Part one of a three-part series that looks at the challenges facing insurance companies. This week, the battle for a fairer tax regime.
One could be forgiven for mistaking the UK tax regime for a market in Marrakesh, what with the government’s willingness to bargain on multiple tax fronts, and Prime Minister Gordon Brown’s credibility under constant scrutiny as he continues to give ground to vested interests.
For insurers, the government’s U-turns and watered-down compromises have created an intriguing tax climate where it seems anything is now negotiable. While insurers face challenges and uncertainty in terms of planning their future tax liabilities, they also have a golden opportunity to strike at the chinks in the taxman’s armour, with competitiveness of the UK tax system at the top of their agenda.
Convincing the Treasury to back down on solid plans for new taxes is not as difficult as it once was. In the past few months, Chancellor Alistair Darling has scaled back plans to reform capital gains tax. And last month the government held an emergency £2.7bn mini-Budget to compensate those who lost out from the abolition of the 10p tax band.
A further sign of the government’s willingness to make concessions came last week, when it was reported that it might reverse proposed new duties on motorists and hauliers following a protest by hundreds of lorry drivers on the streets of London.
The Treasury has proved itself no less willing to negotiate with the insurance market. Two weeks ago the ABI held an unprecedented meeting with Darling, marking the first time a UK Chancellor has spoken at an ABI board meeting.
The ABI has declined to disclose details of its meeting with the Chancellor, but confirmed it did try to ensure that UK companies are not taxed on overseas profits.
This week it was reported that the Treasury will delay proposed changes to the taxation of foreign profits. According to timesonline.co.uk, officials said that legislation may now not be enacted before 2010, which is the year by which Gordon Brown must call a general election.
The government’s original intention was to simplify the way it taxed UK multinationals on foreign subsidiaries. But the ABI said the risk of a new foreign-profit tax is that foreign subsidiaries could be treated as tax avoidance schemes even if their profits are not brought back to the UK.
The Chancellor was due to issue a consultation document by the end of July. But this week it was reported that the Treasury will delay proposed changes due to mounting pressure.
Sarah Knight, assistant director of financial regulation and taxation at the ABI, says: “The meeting the Chancellor had with the ABI is a positive indication of the government’s willingness to work more constructively with industry, and that it recognises the importance of the UK insurance industry, which is a positive change in stance. It acknowledges it’s the right time to work with us to look at longer-term strategic needs of the industry and government, and how we can work together more positively.”
But Knight stresses that the ABI’s goal of a simplified and modernised system of taxation on foreign profits, without excessive taxation, is by no means a guarantee: “With the economic downturn, there’s not a lot of money around for the Exchequer to spend. So although there have been a number of changes and tweaks to existing policy, money is tight and any negotiations will no doubt reflect that,” she says.
Insurers also scored a victory after AXA UK chief executive Nicolas Moreau was named as a representative on the government’s new 14-member multinational tax forum. The forum, to be chaired by Financial Secretary Jane Kennedy, aims to ensure UK competitiveness.
But it has not all been plain sailing for insurers. They are still in the dark on several other tax fronts, such as the Revenue’s intention to define and tax excessive reserves, which are not currently taxed. The ABI believes new taxes will be introduced. The provision to tax excessive reserves was removed in 2007 and the government’s original idea to replace the tax proved unworkable. New legislation was due in April, but nothing has been produced.
Insurers are worried that the longer it gets into the tax year, the bigger the chance they could inadvertently be caught over a new reserves limit. This is particularly relevant as insurers are holding on to reserves in preparation for another possible season of floods.
“Although there have been a number of changes and tweaks to existing policy, money is tight and any negotiations will no doubt reflect that.
Sarah Knight, ABI
Meanwhile, there is another potential tax hit from the US. UK insurers covering an US risk are currently exempt from paying federal excise tax, which is a tax on the gross premium at 4% for property-casualty insurance, and 1% for life insurance and all types of reinsurance.
But a recent Internal Revenue Service (IRS) ruling means UK insurers might have to pay 1% tax if they use a reinsurer outside of the UK and the US to cover a US risk.
The ruling would subject foreign companies located in countries having a treaty waiver of the tax to liability for tax due on reinsurance with a non-exempt company. It also treats the subsequent reinsurance as terminating the exemption for the first transaction protected by the treaty waiver, except in certain cases.
Brenda Viehe-Naess, a US lobbyist and spokeswoman for the Reinsurance Association of America, told Insurance Times: “By collecting the tax for both legs of a transaction, even though the first leg was exempted by treaty, the IRS would effectively deny the benefits of a treaty waiver to a qualified foreign insurer, and force it to collect the tax from the foreign insurer. This could have an adverse effect on the US tax treaty network.”
The ABI is investigating the potential impact, and is aware that the UK’s Big Four accountancy firms working in the US feel the measures will affect UK companies.
Knight says: “Currently, you only lose exemption if you deliberately set up as a tax avoidance measure. So the first leg (insurers) in the UK should be relatively safe whatever happens. We don’t think they could be affected, but there is a risk. The US is not clear it will apply this to any second leg from the UK to a country that does not benefit from such an exemption. It’s not too clear how the US is going to apply this in practice, but we believe it could be anti-competitive.”
Corporation tax is another major issue for the UK, where the rate is 28%. The ABI says it will always work to ensure the headline rate is competitive, but believes the government is unlikely to change this so soon after lowering the rate 2% from last year. The ABI sees the most realistic battleground on other tax fronts.
But the past year has seen a number of Lloyd’s insurers redomicile to Bermuda, such as Hiscox and Hardy, for a very simple reason – Bermuda’s corporation tax is zero on capital held.
Stephen Catlin, chairman of Catlin Group which redomiciled to Bermuda a few years ago, has said he would return the company to the UK if its tax environment were better.
Competitiveness of London as a financial centre has been under question, with Lord Levene, the Lloyd’s chairman, heading a high-level working group to look at this issue.
Last month, Lord Levene was quoted as saying that he feared more of Lloyd’s managing agents would redomicile to lower tax regimes unless the rules were changed. He said: “This could make a real difference to our business. If their headquarters move to other countries, they might in due course look to do more of their business, currently transacted through London, overseas and we want to avoid that.”
It is clear that the government is under pressure from all sides, and that pressure does not show any signs of easing up. It appears unlikely that the insurance industry will be pacified by minor tweaks to controversial tax proposals and, while it may not be in the driving seat, it is certainly sitting shotgun. In the current political climate, shouting loud enough may be all it takes.
Foreign profits tax
This is the tax issue that has UK insurers up in arms, and has caused Brit Insurance and Amlin to threaten to redomicile. Due to mounting pressure, the Treasury has backed down on plans to tax UK multinationals on foreign profits and has agreed to put watered-down proposals out to consultation this month. The ABI is anxious to see the
proposals, because the government is
looking to legislate in 2009.
Big businesses welcomed the last Budgets cutting of the headline corporation tax rate, which is paid on annual profits of more than Ã‚Â£1.5m, from 30% to 28%. Prime Minister Gordon Brown said the revamp meant the UK rate would be lower than that in the US, Germany, France and Japan. But with the Ireland rate at 12.5% and the Bermuda rate
at zero on capital held, some UK insurers believe a further cut is needed to ensure long-term competitiveness.
Federal excise tax
An American tax imposed on policies covering a US risk but placed with a foreign insurer or reinsurer. The tax is imposed on the gross premium, at 4% for property-casualty insurance, and 1% for life insurance and all types of reinsurance. The tax is waived in treaties with many of the US major trading partners, including the UK. But due to a recent US Internal Revenue Service ruling, UK insurers might have to start paying 1% tax if they use a reinsurer outside of the UK and the US to cover a US risk.
Excessive reserves tax
The provision to tax excessive reserves was removed last year and the governments original idea to replace the tax did not work. But the ABI believes a new tax on reserves will be introduced, and the trade body wants answers so that insurers can plan their tax liabilities effectively. New legislation due in April never arrived, but it could be any day now. This is a concern for insurers who need big reserves in order to prepare for potential floods this summer.