09 February 2015

Insurance Europe comments on the OECD’s discussion draft : BEPS action point 4

Insurance Europe supports the aims of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan to address weaknesses in the international tax environment and supports the objectives of the discussion draft to address BEPS practices using interest and economically equivalent payments.

Insurance Europe welcomes the acknowledgement in the discussion draft that a different approach is required for the financial sector in light of its particular circumstances and regulatory/operating environment. Requiring tax treatment that is inconsistent with the sector’s regulatory position would undermine the OECD's stated policy aim of disallowing only those deductions which are used to achieve BEPS. Insurance Europe agrees that existing regulatory requirements act already as an effective limitation rule for the insurance sector.

Therefore, Insurance Europe’s first preference would be for insurance company interest to be excluded from the scope of BEPS Action 4.

In the absence of this blanket exclusion, Insurance Europe sees as a second best solution, a role for targeted rules (due to the very material difference of leverage ratios in the (life) insurance industry compared to other industries); best practice should allow territories the flexibility to use and adapt existing rules with a proven track record - including arm’s length rules.

Given that most insurance groups are net interest recipients, as a third best solution a fixed ratio approach may be appropriate for the sector, as long as it is applied on a territory by territory basis, is set at the right level and by reference to the right measure and provided that the ratio test is not so restrictive that it effectively abandons the arm’s length principle.

In any case, Insurance Europe sees that there is an important issue that has to be solved with the proposed scope of the discussion draft’s interest rules presented in Paragraph 35 (i.e. interest on all forms of debt, payments economically equivalent to interest and expenses incurred in connection with the raising of financing). There has to be a precise carve-out for all payments linked to the insurance business; possibly there has to be a positive list of interest that has to be taken into account when computing the allowed interest deduction.

Insurance Europe disagrees with the approach proposed in Paragraph 211 on the basis that a group-wide solution is not appropriate for the insurance industry.

The scope of any limitation of interest deductibility should be restricted to the tax policy concerns identified in paragraphs 3 and 10 of the discussion draft — debt funding of inbound and outbound investments by groups. Therefore, the discussion draft should consider whether any tax policy concerns arise, for example, (i) where the borrower and the affiliate that uses the loan proceeds are in the same country or (ii) where the interest-payer is located in a country that has a tax rate that is equal to or lower than the tax rate in the country in which the affiliate receiving the interest is located (if the interest is otherwise subject to tax).

Europe is an important centre of insurance and reinsurance, with London, Köln, Munich and Zürich being worldwide centres of excellence and many European insurers have worldwide prominence. Paradoxically, a rule that limited interest deductions in such European locations may have the undesired effect of effectively enhancing the competitiveness of competitors based in tax haven territories, and hence running directly contrary to the purposes of the wider OECD BEPs project.

Full position paper

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