Insurance Europe urges focus on equalisation reserves in EC tax reform

Insurance Europe wants the EC to recognise equalisation provisions for tax purposes as it prepares to introduce BEFIT, a new consolidated and simplified pan-European corporate tax regime. Risk and insurance managers will be particularly interested in this element of the proposed new tax regime as it applies to insurers because it could mark a significant step towards a tax-friendlier environment for captives across Europe. Equalisation provisions are basically a means of setting aside a fund for a ‘rainy day’. If they are made tax deductible they can prove an attractive tool for captive owners and open market insurers and reinsurers. Insurance Europe explains in its response to the EC’s consultation on the proposed BEFIT regime: “Equalisation provisions are indispensable for enabling insurance companies to cover large claims, such as those arising after natural catastrophes. Insurance Europe therefore suggests that BEFIT should address this issue.” The EC explained that its Business in Europe: Framework for Income Taxation (BEFIT) regime proposes a comprehensive solution for business taxation in the EU. “This initiative aims to introduce a common set of rules for EU companies to calculate their taxable base while ensuring a more effective allocation of profits between EU countries, based on a formula. It will also aim to reduce compliance costs and create a coherent approach to corporate taxation in the EU,” said the EC. Overall, Insurance Europe welcomes the aims of the planned new rules. “Insurance Europe supports the EC’s aim of simplifying the determination of taxable income and to reduce compliance costs for companies operating cross-border. Similarly, Insurance Europe supports any measure designed to counter aggressive tax planning and tax avoidance,” stated the federation. Insurance Europe said, however, that the consolidated approach to tax needs to be tied up with VAT rules. “Insurance Europe welcomes the intention to build BEFIT based on a consolidated approach. It is only through consolidation that companies’ cross-border activities within the EU can be recognised, which in turn reinforces the European Single Market. At the same time, to achieve this objective, BEFIT should be accompanied by rules allowing cross-border VAT groupings,” it stated. The federation also said the EC needs to work closely with international efforts to tighten up and clarify tax rules for multinationals, such as the GloBE reform package put forward at the start of this month by the OECD/G20 Inclusive Framework on Base Erosion Profit Sharing (BEPS). The OECD explained that its technical guidance has been published to assist governments implementing the landmark reform to the international tax system, which will ensure multinational enterprises will be subject to a 15% effective minimum tax rate. When the rules were published, Grace Perez-Navarro, director of the OECD centre for tax policy and administration, said: "While this brings an end to the work we had set for ourselves in October 2021, we will continue, over the coming months, to work hard to ensure that the rules are implemented in a coordinated and administrable manner. This will include listening to stakeholders on how the operation of the rules can be further refined to reduce compliance costs and achieve better tax certainty for business and how we can optimise the information to be reported in the GloBE information return, while also developing a robust and transparent peer review process and expanding our capacity building efforts." Insurance Europe stressed how important it is for the EC’s rules to be coordinated with the international effort. “Insurance Europe considers that an informed view on the calculation of the tax base could be developed only after a thorough assessment of the impact of the GloBE reform from the OECD two-pillars initiative,” it stated. “BEFIT should be established as a mandatory initiative only once in-scope groups have been able to assess whether the drafted rules add an extra layer of compliance requirements to existing local and global applicable rules for determining a corporate tax base,” added Insurance Europe.

Insurance Europe urges focus on equalisation reserves in EC tax reform

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