AM Best


OECD agreement toward global minimum tax moving forward

The OECD has stated that from 2023 certain multinational enterprises will be subject to a minimum tax rate of 15 percent, in order to base taxes on where profits emerge. George Hansen of AM Best explains.

“The impact will depend on the final nature of the laws passed by the respective governments.”
George Hansen, AM Best

In early October, the Organization for Economic Cooperation and Development (OECD) stated that 136 out of 140 countries and jurisdictions agreed that certain multinational enterprises (MNEs) will be subject to a minimum tax rate of 15 percent, beginning in 2023. The focal point of such action is to base taxes on where profits emerge, even if companies have no physical presence in a particular country or jurisdiction. This is in response to the global digitisation of the economy.

The agreement, consisting of a two-pillar solution, was presented to G20 foreign ministers in Washington, DC on October 13, 2021. A follow-up presentation was made at the G20 Summit in Rome at the end of October.

Pillar 1 of the proposal will apply to MNEs with global sales exceeding €20 billion ($ billion) and profitability above a 10 percent threshold. Profits of up to 25 percent above the 10 percent threshold would be reallocated to market jurisdictions. The OECD estimates that up to $125 billion of profits will be reallocated to jurisdictions each year. Pillar 1 is not applicable to regulated financial services companies.

Under Pillar 2, which will have insurers within its scope, there will be a global minimum tax rate of 15 percent. The minimum tax rate will apply to companies with revenue above €750 million. The OECD estimates that Pillar 2 will annually generate $150 billion of additional global tax revenue.

Insurer accounting differences may lead to double taxation

Insurers globally are subject to numerous accounting regimes, making it difficult to apply the Pillar 2 construct to the industry. Profits may not be realised at the point of sale, as with other industries. While short-term insurance coverages may fit into Pillar 2, longer duration coverages will pose a very difficult challenge when applying Pillar 2 revenue and profit measures. Life insurance, for example, has very long periods over which revenue and profits are realised.

The use of deferred tax balances allows for some of the timing differences between accounting regimes. The insurance industry has sent comments to the OECD recommending that such deferred taxes be taken into account when determining an MNE’s effective tax rate. Without this, insurers could see double taxation and will not be treated on par with other industries.

The devil is in the detail as accounting principles and standards are subject to guidance from accounting authorities. The impact will depend on the final nature of the laws passed by the respective governments, exemptions that some protective governments may seek to sustain their competitive advantage and accounting interpretations.

AM Best believes that the low-tax regimes have been resilient thus far in the face of the US Base Erosion and Anti-Abuse Tax (BEAT) implementation in 2017 and places such as Bermuda and Ireland are also seen as centres of excellence with respect to underwriting, capital management and mature regulatory environments.

George Hansen is a senior industry research analyst in the Credit Rating Criteria–Research & Analytics Department of AM Best. He can be contacted at: george.hansen@ambest.com


Video by dabarti on Envanto, Image by Mr Doomits on Shutterstock

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NOVEMBER 2021


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