Insurance tax changes loom on the horizon
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Insurance tax changes loom on the horizon

Conor Hynes and Ronan Connaughton of Deloitte Ireland explore the impending changes arising from BEPS Action 7 and the Skandia case and provide insight on the potential tax impact for the insurance industry.

The Greek philosopher Heraclitus is attributed with the saying, "the only thing that is constant is change". Recent developments in the international tax landscape would certainly show the truth of this statement. Significant changes are afoot in the international tax arena, including developments in the OECD's base erosion and profit shifting (BEPS) action plans, the EU's transparency initiatives (including country-by-country reporting), and a renewed impetus among policy makers to implement an EU financial transaction tax (FTT).

In an insurance context, two of the most topical – yet potentially far-reaching – tax issues facing insurance groups are: the suggested changes to the definition of what constitutes a permanent establishment (PE) under BEPS Action 7; and the implications of the Court of Justice of the European Union's (CJEU) judgment in a case involving Skandia America Corporation, which has sought to depart from the well-established principle that intra-entity transactions do not give rise to a supply.

BEPS Action 7: Preventing the artificial avoidance of PE status

The ambition of the OECD and G20 to reform international taxation has seen significant progress to date. The initial discussion draft on Action 7 of the OECD's action plan to tackle BEPS contained a variety of proposed options dealing with concerns around possible artificial avoidance of PE status. The options detailed broadly sought to lower the PE threshold and narrow the exemptions to PE status contained in article 5 of the OECD Model Tax Convention. While the focus of the initial discussion draft released in October 2014 sought primarily to target centralised principal company/entrepreneur models, somewhat unexpectedly it also included specific proposals targeting perceived permanent establishment issues in the insurance industry.

On May 15, a revised discussion draft on Action 7 was released. This followed consideration of more than 800 pages of commentary from various stakeholders on the initial draft, and a subsequent public consultation held in January in which opinions were expressed on the proposed changes. In an insurance context, major concerns centred on the need for less ambiguity and subjectivity in the proposals and the likelihood of the proposals increasing compliance costs. Indeed, many questioned why specific proposals were included for the insurance industry and why it had been singled out from other sectors of the economy.

Following an analysis of all of the stakeholder input received, the revised discussion draft selects some of the proposals, and in some instances refines them, from the alternatives put forward in the initial draft. It sets out proposed amendments to article 5 of the OECD Model Tax Convention and its associated commentary.

While the discussion draft covers many issues, ranging from fragmentation of activities to specific activity exemptions and the splitting of contracts, changes to the dependent and independent agent rules are of particular interest to those in the insurance industry. The proposals seek to alter the PE threshold and would be a significant shift in relation to what constitutes a taxable presence for insurance enterprises.

PE threshold for insurance

The initial concern raised was that insurance enterprises may conduct large scale business in a jurisdiction without having a PE. To date, an insurance enterprise, for example, operating on an EU cross-border freedom of services basis, without a fixed place of business or a dependent agent concluding contracts, is not sufficient to constitute a PE.

To the relief of many in the industry, the revised discussion draft concludes that insurance should not be singled out for specific proposals (despite such proposals being included in the initial draft). This restores a level playing field for insurance enterprises vis-à-vis other industry sectors, as now all entities are subject to the general changes proposed. In particular, the discussion draft proposes general changes to the rules on dependent and independent agents contained in the OECD Model Tax Convention whereby broadly:

  • Paragraph 5 of article 5 is broadened, extending the 'conclude contracts' threshold to situations where the agent "habitually concludes contracts, or negotiates the material elements of contracts"; and

  • Paragraph 6 of article 5 is strengthened in respect of the requirements for an agent to be considered 'independent'. In particular, an agent will not be considered independent where it acts, "exclusively or almost exclusively for one or more enterprises to which it is connected".


If adopted, the proposals could have a substantial tax impact on those insurance entities selling insurance cross-border via locally based agents and they could therefore result in a significant compliance burden, particularly in determining areas of uncertainty including by whom, and where, the material elements of contracts are negotiated.

Lowering the PE threshold beyond concluding contracts is likely to create greater subjectivity in determining whether a PE exists, as the proposed language in Action 7 is open to interpretation despite a number of examples being included to aid in understanding the new concepts. For example, "negotiating the material elements of contracts" would include where a person acts as the sales force for the non-resident entity and where the negotiation of the material elements of the contract is limited to convincing the account holder to accept standard terms.

While some clarification and examples have been provided on the meaning of the new concepts, this has been included in the commentary rather than the treaty article itself. As a result, revenue authorities in different countries may well interpret the proposed new language differently, which could potentially increase tax risk and tax liabilities for insurance companies. Broadening the scope of agents' activities that could give rise to a PE would also likely lead to a greater number of disputes over taxing rights involving tax administrations globally. It would also open up the potential for increased instances of double taxation. Where such proposals are recommended and adopted, there would clearly be a need for materially improved dispute resolution mechanisms.

Next steps

Comments were invited on the new discussion draft by June 12 2015, before final recommendations are made on changes to the OECD Model Tax Convention. In a positive move, the OECD acknowledged that further guidance and examples are required in respect of attribution of profit to PEs, with guidance to be provided by the end of 2016.

The insurance industry will have to pay close attention to the proposed changes, as the widening of the PE threshold beyond 'concluding contracts' has the potential to affect existing operations and raise a number of difficulties, specifically in terms of interpretation of the new concepts put forward for inclusion in the revised article 5 of the OECD Model Tax Convention.

Skandia: The impact on VAT grouping

The September 2014 decision of the CJEU in the case of Skandia America Corp. (USA), filial Sverige v Skatteverket (C-7/13) (Skandia) has left many international groups reviewing what the potential tax cost could be. The case focused on whether VAT was self-assessable on services provided by a head office in the US to its Swedish branch, which was within a local VAT group. The CJEU concluded that in the circumstances under consideration VAT was assessable on those services under the reverse-charge mechanism. The decision reached is of particular relevance to those in the financial services and insurance sector where irrecoverable VAT can be a significant cost. It has the potential to cause widespread disruption to cross-border structures that are in place for commercial reasons across the sector, but which generate VAT savings as a consequence.

Background and the CJEU's decision

The Skandia case focused on Skandia America Corporation, a US-incorporated insurance company with a fixed establishment (a branch) in Sweden that was a member of a Swedish VAT group. The head office in the US purchased IT services from a third party and made those services available to the Swedish branch in return for a fee.

While the Swedish tax authority accepted that transactions between a head office and its branch are not considered 'supplies' for VAT purposes (as per the FCE Bank (C-210/04) case), in the case of Skandia the Swedish tax authority questioned whether the disregard provision had equal application where the recipient was a member of a Swedish VAT group.

In its judgment, the CJEU chose not to follow the opinion issued by the Advocate General and found that:

  • The Swedish establishment/branch of Skandia America Corporation was, as a result of being a member of a Swedish VAT group, effectively separated from its US head office for VAT purposes;

  • The Swedish VAT group was a taxable person in its own right – not directly identifiable with its members, but a separate person from them; and

  • Therefore, there was a difference between the facts in Skandia and the principle that intra-entity transactions do not give rise to a supply as established in FCE Bank.

The conclusion reached was that the VAT group was obliged to account for VAT on a reverse charge basis on the fees recharged to it from the US head office, given that the Swedish branch was found to no longer be part of the same taxable person as its US head office. The judgment thus presented the prospect of VAT being imposed on services and cost allocations provided on a cross-border basis where either the supplier or recipient is a member of a local VAT group arrangement.

VAT grouping rules and impact across borders

In arriving at its judgment, the CJEU did not make reference to how article 11 of the Principal VAT Directive (Dir. 2006/112) on VAT grouping has been interpreted and implemented across different EU member states. Two different approaches have broadly been taken by member states that have chosen to implement local VAT grouping provisions:

  • A number of member states have introduced local VAT grouping rules and operate an arrangement whereby only the local establishment of the members of the group are regarded as part of the local VAT group (that is, a 'Swedish style' VAT grouping); and

  • Some member states extend VAT grouping to the entire legal entities in the group whereby the local VAT group includes the foreign establishments of all the entities that are members of the group (that is, an 'Irish/UK style' VAT grouping).

Given the divergence in interpretation of the VAT grouping rules across the EU, the practical impact of the Skandia decision will likely be equally divergent.

In the UK, HMRC has taken a narrow interpretation of the Skandia decision, seeking to limit its application. It issued guidance to the effect that VAT will apply to supplies when a foreign establishment of a UK-established entity is in a foreign VAT group, only to the extent it is in a member state that has implemented legislation and practices similar to Sweden's (that is, in a member state which applies 'Swedish style' VAT grouping).

Other member states have also moved. For instance, Belgium has recently become the latest member state to announce that it will fully uphold and apply the decision reached in Skandia.

The Netherlands, however, in direct contrast has indicated that it will not apply the Skandia judgment on the basis that the Dutch VAT grouping rules differ from the Swedish rules.

In an Irish context, Irish Revenue has initiated a consultation process with existing practice being maintained until such time as the process is complete and new guidance is published. While the final outcome remains to be seen, Irish Revenue is likely to be anxious not to be out of step with the UK approach.

In light of the divergence in interpretation arising across member states, the European Commission (EC) recently published a working paper (No 845) setting out its views on the Skandia judgment, including whether the judgment applies in circumstances which differ from the specific facts of the case. The EC, in consultation with the VAT Committee, aims to reach a common and consistent position on the consequences of the judgment. Interestingly, the Commission's initial view appears to call into question the legitimacy of Irish/UK style VAT grouping and its compatibility with EU law. This in turn raises significant questions in respect of the narrow interpretation of the Skandia case taken by both UK and Dutch tax authorities to date; a narrow interpretation which potentially may also be the position Irish Revenue is considering on the matter.

Where to now?

For insurers, the potential outcomes will vary across jurisdictions depending on how Skandia is interpreted in each member state, the nature of activities being undertaken and the outcome of the EC's consultation. In future, insurance companies will need to:

  • Understand the services/cost allocations or charges made between different establishments of the same legal entity;

  • Analyse VAT recovery methods to ensure the method adopted takes account of any potential additional input VAT together with the value of any new supplies recognised between establishments within the same legal entity;

  • Become more aware of the interpretation of Skandia taken by all member states relevant to existing operations and the resulting VAT rules in respect of previously disregarded supplies now being recognised; and

  • Consider whether maintaining a VAT group remains the most efficient way to structure activities or if altering underlying contracts or delivery arrangements could deliver VAT savings.

It will likely be a considerable time before the full extent of the ramifications of the Skandia case become apparent and before certainty is provided in terms of interpretation in differing member states, particularly in light of the EC's current working paper on the issue. However, what is clear is that businesses will need to better understand their cross-border intercompany transactions, with a view to ensuring VAT is appropriately charged on these following the outcome of the Skandia case.

Potential changes on the horizon

The proposals under BEPS Action 7 and the judgment handed down in Skandia represent two potentially substantial tax changes on the horizon for the insurance sector. BEPS Action 7 may result in the redrawing of international rules in relation to when permanent establishments will arise. This raises questions for insurance entities on potential tax exposures that may arise as a result of the types of activities being undertaken across jurisdictions, as well as associated profit attribution. The CJEU decision in Skandia may have profound impacts on cross-border arrangements, where such arrangements previously allowed the VAT grouping of branches.

What is clear is insurance groups will need to become much more aware of the potential tax impact of their activities in each jurisdiction in which they operate. Such groups may need to consider methods to mitigate any potential unanticipated PE risk and, where VAT grouping of branches has occurred, if necessary, how to alter or unwind such cross-border arrangements.

While there is still a long way to go before there is certainty on either issue, now is the time for insurance entities to examine their cross-border activities and to prepare to respond to the likely eventualities of a rapidly changing international tax landscape.



Conor Hynes

Partner, International Tax and Financial Services

Deloitte IrelandTel: +353 (0)1 417 2205

Fax: +353 (0)1 417

Conor is a tax partner with Deloitte Ireland with more than 20 years' experience advising clients in financial services and international tax. He advises on Irish and international taxation issues arising on the location of operations in Ireland and has been involved in advising on numerous international group reorganisations.

He has assisted a number of large insurance companies in Ireland in relation to Revenue queries and audits. Conor also has extensive experience in advising on the life taxation regime that applies to insurance companies in Ireland and the tax implications for both Irish resident and non-resident policyholders.

Conor reviews Irish multinationals to assess the tax risks in their business and recommends structural changes, including tax planning for cash utilisation, planning overseas acquisitions, factoring, repatriation of profits, financing and structuring outbound operations. He has provided advice to a number of clients in relation to inbound and outbound investment and utilising tax planning opportunities.

Conor has presented at a number of seminars on the implications of BEPS for insurance and financial services companies. He has also spoken at international tax conferences on inbound investment into Ireland and Irish corporate tax planning, and written a number of articles on the taxation of financial services companies in Ireland. He was part of the industry grouping that negotiated the drafting of the 2003 securitisation legislation in Ireland.



Ronan Connaughton

Manager, International Tax and Financial Services

Deloitte IrelandTel: + 353 1 417 2854

Fax: +353 1 417 2300


Ronan Connaughton is a tax manager with Deloitte, specialising in international tax and financial services. Ronan has a number of years of financial services and international corporate tax experience and advises a broad range of clients in the insurance, reinsurance, securitisation, banking, and investment management sectors.

Ronan has extensive experience in advising a range of both domestic and multinational companies on tax planning aspects of doing business in Ireland and advising on tax consulting assignments including M&A projects, the restructuring of group operations, migrations and inward investments. He also manages and co-ordinates the provision of tax services to Irish subsidiaries of multinationals and Irish indigenous companies with overseas operations and has specific experience of working with general and life insurance companies in the provision of taxation consulting and compliance advice.

Ronan is an associate of the Institute of Chartered Accountants in Ireland and an associate of the Irish Taxation Institute and also holds a bachelor of arts degree in accounting and finance and a master of business studies degree in accounting from Dublin City University.

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