The OECD included specific guidance for the application of GloBE rules for insurance companies in its recent, major update. What are the key insurance specific points and the implications for insurance companies in scope of the rules?
Yvonne Diamond, Senior Tax Manager, BDO: The guidance provides a number of clarifications regarding the application of the GloBE Model Rules for insurance groups.
The guidance clarifies that the “Taxable Distribution Method” election (Article 7.6 of the GloBE Model Rules) applies to Insurance Investment Entities where certain conditions are met. This means that the income and taxes related to such distributions or deemed distributions should be treated as income and taxes of the Constituent Entity that owns the Insurance Investment Entity, and the entity itself is excluded from top-up tax calculations.
In order to preserve the tax neutrality of the Investment Entity regarding any minority-interest holders, Insurance Investment Entities are specifically excluded in the definitions of Intermediate Parent Entity and Partially-Owned Parent Entity in the guidance.
Article 3.2.10 of the GloBE Model Rules provides a set of rules that essentially treats Additional Tier One Capital in the same manner as a debt instrument. Therefore, movements in equity due to distributions on Restricted Tier One Capital instruments should be treated as being within GloBE Income or Loss.
The insurance company is obligated to pay all earnings from the investment to the policyholders less an investment management fee where it holds investments in equities on behalf of the policyholders. The new rules aim to eliminate what is described as a potential mismatch under the GloBE rules.
Under the rules for Excluded Dividends, there is an exception for dividends from Short-term Portfolio Shareholdings (i.e. held for less than one year at the time a dividend is distributed). These dividends are included in the GloBE Income or Loss.
Mutual insurance companies are regulated insurance companies which are owned exclusively by their policyholders. The guidance clarifies that the Investment Entity Transparency Election in Article 7.5 applies when an Investment Entity is owned by a mutual insurance company.
The clarifications set out above will be welcome by the insurance sector. In the absence of this latest guidance, there was a risk that certain elements of the rules would not operate as intended for the industry, and there was concern that the application of GloBE rules could lead to unintended results for insurance groups.
Content adapted from Finance Dublin’s Irish Tax Monitor.