15-point action plan (2) Action 8 Ensure that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with value creation Action 9 Prevent BEPS by transferring risks, or allocating excessive capital to group members, align returns with value creation Action 10 Other high-risk transactions: re-characterise transactions, management fees and head office expenses (Sept. 2015) Action 11 Establish methodologies to collect and analyse data on BEPS (Sept. 2015) Action 12 Recommendations for mandatory disclosure rules for aggressive tax planning and design model for exchange of information of tax schemes between tax administrations (Sept. 2015) Action 13 Re-examine transfer pricing documentation: and include CbCR in master file (Sept. 2014) Action 14 Make dispute resolution mechanisms more effective (Sept. 2015) Action 15 Develop a multilateral instrument (Dec. 2015)
13 Tax in the international arena Tax in the international arena OECD member Not OECD member EU members G20 G8 BRICS AT, BE, BG, CZ, DK, EE, FI, FR, DE, EL, HU, IE, IT, LT, LU, NL, PL, PT, SK, SI, ES, SE, UK CAN, JAP, USA MEX, KOR,TUR, AUS FR, DE, IT, UK, (EU) CAN, JAP, USA FR, DE, UK, IT CY, HR, LV, MT, RO BRA, CHI, IND, RUS, SA INO SAU, ARG RUS BRA, CHI, IND, RUS, SA MIST MEX, KOR, TUR INO Following? MAL, THA, SIN, VIE, SA Others SWI, CHIL, ICE, ISR, NZ, NOR HK GCC (including UAE, Abu Dhabi and Dubai) Caribbean and Latin America ASEAN (BRU, MYA, CAM, LAO, PHI) African countries
14 EU OECD G20 G8 Focus: tax transparency Transparency and exchange of information International mismatches (hybrids) Transfer pricing Anti-abuse provisions Harmful tax practices Tax havens Digital economy and taxation Influencing taxpayer behaviour
15 Tax transparency Transparent to whom? Transparent between taxpayer and tax administration: mandatory disclosure rules and OECD CbCR Transparent between tax administrations: exchange of information Transparent to the public: mandatory CbCR Transparent to the public: voluntary CbCR
16 Example 1: transparency between taxpayer and public (mandatory) EU institution EU action plan Point 15 Objective Timing EU Council EU country-by-country tax reporting Public accountability on tax arrangements and payments 1. Extractive industries (US Dodd-Frank act) 2. Banks (CRD-IV package) 3. All multinationals?
17 Example 2: transparency between taxpayer and public (voluntary) NGOs Action point Objective Timing Transparency initiative Extractive industry transparency initiative (EITI) Oikos Tax justice network Examples: BHP Billiton Shell Vodafone RBS Statoil Rio Tinto Public accountability on tax arrangements and payments Now Many others SABMiller HSBC Carlsberg
18 Payments to government Entitlements Comparative overview of CbCR initiatives Nature of reporting EU accounting and BEPS action plan Dodd-Frank act CRD IV transparency dir. Point 13 Names of entities, nature of activities and geographical location O O P P Host government's production entitlements P P O O National state-owned company production entitlement P P O O Royalties P P O O Dividends P P O O Bonuses (signature, discovery, production etc.) P P O O Fees (license, rental, service etc.) P P O O Infrastructure improvements P P O O Payments in kind P P O O Taxes on profit or loss Accrual basis??? O Cash basis P?? P! Withholding tax paid! O O? P! Other taxes on income, profit or production P P? O Profit or loss before tax O O P P Revenues O O P P Number of employees O O P P Total employee expense O O O P Stated capital and accumulated earnings O O O P Tangible assets other than cash or cash equivalents O O O P Public subsidies O O P O Intercompany payments (interest, royalties, service fees) O O O P Legal entities O O O P Place of effective management O O O P Important business activities O O O P
19 Example 5: Transparency between tax administrations OECD BEPS action plan Point 5 Timing 1. Counter harmful tax practices OECD forum on harmful tax competition 2. Including a. Compulsory spontaneous exchange of rulings and unilateral APAs Review report (Sept. 2014) + revision of harmful criteria (Dec. 2015) Strategy to expand participation to non-oecd members (Sept. 2015) b. Requiring substantial activity for any preferential regime EU in parallel EU code of conduct group EU joint transfer pricing forum Committee on administrative cooperation for taxation (CACT) Model instruction for spontaneous exchange of information on rulings and unilateral APAs 2014
20 EU OECD G20 G8 Focus: hybrids Transparency and exchange of information International mismatches (hybrids) Transfer pricing Anti-abuse provisions Harmful tax practices Tax havens Digital economy and taxation Influencing taxpayer behaviour
21 OECD BEPS anti-abuse provisions BEPS action plan Point 2 OECD BEPS 2: neutralising the effects of hybrid mismatch arrangements Timing Sept BEPS 5: hybrid branches EU Amending parent subsidiary directive 2014 EU Code of conduct proposals to close mismatch arrangements (hybrid entities, hybrid permanent establishments) 2014
22 EU OECD G20 G8 Focus: anti-abuse Transparency and exchange of information International mismatches (hybrids) Transfer pricing Anti-abuse provisions Harmful tax practices Tax havens Digital economy and taxation Influencing taxpayer behaviour
23 OECD BEPS anti-abuse provisions OECD BEPS action plan Point 4 Timing Limit base erosion through interest deductions and other financial payments Develop recommendations for designing limitations on excessive interest deductions or financing the production of exempt or deferred income Sept. 2015
24 EU OECD G20 G8 Focus: harmful tax practices Transparency and exchange of information International mismatches (hybrids) Transfer pricing Anti-abuse provisions Harmful tax practices Tax havens Digital economy and taxation Influencing taxpayer behaviour
25 Harmful tax practices EU Council: code of conduct for business taxation EU Commission: state aid investigations OECD BEPS: forum on harmful tax practices
26 Example 1: EU state aid? Amazon US Payments for technologies Amazon Europe Holding Technologies [partnership] Luxembourg 2012 tax: nil (exempt) Payments for technologies European sales support Cost-plus fee Sales support services Amazon EU SarL Luxembourg 2012 sales revenues: 12bn 2012 profits: 30m 2012 tax: 8m 300 FTEs 2012 profits: 10m Customer sales transactions 2012 tax: 3m European customers
27 Example 2: EU state aid? IP transfer US Inc Dividends USA X Ireland Holdings Royalties Bermuda X Ireland Ltd Royalties Ireland Fee X Netherlands Holdings BV Netherlands Customers (EU/Japan)
28 Example 4: ruling practices EU state aid investigations Multiple jurisdictions Based on public information in newspapers/parliaments Procedure?
29 Harmful tax practices EU Council : Code of Conduct for business taxation Insurance, reinsurance and captive insurance 1999 EU Code of Conduct report: Harmful where it appears that the level of tax effective reserves which is permitted may be in excess of the real underlying risks; or where there is an exceptionally long deferral of taxation on insurance profits; or where there is a special regime of exemption or reduced rate or fixed base taxation for certain types of business. The Group also noted that some of the exempt and offshore company measures and of the financial services, group financing and royalty payments measures that have received positive evaluations can be used by companies carrying on insurance or reinsurance business. Harmful: B007 Provisions for fluctuations in reinsurance Luxembourg; B008 Aland Islands Captive Insurance Finland; B12 Exempt (offshore) Companies and Captive Insurance Gibraltar; F23 Captive Insurance Netherlands Antilles; F32 Captive Insurance Aruba; F42 Offshore Insurance companies Guernsey; F43 Insurance companies Guernsey; F48 Captive insurance companies Jersey; F 63 Exempt insurance companies Isle of Man
31 Future outlook on global tax coordination efforts? 2015 Final OECD and EU reports Implementation 2018 Evaluation Onwards? OECD / EU Unilateral
32 OECD and EU expected results? Transparency CbCR and automatic exchange of information Hybrids closing of possibilities Conduits anti-abuse provisions (unilateral and treaties) Enhanced transfer pricing documentation and audits Patent/IP boxes: nexus and significant development/management
33 Global tax future outlook? Attempts at global tax coordination Signs of fragmented implementation Leading to ever more complexities where business grows more global while taxes remain local
34 Global tax future outlook? Signs of fragmented implementation Unilateral actions by countries Increased risk of tax disputes Non-effective dispute resolution mechanisms
35 Navigating through fast-changing landscapes business responses? Sustainable tax planning: substance and transparency-based Increasing need for tax risk management Enhancing transfer pricing strategy and documentation Increasing tax transparency and CSR Enhancing relationship with tax authorities
37 IFRS IV Phase 2
38 Insurance Contracts 20 June 2013: Re-exposure draft published 25 October 2013: Comment period ends 1 January 2017: Earliest possible effective date 1 January 2018: More likely earliest effective date Overview Introduction of a comprehensive accounting and measurement model for all insurance contracts Proposals apply to all insurance contracts, rather than insurance entities, and to investment contracts with a DPF issued by insurers Model is based on current fulfilment value, including four building blocks Use of current assumptions and discount rates Simplified (or premium-allocation ) measurement approach for some short-duration contracts Revised definition and accounting for acquisition costs Mirroring approach for some participating contracts, better aligning the measurement of these contracts with their underlying items New presentation and disclosure requirements
39 Overview of applicable approach (IASB) Current fullfilment value Short duration Pre claims period Short duration Claims period Long duration Premium Allocation Approach Building blocks without residual margin Building blocks with residual margin 39
40 IFRS 4 Phase II measurement model The four building blocks Current fulfilment value 1 Probability-weighted current estimates of contractual cash flows 2 Discounted using current rates to reflect the time value of money 3 4 Risk adjustments Contractual service margin (residual) (to remove any profit on inception) 40
41 Fundamentals Building block approach Initial recognition: Expected cash inflows Building block 1 Building block 2 Building block 3 # Building block 4 Expected cash outflows Discounting ** Risk adjustment Contractual service (or single) margin * Recognised in profit or loss if no contractual service margin ** Effect of discounting could be to either increase or decrease the liability zero
42 Building block approach & presentation Initial recognition: Expected cash inflows Building block 1 Building block 2 Building block 3 # Building block 4 Expected cash outflows Discounting ** Risk adjustment Contractual service (or single) margin * Recognised in profit or loss if no contractual service margin zero Presentation of changes in profit or loss and OCI (# IASB only): ** Effect of discounting could be to either increase or decrease the liability Changes in cash flows unrelated to services: profit or loss Changes in cash flows related to past and current services: profit or loss Unwind of lockedin discount rate: profit or loss Changes in discount rate: OCI Changes in risk adjustment: profit or loss # Release of margin: profit or loss Offset changes related to future services # Changes in cash flows related to future services: Offset against the margin * #
43 Comparing the proposals with Solvency II and current accounting IFRS Phase II versus Solvency II Liabilities Assets IFRS 4 phase II Solvency II Equity Residual margin Surplus SCR MCR Market value of assets Risk adjustment Risk margin Direct acquisition costs Expected present value of future cash flows Market consistent value for hedgeable risks Best estimate for non-hedgeable risks
44 Fiscale aspecten van IFRS IV
45 Fiscale aspecten van IFRS IV Regels voor bepalen technische voorzieningen veranderen ingrijpend Voor landen waarin de fiscale winstbepaling IFRS volgt (bijvoorbeeld UK) leidt invoering potentieel tot een grote resultaatsprong Mogelijk dus ook groot cash effect Overgangsregeling?
46 Fiscale aspecten van IFRS IV - Nederland In Nederland zijn goed koopmansgebruik en BWRV bepalend voor de omvang van de technische voorziening voor de fiscale jaarwinstbepaling Artikel 2 BWRV: 1. De premiereserve wordt berekend naar de grondslagen die worden gehanteerd bij de bepaling van het tarief waarop de verzekeringen zijn of worden gesloten. 2. Een omrekening van de premiereserve naar in totaal zwaardere grondslagen wordt in aanmerking genomen indien: a. de omrekening betrekking heeft op de gehele verzekeringsportefeuille met uitzondering van het gedeelte dat gesloten is tegen de op het tijdstip van de omrekening voor nieuw te sluiten verzekeringen geldende tarieven, en b. bij de omrekening en vervolgens voor de toepassing van het eerste lid de volgende grondslagen worden gehanteerd: i. de op ¼ percent naar beneden afgeronde en met ¼ percent verlaagde gemiddeld behaalde rendement op de gehele ii. iii. beleggingsportefeuille; de sterftetafels die op het tijdstip van de omrekening worden gehanteerd bij de bepaling van het tarief voor nieuw te sluiten verzekeringen; de batepremie die uit de brutopremie wordt afgeleid door deze te verminderen met een bedrag gelijk aan het verschil tussen de brutopremie en de nettopremie voor de op het tijdstip van de omrekening nieuw te sluiten verzekeringen. Commerciele verslaggevingsregels dus in principe niet relevant voor fiscale winst
47 Fiscale aspecten van IFRS IV - Nederland Om BWRV te kunnen blijven toepassen moeten historische grondslagen worden vastgehouden Berekening technische voorzieningen voor Solvency II en IFRS zullen afwijken. Is het realistisch dat er nog een apart systeem voor fiscale doeleinden wordt aangehouden? Als historische grondslagen niet langer beschikbaar zijn, moet voorziening op andere wijze worden bepaald omrekening Regels van artikel 2, lid 2, onderdeel b leiden tot minimaal evenveel praktische complicaties als voortzetten van historische grondslagen: Wat is gemiddeld behaalde rendement? Berekening voorziening in latere jaren: opnieuw omrekening of vasthouden van de grondslagen van eerdere omrekening als nieuwe historische grondslagen.
48 Fiscale aspecten van IFRS IV - Nederland IFRS
49 Fiscale aspecten van IFRS IV - Nederland Regels voor berekening premiereserve in BWRV achterhaald? IFRS regels voor winstdelende polissen veranderen. Anders dan systematiek BNB 2004/59. In overeenstemming met BWRV / Goed koopmansgebruik? Acquisitiekosten: IFRS behandeling fiscaal aanvaardbaar? Alternatief? Meest voor de hand liggend: tax = ifrs Dan moet IFRS IV wel in overeenstemming zijn met goed koopmansgebruik Grote waardesprong bij invoering. Overgangsregeling? IFRS IV: verwachting dat resultaten veel volatieler zullen worden. Volatiele fiscale winst: Liquiditeitsgevolgen Mogelijke verliesverdamping
50 Fiscale winstbepaling verzekeraars Zou er gedacht moeten worden aan alternatief voor BWRV? Initiatief bij MvF / Belastingdienst of bij verzekeraars? Wat zijn de wensen uit de sector: Praktisch hanteerbaar Geen eenmalige grote impact bij invoering Volatiliteit fiscale winst dempen Alleen aanpassing relevante artikelen of algehele herziening? Timing
51 Solvency II
52 Solvency II - Background Current regulations are based on the EU Solvency I Directives (latest of those Directives implemented in 2002, but has its origins in the 1970s) Solvency I has become outdated, for example only requres explicit solvency capital to be held against insurance risks. No specific requirement to hold capital against market, credit or operational risk. Solvency II will reform solvency requirements for life and non-life insurance undertakings. The Solvency II Framework Directive has had to be adapted - through the Omnibus II directive (adopted by European Parliament on March 11, 2014). European Parliament and the Council agreed that the Solvency II Directive (including the amendments introduced by Omnibus II) should apply as of 1 January 2016
53 Solvency II Pillars Solvency II is closely based on the Basel 3-pillar structure Pillar 1 covers all the quantitative requirements. This pillar aims to ensure firms are adequately capitalized with risk-based capital. All valuations in this pillar are to be done in a prudent and market-consistent manner. Companies may use either the Standard Formula approach or an internal model approach. Pillar 2 imposes higher standards of risk management and governance within a firm s organization. This pillar also gives supervisors greater powers to challenge their firms on risk management issues. It includes the Forward Looking Assessment of Own Risks (FLAOR), formerly known as the Own Risk and Solvency Assessment (ORSA), which requires a firm to undertake its own forward-looking self-assessment of its risks, corresponding capital requirements, and adequacy of capital resources. Pillar 3 aims for greater levels of transparency for supervisors and the public. There is a private annual report to supervisors, and a public solvency and financial condition report that increases the level of disclosure required by firms.
54 Solvency II - Pillar I Components
55 Break-down of quantitative requirements under Pillar 1 The quantitative requirements under Pillar 1 can effectively be broken down into six components: 1. Valuation of assets and liabilities Harmonized with existing fair value options within International Financial Reporting/ Accounting Standards (IFRS/IAS), as far as possible 2. Technical provisions The calculation of technical provisions will be based on their current exit value. They will be established as best estimate liabilities plus a risk margin (except in the case of hedgeable risks arising from (re)insurance obligations) 3. SCR The SCR is designed to project the economic balance sheet in one year s time following a 1-in-200-year loss event occurring. The SCR covers at least the major risks, insurance, market, credit, and operational risk and will take full account of any risk mitigation techniques that can be demonstrated and would be applied in times of stress. 4. MCR MCR is designed to be the lower solvency calculation, corresponding to a solvency level, below which policyholders and beneficiaries would be exposed to an unacceptable level of risk, if the insurer were allowed to continue its operations.
56 Break-down of quantitative requirements under Pillar 1 5. Own funds BOF is the excess of assets over liabilities as determined by the EBS with any qualifying subordinated debt added back. Some forms of off-balance-sheet finance may receive regulatory approval to qualify as AOF. Both BOF and AOF are allocated to tiers of Own Funds depending on prescribed criteria, and the SCR and the MCR both have rules regarding the extent to which the tiers of Own Funds can be used as coverage of these requirements. 6. Investments Under Solvency II, there are no prohibitions on classes of assets, but, for all assets held, insurers need to be able to demonstrate that they comply with the prudent person investment principles (PPIP) and that they fully understands the risks involved, makes proper provision for these (via the SCR), and that investment decisions are made in the best interests of the policyholders.
57 Recognition of deferred tax assets and the tax effect of the stress scenario If insurance companies comply with the recognition criteria set out in IAS 12 they can: recognize DTA on the SII balance sheet, thus increasing own funds; and reflect the tax effects of the 1-in-200 shock when calculating the SCR (known as the lossabsorbing capacity of deferred tax in the context of standard formula firms) thus lowering their SCR. Both aspects may have a material impact on a insurance company s Solvency II position.
58 Loss-absorbing Capacity of Deferred Taxes ( LACDT ) Article 103: The Solvency Capital Requirement calculated on the basis of the standard formula shall be the sum of the following items: (a) the Basic Solvency Capital Requirement, as laid down in Article 104; (b) the capital requirement for operational risk, as laid down in Article 107; (c) the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes, as laid down in Article 108. SCR = BSCR + Operational risk - Loss absorb of TP - LACDT Loss absorbing capacity of deferred taxes: will the shock loss be tax deductible? If so, will there be sufficient profits from which to deduct it?
59 Solvency II LACDT Loss absorbing capacity of deferred taxes. What about current tax in the shock scenario? Date of shock loss: The Standard Formula requires that the loss is instantaneous, which could be interpreted as meaning either on the reporting date, or immediately after it. With an Internal Model, a 12 month time horizon should be taken and this prospective view implies that the loss should be treated as arising in the period following the balance sheet date. The main impact of this is in respect of the periods to which the shock loss can be carried back or offset against profits elsewhere in the group. Dutch fiscal unity: if an insurance company is a member of a fiscal unity, it will not have receivables on the Dutch tax authorities itself. Will this affect the LACDT? Will an agreement regarding the setting off of taxes within the fiscal unity improve this position? CEIOPS Advice for Level 2 Implementing Measures on Sollvency II: The adjustment to the basic SCR for the loss-absorbing capacity of deferred taxes is equal to the change in the deferred tax liability and/or asset.
60 Valuation of deferred tax assets and liabilities Deferred tax assets and Liabilities to be valued in accordance with International Accounting Standards Need to demonstrate recoverability Supervisory authority will require demonstration that future taxable profits are probable Deferred Tax can take the form of an asset or a liability Deferred Tax arises where there is a difference between the Solvency II economic balance sheet valuation and the corresponding tax assessed value Values should not be discounted DTA s are amounts of taxes recoverable in future periods: Deductible temporary differences Carry forward of unused tax losses Carry forward of unused tax credits
61 Own Funds Tier 3 restrictions Own Funds (excess of assets over liabilities) Net Deferred Tax Asset classified as Tier 3 Basic Own Funds if criteria met Eligible Tier 3 restricted to 15% of total eligible Own Funds QIS5: DTA s comprised over 50% of Tier 3 capital Eligibility restrictions also apply to MCR Consolidation treatment of deferred taxes from participations has a large impact on the group net DTA position For group solvency calculations, the tier limits should only be applied on group level
62 Group Issues The consolidation treatment of participations under Solvency II can be different than the IFRS consolidation treatment. As a result, the netting of DTL from participations on group level could be impacted. Consolidation is only discussed in the Group Supervision articles (Title III of the Directive) Solo Reporting No consolidated reporting should be made on solo level, only at group level Participations should be valued on quoted market prices, or where this is not possible, on the adjusted equity method. As a result the DTA or DTL of a participation cannot be used in netting on solo level Group Reporting For group entities where DTA and DTL of participations are included on their balance sheet the resulting own funds from the net DTA position are assumed to be not effectively available (Article b SCG3, DDA), unless the entity can demonstrate to the satisfaction of the supervisory authority that this assumption is inappropriate (article 323.3, DDA)
63 Extent to which the LACDT is recognized KPMG Technical Practices Survey 2013
64 DTA sources of income profit KPMG Technical Practices Survey 2013
65 Regulators view on valuing tax losses Evidencing future profits will generally be more challenging than tax technical aspects Regulators could challenge the value of tax losses: Imposing a limit on the number of years of future profits that can be used Challenge a particular item of future profit Probing the assumptions and evidence used to support future profits Each insurer will need to argue its position individually. Management decision on how tax is being used to reduce SCR
66 Regulators view: PRA Supervisory Statement SS2/14, Solvency II: recognition of deferred tax Applies to all firms supervised by the PRA - UK life insurers, general insurers and mutuals; not applicable to firms outside the UK PRA s proposed Supervisory Statement will be subject to review if EIOPA choose to issue regulations or guidelines on tax, however the PRA would not include anything in the Supervisory Statement which they expect would be likely to be contradicted. Nothing appears to be inconsistent with what was included in pre-consultation drafts of level 3 text produced by EIOPA in 2012 Although in principle not applicable to firms outside the UK, the Supervisory Statement may indicate what the view of other regulators could be
67 PRA: Supervisory Statement Judgement will be needed by both Firms and supervisors to decide if future taxable profits are probable in accordance with IAS 12. The supervisory judgment will be based on knowledge of the firm and information, primarily related to business projections, provided by firms. the PRA does not expect a firm to reflect any tax effects of the shock in its SCR calculation if the notes to its statutory accounts disclose that: it has unrecognised tax losses; and those tax losses were not recognised because it was considered not probable that future profits would arise against which they might be utilised Rebuttable if it is explained as to why the firm s taxable profitability would improve to such a material extent after the stress scenario, or why losses generated in the stress scenario might otherwise be expected to be utilized, for example because they relate to a different type of tax or another jurisdiction Group relief (the transfer of tax losses to profitable companies in the same group) can be assumed but the impact of the shock on other group companies (including non-sii companies) needs to be considered. The PRA state that before embarking on complex work, firms should consider if the output will likely be of sufficient quality to be credible. They will be unconvinced by the layering of ever more assumptions, data and complexity in an attempt to support a position
68 Board oversight of tax methodology Tax can offer a material saving on capital requirements therefore the Board may want to challenge the tax methodology adopted (for example, can a more beneficial tax position be taken, or, where aggressive positions have been taken, are they happy to bear this increased tax risk? )
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