Canadian multinational insurers warned of new tax rules

As if P&C insurers don’t have enough regulatory issues on their plate, tax experts are urging multinational insurers based in Canada to be aware of new international tax rules featuring a minimum global tax rate.

“The global tax environment is…having an impact on insurance board priorities and outlooks [in Canada],” financial advisory firm KPMG observed in a web post entitled, The road ahead for insurance organizations: Key considerations for insurance boards. “Canadian insurance organizations are looking specifically at BEPS 2.0, the OECD and G20-sponsored joint initiative on Base Erosion and Profit Shifting (BEPS).

“They’re focused on what impact the Canadian application of BEPS 2.0 may have on dividends, given its proposal of a minimum tax rate for multinational corporations. As a result, many organizations are contemplating restructuring plans that will maximize returns under BEPS-related tax treatments.”

BEPS refers to tax planning strategies exploiting gaps and mismatches in tax rules, as noted by the Organisation for Economic Co-operation and Development (OECD). Strategies include artificially shifting profits to low- or no-tax locations where the taxed corporation has little or no business activity, or eroding tax bases through deductible payments such as interest or royalties.

“Although some of the schemes used are illegal, most are not,” says the OECD. “This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.”

Related: Beware the tax implications of unlicensed insurance

One hundred and thirty-eight members of the OECD/G20 Inclusive Framework on BEPS agreed in July 2023 to conduct a major reform of the international tax system, featuring a proposed new global minimum tax of 15%.

Canada has committed to implement the global minimum tax rule in 2024. The federal government introduced draft legislation in August 2023 that would apply the tax rule to fiscal years starting on or after Dec. 31, 2023. The initiative would affect multinational enterprises in Canada with annual revenues just under Cdn$1.1 billion.

MSA Research statistics published in Canadian Underwriter’s 2023 Stats Guide show only 13 insurance companies or providers in Canada posted more than $1 billion in Net Premiums Written (NPW) in 2022. The Top 5 in 2022 were: Intact ($12.6 billion NPW); Lloyd’s ($6.1 billion); Desjardins ($6 billion); Co-operators ($4.1 billion); and Wawanesa ($3.8 billion).

KPMG warns the new international tax regime will mean three changes for affected multinational Canadian insurers.

First, the new tax rules will be complex.

For instance, “the [BEPS] Pillar Two rules are applied on a country-by-country basis, meaning that a [multinational company subject to the tax rules] must calculate its [effective tax rate, or ETR] in every jurisdiction in which it operates, based on a detailed and complex set of rules,” KPMG says. “For example, higher taxes in one jurisdiction cannot offset lower taxes in another. If the jurisdictional ETR falls below 15% (which can happen even for jurisdictions with high headline tax rates or accounting ETRs above 15%), the company is generally required to pay a ‘top-up tax.’”

This means a second major change for global insurers based in Canada — new financial statement disclosures and requirements.

Which means increased compliance costs and operational coordination, a third major change listed by KPMG.

Feature image courtesy of iStock.com/zahiV