Global digital tax – Public consultation and on the Reports on Pillar One and Pillar Two Blueprints

Insurance Europe Preliminary Assessment

The key points emerging from the draft Blueprints which are most likely to affect the insurance sector are the following:

  • The Blueprint for Pillar One excludes insurance from its scope, together with other financial services such as banking and asset management.
  • The Blueprint for Pillar Two includes (re)insurance premiums in the category of “high-risk services payments” that present a greater BEPS risk.
    • According to the secretariat, the payment of premiums should not be considered as high-risk services payments; because of the nature of the insurance business and the regulations applicable to the sector, insurance premium taxes are usually collected in the source jurisdiction. The subject to tax rule would therefore not apply in most cases.
    • The considerations made on the reinsurance sector in the draft do not seem to reflect the nature and importance of reinsurance for our sector. Reinsurance helps in the diversification of risk across regions and continents, given the global scale of operations and its function of shock absorber. This key macroeconomic role enhances financial stability and enables a reinsurer to only retain a relatively small portion of the risk deriving from any single negative event.
  • Insurance Europe and GFIA in the past months provided feedback calling for more transparency and simplicity in the process, along with comments on several other aspects of Pillar Two.

Summary

  • The media have leaked two draft reports outlining the Blueprints for Pillar One and Pillar Two of the OECD’s Programme of Work on the Tax Challenges Arising from the Digitalisation of the Economy.
  • The documents, which are dated 3 August 2020, are drafts still subject to changes and confidential. It is the secretariat’s understanding that the current versions of the blueprints may present some differences from the ones leaked by the media. 2
  • The documents have been prepared in view of the meeting of the Inclusive Framework (IF) which is expected to be held in October. The meeting will focus on the finalization of the Blueprints.

The Blueprint for Pillar One, which draws on the work conducted in 2020 by the Inclusive Framework:

    • Outlines the key elements of Pillar One:
      • a new taxing right for market jurisdictions over a share of residual profit calculated at an MNE group (or segment) level (Amount A);
      • a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction, in line with the ALP (Amount B);
      • processes to improve tax certainty through effective dispute prevention and resolution mechanisms in case of disagreements on the amounts of profit allocated to market jurisdictions.
      • the current arm’s length principle (“ALP”) system, which allocates taxing rights for insurance business to the appropriate jurisdiction
    • Recognises that there are still technical and political issues pending. Political decisions are required on
      • Scope
      • Amount of profit to be reallocated (Quantum)
      • Extent of tax certainty
  • Excludes insurance from its scope, together with other financial services such as banking and asset management.  The rationale for exclusion, which reflects Insurance Europe’s comments submitted in the past, in short is that
    • the business is already extensively regulated;
    • it is illegal in many countries to sell insurance if there is no locally regulated, and thus taxed, presence;
    • taxing rights are already largely in the jurisdiction of the consumer.
  • Includes a process map to explain how the taxing right will apply in practice.

The Blueprint for Pillar Two is devoted to providing more details on GloBE rules and:

    • Considers (re)insurance premiums as a “high-risk services payment”. According to the draft, service payments are considered to present a greater BEPS risk if the value of the service is primarily based on mobile factors such as capital, assets, or risks that are owned or assumed by the service provider. Conversely, payments for services present a lower risk from a BEPS perspective where their value is primarily linked to functions performed by the service provider. Whilst the latter type of services may, in certain cases, be equally difficult to price from a transfer pricing perspective they might not be expected to give rise to the same base-eroding opportunities as services that are primarily based on the provision of capital, assets or risk. This is because the functions performed by personnel are less mobile than the ownership or assumption of capital, assets and risk and therefore less susceptible to BEPS strategies.
  • Calls for the application of the “subject to tax” rule to insurance and reinsurance premiums, considering the previous motivations.
  • Includes detailed explanations on
  • The scope of the GloBE rules (i.e. the income inclusion rule and undertaxed payments rule) and how to determine the effective tax rate, based on a jurisdictional blending approach;
  • The mechanics for applying the GloBE rules, once low-tax jurisdictions have been identified;
  • The application of the subject to tax rule (STR), as a complement of previous rules. The STR is considered a supporting element in preventing that certain payments may give rise to base erosion or profit shifting concerns;
  • Implementation and rule coordination to ensure effective co-ordination and tax certainty in practice.

Public consultation

Public consultation and on the Reports on Pillar One and Pillar Two Blueprints.docx

Insurance Europe response

GFIA response – draft