Asia Pacific Insurance Tax News November 2008

Financial Services

PricewaterhouseCoopers Asia Pacific Insurance Tax News is a periodic publication that offers insights into trends and developments in insurance and taxation.

Contents Foreword 03 Australia – New legislation impacts foreign non-life Welcome to our first issue of the PricewaterhouseCoopers (PwC) Asia Pacific insurers Insurance Tax News 06 China – Meeting stormy challenges ahead in It gives me great pleasure to launch our latest tax publication for the insurance tax insurance industry - the Asia Pacific Insurance Tax News. 08 India – Some taxing issues for the life insurance industry The Asia Pacific region is an exciting place to be. As set out in Swiss Re’s publication sigma 03/2008, based on the results of its 2007 World Insurance 10 Korea – Tax treatment of Survey, the Asia Pacific region is home to three of the top ten insurance Variable Insurance countries in the world by total premium volume. Japan was ranked third, 12 Philippines – Taxwise or Korea seventh and China tenth. Asia Pacific is also home to India and China, otherwise, insurers should the two most populous countries in the world. Add on to that mix the low be happy insurance penetration rates in countries like Indonesia and Vietnam, and 14 Singapore – Incentives to you’ll find that Asia Pacific must be one of the most desirable insurance reduce your effective tax regions in the world today. rate 17 Taiwan – New Despite its attraction, the Asia Pacific region is a minefield where taxation is developments in tax for concerned. Quite often, we find that the tax laws are not designed to cater to insurance companies the special situations of insurers. We also find tax laws struggling to keep up with the innovation and developments in the industry. The rapid proliferation and updates around regulations and accounting standards also pose additional tax challenges.

In this issue of Asia Pacific Insurance Tax News, our specialists from seven countries will share with you some of these insurance tax issues. I hope you will find them of interest. Please do give us your feedback on the issues discussed and what topics you would like to see addressed in future issues.

YIP, Yoke Har Asia Pacific Insurance Tax Leader PricewaterhouseCoopers

pwc The Asia Pacific Insurance Tax News offers an insight into topical tax issues in the insurance industry in the Asia Pacific. If you would like to discuss further any of the issues raised, please contact the individual authors or the country contacts listed at the end of each article. Australia New legislation impacts foreign non-life insurers in Australia

Foreign non-life insurers who • High value insureds who are most aspects of the business subject are writing Australian business, sophisticated purchasers of non- to certain approvals obtained from or contemplating doing so, have life insurance bearing complex offshore. Hence, an agent can have always needed to consider whether risks the following responsibilities: they have a taxable presence in • DOFIs which cover atypical risks Australia and therefore, subject to • Authorised to write business on such as risk arising from nuclear, Australia’s corporate tax regime. behalf of the DOFI terrorism or aviation risks Whereas a technical analysis might • Appointed to manage have been relatively straight-forward • DOFIs which cover customised investments/assets in Australia in the past, an introduction of new risks regulatory requirements mean that • Delegated to manage the the implications to foreign non-life Permanent establishment underwriting process in Australia insurers now need to be revisited. including claims handling Prior to the introduction of the new • Tasked to provide administration DOFIs – considered regulatory requirements, DOFIs were services generally taxed on 3% of premiums authorised insurers under • Entrusted to deal with the derived by them from Australian new prudential requirements regulators. insureds. Where the DOFI was acting New legislation, operating from through an agent, that agent had the obligation of collecting tax and Implications on income tax 1 July 2008, now requires direct position offshore foreign insurers (DOFIs) remitting it to the Australian Taxation Office (ATO). operating in the Australian non-life From an income tax perspective, insurance market to be authorised even though a DOFI may use an insurers and therefore, subject to With the new prudential requirements, DOFIs choosing to agent which may be independent, Australia’s prudential requirements. there is still a likelihood that the DOFIs are typically foreign insurers continue its operations in Australia can do so in a number of ways: DOFI is carrying on a business writing non-life insurance business in through a permanent establishment Australia through an agent or broker. • Open a branch operation in in Australia. Assuming this is the Australia case, it will have a taxable presence These new rules were introduced to in Australia and be taxed on profits ensure that adequate protections are • Open a subsidiary in Australia at the corporate tax rate of 30%. afforded to policyholders of DOFIs. • Appoint an agent in Australia. In addition, where the DOFI has As a result, DOFIs are now regulated reinsurance arrangements relating in a manner consistent with domestic to Australian risks, an election can insurers and those foreign insurers Operating through an Agent be made such that the reinsurance with existing branches or subsidiary Typically, in the short term, most premiums paid by the permanent operations in Australia. DOFIs in Australia seem to prefer establishment are deductible and to operate through an agent, reinsurance recoveries assessable. One of the prudential requirements particularly where the Australian Should this election be made, a of holding an insurance licence in business written is not substantial. 3% tax applies to the reinsurance Australia is that DOFIs must maintain Under such circumstances, since premiums paid to the non-resident sufficient assets in Australian to meet the DOFI would not normally have reinsurer. The contrasting tax their liabilities. There are however staff in Australia, the appointed positions are summarised in the proposed exemptions from being an agent would typically administer table on the next page: authorised insurer which apply to:

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 that this will likely happen sometime DOFI Income tax position Offshore reinsurance in the near future. No Australian permanent Australian insured or agent Unaffected by Australian tax establishment is required to withhold 3% of premiums Impact on cost

Australian permanent Taxed at 30% of taxable If no election – reinsurance Where DOFIs are compelled to establishment profits premiums are non-deductible comply with Australia’s regulatory and reinsurance recoveries non- requirements, careful consideration assessable. should be given to income tax issues If election is made – 3% tax - particularly, whether there is a on reinsurance premiums; permanent establishment and how reinsurance premiums are the transition is managed. In some deductible and reinsurance areas the technical analysis is not as recoveries assessable. straight-forward as in the past. Aside from income tax obligations, there Where a DOFI finds itself operating the amount which is attributable to are also a number of indirect taxes through a permanent establishment, that permanent establishment. The that may apply and these include there are also a number of complex profits attributed to the permanent stamp duty, goods & services tax transitional issues to consider. establishment are then determined and fire service levies. These indirect In particular, it is not entirely on the assumption that the taxes can become a significant cost clear how Australia’s tax regime, permanent establishment is a distinct concern to the business and which applicable to insurance permanent and separate enterprise. is why their implications should be establishments, takes into account considered thoroughly. businesses that are written before Australia moreover has the DOFI was seen to be carrying on comprehensive transfer pricing rules its business through a permanent in its domestic legislation. The rules establishment. It is unclear because require permanent establishments to there does not appear to be any deal with related parties on an arm’s jurisdiction limitations imported into length basis. these provisions. At worst, it implies a potential for double taxation. On 18 July 2008, the OECD released the final Report on the Attribution of Attribution of profits Profits to Permanent Establishments Parts I - IV (the Report). Part IV of the Report relates to the Where a DOFI is carrying on insurance industry and it prescribes business through a permanent a methodology for determining establishment, a question arises the profits to be attributed to the as to the amount of profits to be permanent establishment. It is taxed. The business profits article beyond the scope of this article in the double taxation agreements however to discuss the details of the with which Australia has entered Report, but it is worth noting that into generally states that the although the ATO has not publicly amount of profits of the non- endorsed the Report, it is anticipated resident to be taxed in Australia is

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 Peter KENNEDY Tax Partner PricewatehouseCoopers Australia

Darren MACK Tax Director PricewaterhouseCoopers Australia

Peter and Darren specialise in both life and non-life insurance taxation. They have a strong commitment to the Australian insurance industry and have lobbied the Government on behalf of clients, participating in industry bodies and associations, and working closely with key insurance representatives at the ATO.

For further information, please contact: Peter KENNEDY +61 2 8266 3100 [email protected] Darren MACK +61 2 8266 9132 [email protected] Sarah BARNETT +61 3 8603 4343 [email protected] Tom TORYANIK +61 2 8266 2236 [email protected] Josephine LEE +61 2 8266 0915 [email protected] Samuel G LEE +61 2 8266 9218 [email protected]

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 China Meeting stormy challenges ahead in insurance tax

Despite its attraction, the China face the problem of tax loss expiry, Business tax and stamp duty investment and tax environment is and may have to endure significant extremely challenging for foreign write-offs of related deferred tax In China, indirect taxes often exceed insurers not simply because of its assets in their books. Careful income tax and can have a far constantly changing regulations, planning is therefore required to greater impact on foreign insurers. but also the ambiguity sometimes enable foreign insurers to earn an surrounding the interpretation of income stream within the five years Non-life insurers are subject to an tax policies and the prevailing time frame that allow them to utilise insurance premium tax known as inconsistencies underlying their tax loss before its expiration. Business Tax (BT) which is levied at enforcement practices. 5% on the gross insurance premium Tax deductibility of various earned. This article highlights some of the insurance reserves latest developments in the China tax Life insurers are in a more tax and regulatory regime that may affect One of the major tax challenges advantageous position as life foreign insurers operating in the fast for foreign insurers in China is the insurance products may be granted growing China market. deductibility of various insurance BT exemption upon proper approval reserves and provisions. A number by the Beijing State Administration Reduced tax rate under the of the key tax rulings in China of Taxation. However, the new income tax law which have set out tax treatments application for BT exemption is a on this subject were issued back time-consuming and cumbersome The new China corporate income tax in the late 1990s. They basically exercise because every new product law bears good news to insurers as limit tax deductions of insurance needs a separate exemption to be the new law reduces their tax rate reserves to the same limits as granted. If a new life insurance from 33% down to 25% effective those applying under the insurance product is launched before a BT 1 January 2008. However, many accounting rules prevailing in China exemption application is approved, foreign insurers are still operating in at that time. However, the Chinese BT would have to be paid on the a loss position and therefore cannot insurance accounting rules have related premium income during the enjoy any immediate benefit from the undergone significant changes interim period. tax rate reduction. when a comprehensive new set of Another indirect tax affecting insurers accounting standards, which were is stamp duty which is levied at 0.1% Generally speaking, the gestation effective in 2007, was introduced. on the premium amount stated in period for foreign insurers in This has led to greater book-tax property insurance contracts. The China can be in the region of 8- differences for the insurers in China. 10 years. Fierce competition and stamp duty is imposed on the parties rapid geographic expansion also The introduction of the new income to the property insurance contract. contribute to the significant loss for tax regime in China (effective However, the stamp duty regulations the foreign insurers in China during 1 January 2008) created significant are not entirely clear on whether their start-up period. However, tax uncertainty as to whether the reinsurance contracts are also losses in China can only be carried old tax rulings governing the tax dutiable documents. This uncertainty forward for a period not exceeding deductibility of the various insurance has posed concerns and challenges five years. reserves are still applicable. There is to reinsurers in China. therefore a pressing need for China’s Foreign insurers that have been tax authorities to clarify the basis operating for more than five years in of claiming tax deductions for the China but are unable to breakeven various insurance reserves without further delay.

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 New products The way ahead Matthew WONG Tax Partner PricewaterhouseCoopers One of the biggest opportunities Positive regulatory reforms in China China faced by foreign insurers is their will usher abundant opportunities ability to introduce innovative for foreign insurers to achieve products to the customers. For greater market share; and broaden example, there was significant product offerings. At the same time, growth in unit-linked life insurance China’s tax landscape for insurers products at a time when the stock will change significantly in the areas Matthew is the practice leader of the market in China was relatively strong. highlighted in this article. The need China Financial Services Tax Group in for foreign insurers to perform a PricewaterhouseCoopers. He specialises Some of these life insurance comprehensive operational tax in financial services and has extensive products are structured with strong review on their business in China is experience advising insurance companies in savings and investment components. of paramount importance in order China and foreign insurers on structuring their investments into China. In China, banks are required to to navigate the new operational withhold individual income tax on environment more effectively and payment of interest to individual cost efficiently and allow them to customers on savings deposits. gain greater competitive advantage However, the question of whether going forward. this withholding requirement will be extended to life products with savings and investment elements is still a grey area. Tax authorities in various locations in China have started to make extensive queries on these products and some have sought to argue that these products are of a similar nature to savings deposits, and thus are subject to withholding tax. For further information, please contact: Foreign insurers intending to build Matthew WONG up a significant portfolio of these +86 21 6123 3052 products should carefully monitor [email protected] the latest developments on this topic Kenny LAM in view of the potential operational +86 21 6123 2595 [email protected] tax risk, which can be significant, in connection with the withholding tax Rex CHAN +86 10 6533 2022 issues on these products. [email protected] Catherine TSANG +86 755 8261 8383 [email protected] GOH Liang Shang +852 2289 5609 [email protected]

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 India Some taxing issues for the life insurance industry

Life insurance companies in India for to the surplus so arrived. disclosure purposes as required are regulated by the Insurance under the insurance regulations, Regulatory and Development In view of these special provisions and as such, the surplus (deficit) Authority (IRDA). The IRDA was overriding the general rules under the two accounts need to constituted in 1999 and has since applicable for the computation of be aggregated when determining prescribed various regulations business income, items that are taxable profits. The premise for this including those relating to the normally considered for adjustments approach is moreover supported preparation of financial statements, to determine taxable business by IRDA regulations since under maintenance of solvency margins, income are instead not considered in the requirements, life insurance investment restrictions, and the computation of taxable income companies are not allowed to carry others, for all Indian life insurance of a life insurance company. on any business other than life companies. insurance business - an aggregation Further, taxable profits of a life of both the accounts would reveal The Indian insurance sector opened insurance business are taxable at the proper income tax profits from up to the private sector in the year a special tax rate of 12.5% (plus the insurance activities. Further, 2000. Up until the opening up of the applicable surcharge and cess); in such cases, transfers, if any, sector, the life insurance business in whereas any other income is taxable made from the shareholders to the India was dominated by the state- at the normal corporate tax rate policyholders account (or vice versa) run Life Insurance Corporation of which currently stands at 30% (plus should be ignored while computing India, which today continues to have applicable surcharge and cess). the taxable profits. a large, albeit declining, share of the market. Post-2000, taking advantage Policyholders and Tax authorities may adopt a stand of a more liberalised regime, several shareholders accounts where only the surplus (deficit) foreign insurance groups have set up arising on the policyholder’s account joint ventures with local partners. A core tax question faced by are to be attributed to the life the Indian insurance industry is insurance business, and that the Special provisions what should be the basis for the special provisions discussed above computation of taxable profits would apply only to such profits. From a taxation standpoint, life in the life insurance business. It Under such a case, the beneficial insurance companies are governed relates to the distinction between tax rate of 12.5% (plus applicable by special provisions under Indian the policyholders account and the surcharge and cess) would apply income-tax law, which overrides shareholders account since, in the to these profits alone, whereas the general rules applicable for format prescribed by IRDA, every the surplus (deficit) arising in the taxation of other business profits. life insurance company is required shareholder’s account would be Broadly speaking, based on these to maintain these two accounts treated as profits from business special provisions, taxable profits separately. other than life insurance. The taxable of life insurance companies shall income on the shareholder’s account be taken to be the annual average The issue therefore is around would be calculated considering the of the surplus (deficit) arrived at by whether insurance companies normal provisions of the income-tax adjusting the opening surplus (deficit) have to prepare and file their tax law and taxed at the normal rate of from the year-end surplus (deficit) as returns of income by aggregating 30% (plus applicable surcharge and determined by the actuarial valuation the surplus (deficit) shown under cess). made in accordance with the these two accounts. It can be Such a position taken by the Insurance Act, 1938. No separate argued on the grounds that these Indian tax authorities could result adjustments are specifically provided two accounts are prepared only for

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 in significant tax exposures for life Challenges for the industry Gautam MEHRA insurance companies. This is an Partner – Tax and Regulatory Services industry issue, and in this context, The above illustrates some of the PricewaterhouseCoopers efforts are being coordinated in tax challenges faced by the life India joint representation through their insurance industry in India. The representative body, Life Insurance current Indian tax provisions are Council. However, the outcome certainly not designed to cater to of such representation and of the the special situation of life insurers litigation currently appears uncertain. and we do expect more issues to Rajesh BHAGAT surface as the industry develops. It Manager – Tax and Regulatory Services is important that the life insurance Carry forward and set off of PricewaterhouseCoopers losses industry keeps abreast of these India issues and remains in dialogue with Another aspect which impacts the Indian authorities. industry concerns the timeframe for the carry-forward and set-off of business losses. Both Gautam and Rajesh specialise in tax for the financial services sector. Gautam, In the initial years of operations, life with over 22 years of experience, provides insurance companies typically incur strategic tax inputs to both large multinational losses due to their income (including as well as domestic players. Rajesh, focusing predominantly on the insurance sector, has premium) being lesser than their extensive experience advising on insurance actuarial liability on the policies taxation and regulatory matters, trust taxation issued. These losses are carried and fund structuring, amongst others. forward to be set-off in subsequent years. Under Indian income-tax law, such brought-forward business losses can be set-off by a company For further information, please contact: against business profits in the Gautam MEHRA subsequent years. Such losses +91 022 6689 1155 are available for carry-forward for [email protected] a maximum period of up to eight Punit SHAH years. +91 022 6689 1144 [email protected] Since there is a relatively longer Rajesh BHAGAT gestation period for insurance +91 022 6689 1114 [email protected] companies, the losses incurred in the initial years could lapse as Akash GUPT +91 011 2323 2916 there may not be sufficient income [email protected] available for set-off in subsequent Amit AGARWAL years. This being an industry issue +91 011 2323 2916 representations have been made to [email protected] the Indian authorities to extend the K S PRASAD time limit for the carry-forward of +91 080 4079 6000 [email protected] such losses.

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 Korea Tax treatment of Variable Insurance

The taxpayer’s position However, the NTS argued, on to become an industry issue; an the grounds of substance, that issue which could potentially incur Variable Insurance provides to unrealised gains in the Variable trillions of Korean Won in taxes and policyholders benefits which vary in Insurance Separate Account should penalties. accordance with the performance of not be adjusted for tax purposes the investment portfolio that is being by the insurance company since The existing rules for the Variable managed on behalf of the Variable the policyholders are the real Insurance Separate Account have Insurance policyholders. beneficiaries from the Variable the effect of creating a timing Insurance Separate Account, rather difference between book and tax. For accounting purposes, the than the insurance company. As mentioned above, in a bullish Variable Insurance is maintained in market, a temporary tax deduction the Separate Account of insurance Consequently, the taxpayer engaged for unrealised gains is created. companies. However for tax PwC Korea to defend its current tax Likewise, in a bearish or “down- purposes, the Variable Insurance treatment after the NTS had notified trending” market, as we are currently Separate Account is treated as that it would issue a tax assessment experiencing, the adjustment to part of the insurance company’s to the taxpayer in relation to this unrealised losses have the effect of own assets and liabilities. As a issue. creating a temporary taxable income result, any unrealised gains and to the insurance company. In a losses relating to the investment A more favourable ruling bearish market, the acceleration component in the Variable Insurance of tax payments as a result of the Separate Account are required After months of meetings and adjustment for unrealised losses to be adjusted for tax purposes. discussions with both the NTS and could create cash flow issues for In a bullish market, this has the the Ministry of Strategy and Finance some insurance companies. effect of creating a temporary tax (MOSF) which was responsible deduction for unrealised gains, even for drafting the tax law and the Amendment to the law? though the insurance company’s highest authority in Korea for the position is considered neutral from interpretation of the tax law before Perhaps, the better way is for the tax both accounting and economic the courts, PwC Korea successfully treatment of unrealised gains and perspectives. obtained a ruling from MOSF to losses of investments in the Variable affirm the treatment adopted by the Insurance Separate Account to be Recently, in the course of taxpayer based on current law. aligned with accounting treatment investigating a US-based life and economic substance. In this insurance company, the Korean Together with a more favorable regard, we understand that the National Tax Service (NTS) ruling, PwC Korea was also able to MOSF is seriously considering challenged the current tax treatment finally convince the pre-assessment the amendment of the relevant of the Variable Insurance Separate panel reviewing this issue at the provisions of the Korean corporation Account. NTS, that a tax assessment should tax laws. PwC Korea supports such not be raised. a change and we will be submitting a Initial position taken by the memorandum to the MOSF on how NTS Industry Impact the current provision ought to be changed. The treatment adopted by the The final decision by the NTS not taxpayer was in accordance with to raise a tax assessment has the strict reading of the tax law. effectively curtailed what was going

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 10 David Jin-Young LEE Tax Partner PricewaterhouseCoopers Korea

Hoon JUNG Tax Director PricewaterhouseCoopers Korea

Lee and Jung specialise in life and non- life insurance taxation and have helped Korean and offshore insurers on taxation requirements. They have, over the years, on behalf of their clients, worked closely with key insurance representatives of the Korean Taxation Office as well as various insurance industry and tax bodies and associations.

For further information, please contact: David Jin-Young LEE +82 2 709 0557 [email protected] Shin-Jong KANG +82 2 709 0578 [email protected] In-Hee YUN +82 2 709 0542 [email protected] Tae-Gyung KIM +82 2 709 8853 [email protected] Hoon JUNG +82 2 709 3383 [email protected] Yeon-Ho CHANG +822 3781 9853 [email protected]

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 11 The Philippines Taxwise or otherwise, insurers should be happy

The Bureau of Internal Revenue’s consultation between the BIR and 4. Inspection and medical fees. (BIR) paradigm shift in revenue representatives of the industry collection has resulted in a barrage organisations, the BIR finally issued Marketing cost which is of revenue issuances serving in August 2008 the RMC 59-2008 considered indispensable to to clarify and provide additional which amended RMC 30-08. As produce and deliver insurance guidelines in tax collection in the a compromise, RMC 59-2008 products is excluded from different business sectors and excluded some of the objectionable the allowable deductions. industries. provisions of RMC 30-08 although However, other expenses certain provisions which were, which are not considered While we can understand that nonetheless, amenable to the as direct cost, such as the initiatives are geared towards industry were retained. investment expenses relating effective implementation and to investment income not enforcement of tax laws, a number The salient features of the new RMC subjected to final tax, are of the issuances appeared to are: allowed as deductions from have crossed the line between gross income. implementation and legislation. I. Minimum corporate income tax II. Documentary stamp tax A recent revenue issuance which The following direct costs are has caused quite an uproar in the allowed as deduction from 1. P15 DST is imposed on insurance industry is Revenue gross income for purposes individual certificates issued Memorandum Circular (RMC) 30-08 of calculating the 2% MCIT pursuant to group policy which the BIR issued in April 2008. of life and non-life insurance contracts and Certificates companies: of Cover on motor vehicle This RMC expanded the scope and insurance. The DST on coverage of the 5% premium tax 1. Salaries, wages and other these documents, though, is and the Documentary Stamp Duty employee benefits of opposed by the industry on (DST) on insurance contracts and personnel directly engaged grounds of double taxation, certificates; extended the application in underwriting; claims and since DST is already imposed of the gross receipts tax on certain benefits; actuarial costs; on the premiums collected income of insurance companies and policy owner services, such as under the insurance contract. limited the allowable deductions but limited to policy changes from gross income for purposes and amendments; policy 2. A health and accident of calculating the 2% Minimum endorsements/assignments; insurance policy is treated Corporate Income Tax (MCIT). policy benefits and features; as a life insurance contract changes in forfeiture options; and, as such, is subject to In view of its controversial provisions, and policy reinstatements. DST under Section 183 of various business groups within the the Tax Code which refers to industry, e.g., Philippine Insurers 2. Commissions on direct Stamp Tax On Life Insurance and Reinsurers Association and writings/reinsurance. Policies. It is no longer under Philippine Life Insurance Association, Section 185, which refers to have asked the Department of 3. Cost of facilities directly Stamp Tax on Fidelity Bonds Finance for the deferment of the utilised in providing the and Other Insurance Policies. implementation of the RMC. service such as depreciation The change in basis means a or rental of equipment used reduction in DST from 12.50% After a series of dialogue and and cost of supplies. (P0.50 on each P4) to 0.25%

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 12 (P0.50 on each P200) based Positive results Malou LIM on the premium collected. Tax Partner PricewatehouseCoopers The combined efforts of the different Philippines 3. Certificates issued to a players in the insurance industry policyholder evidencing his have gained positive results since or her contribution to the majority of the changes embodied variable unit link fund partakes under RMC 59-2008 are favorable to the nature of a deed of trust. the industry. Accordingly, these certificates Genevieve LIMBO are not subject to the DST Although some objectionable Tax Senior Manager prescribed under Section 195 PricewaterhouseCoopers provisions were retained, the final Philippines of the Tax Code since DST product was still acceptable to both is already collected on the the BIR and the industry. premiums from the variable contracts under Section 183 Open dialogues and discussions of the same Code. with the BIR on an industry basis should be exhausted. Such an Both Malou and Genevieve have extensive III. Business tax exercise gives the BIR a clearer experience advising multinational companies understanding and appreciation in insurance tax. Premiums paid on health and of the nature and peculiarities and accident insurance issued by problems of the transactions and both life and non-life insurance practices within the industry and, companies are subject to thus, helps it formulate guidelines 5% premium tax. However, that would ensure efficient tax other related payments which collection in any one particular before were considered part of industry. premiums such as re-issuance fees, reinstatement fees, renewal The insurance industry was fees as well as penalties paid to pleased with the progress made in the life insurance companies, achieving an amendment of RMC are now treated as services fees 30-2008. However, the industry subject to 12% value-added tax believes that there are still a number For further information, please contact: under Section 108 of the Tax Alex CABRERA of issues to be resolved. Hence, +63 2 459 2002 code, or Percentage Tax under during the last week of September [email protected] Section 116 of the same Code if it several insurance companies filed Malou LIM does not exceed the P1.5-million a petition before the Court of Tax +63 2 459 2016 threshold. Appeals (CTA) questioning pertinent [email protected] provisions of RMC 59-2008. No Genevieve LIMBO Lastly, application of the 5% GRT +63 2 459 2017 action has yet been taken by the CTA [email protected] has also been expanded to cover pending the filing of a reply by the other types of investment income Roselle YU Bureau of Internal Revenue. +63 2 459 2123 of insurance companies such [email protected] as income from investments in John Edgar MAGHINAY real estate which are considered This article first appeared in BusinessWorld in +63 2 459 2011 income from performing quasi- the Philippines, “Taxwise or Otherwise” on 25 [email protected] banking activities or similar September 2008. banking activities.

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 13 Singapore Incentives to reduce your effective tax rate

Insurance business is becoming apply to the Monetary Authority of 2008, aims to stimulate the growth increasingly globalised and mobile. Singapore (MAS) for an incentive to of Islamic insurance in Singapore Singapore is not just competing pay tax at the reduced rate of 10% and ensure that Singapore does not within Asia against locations such on the profits it derives from insuring miss out on the exponential growth as Hong Kong and Labuan, but and reinsuring “offshore risks” of Islamic insurance in the region. also competing for the international or from carrying on “offshore life It offers a 5% incentive tax rate for insurance dollar against popular tax- business”. five years to qualifying insurers on favoured locations such as Bermuda, income derived from writing offshore Ireland and Luxembourg. In practice, there are no specific Takaful and Retakaful business. qualifying conditions for this Use of tax incentives incentive and approval for it is The tax incentive is available upon generally always given. application to, and approval from, the MAS from 1 April 2008 to 31 Singapore has long used tax March 2013. Applicants will be incentives to draw business activity 10% tax for offshore evaluated based on their proposed to its shores. In the insurance insurance broking services incremental number of experienced space, a variety of incentives exist professionals who are significantly to entice global insurance players This incentive was introduced in involved in the Shariah-compliant to base their regional operations 2008 to support the development activities and their business in Singapore and place their non- of offshore insurance broking development plans for Singapore. Singapore (i.e. offshore) business in services in Singapore. It grants a Singapore. Most of these incentives 10% concessionary tax rate on apply to insurers and reinsurers but commission and fee income derived 0% tax for offshore there are some that are aimed at from the provision of insurance specialised risks business insurance brokers, service providers broking and advisory services in and captive owners. Some of these Singapore by qualifying insurance This tax exemption scheme is incentives are discussed below. and reinsurance brokers, to non awarded for a period of five years Singapore-based persons. to any insurer who underwrites at Low normal corporate tax least one of the following specialised rate This tax incentive scheme is on insurance risks: an application and approval basis from 1 April 2008 to 31 March 2013. (a) Terrorism Risks; The normal corporate tax rate in Both existing and new brokers can Singapore, currently at 18%, is one apply for this scheme, subject to (b) Political Risks; of the lowest in the Asian region. In eligibility criteria which will include addition, partial tax exemption exists an evaluation of the applicant’s (c) Energy Risks; and such that, effectively, S$152,500 of proposed incremental number of the first S$300,000 of normal taxable experienced professionals employed (d) Aviation and Aerospace Risks. income is exempt from tax. and business development plans in Singapore. This incentive aims to support 10% tax for offshore the development of expertise and insurance business capacity in the above specialised 5% tax for offshore Takaful business lines. The window period Under the long standing offshore and Retakaful business for approval for this incentive is from insurance incentive, a Singapore- 1 September 2006 to 31 August This incentive, also introduced in based insurer or reinsurer may 2011.

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 14 The MAS had earlier advised that experience; and non-Singapore) companies. applicants for this incentive would • At least S$3 million marine hull be expected to recruit and maintain Depending on the size of the & liability premium volume in the at least two additional insurance applicant company, the number preceding financial year. professionals, where one of whom and extent of headquarter services possesses at least 7 years of provided, the number of professional experience in the underwriting of 0% tax for offshore captive employed and the number of non- the qualifying specialised insurance insurance business Singapore entities serviced, the FSI- risks. HQ incentive may be awarded for a Captive insurance companies period of up to 10 years. who are licensed to carry out 0% tax for onshore and such captive insurance activities offshore marine hull & in Singapore may apply for a tax 5% tax for high value-added liability business exemption in respect of their offshore processing services insurance business. The effect of this This tax exemption (0%) scheme incentive is to bring the otherwise The Qualifying Processing Services is available upon approval for a 10% tax rate for offshore business Company (QPC) incentive scheme period of up to ten years to non-life down to 0%, making Singapore an was first introduced in 2004 to direct insurance and reinsurance attractive alternative captive location encourage the provision of high companies (including P&I clubs) in as compared to other usual captive value processing services in the Singapore. Under this exemption locations like Bermuda, Cayman or financial activities of treasury and scheme, approved marine hull & even Labuan. securities, asset management, liability insurers who have made private banking, wholesale banking additional commitment to write The incentive, which is for ten years, and retail banking. In 2004, the QPC marine hull and liability insurance is available upon application from 17 incentive scheme was extended to business from Singapore can enjoy Feb 2006 to 16 Feb 2011. There are the insurance industry. tax exemption on their qualifying no other qualifying conditions for this income. incentive. This incentive scheme gives a QPC a 5% incentive tax rate, for either This is the only incentive which five, seven or ten years, on qualifying applies to both offshore and 10% tax for Financial income derived from the provision, onshore businesses and is intended Services Incentive (FSI) - in Singapore, of prescribed high to complement other shipping Headquarter Services award value processing services in support incentives available to promote of designated insurance and other Singapore as a shipping hub for the Insurance groups who set up financial sector activities. region. their global or regional offices in Singapore to provide headquarter- The prescribed high value processing Applications for the incentive will be type services to its network entities services for the insurance industry evaluated based on both qualitative in the region could qualify for the are: (expertise, business plans, etc) and FSI Headquarter Services award quantitative criteria such as the (“FSI-HQ”). This would entitle the • Run-off management and related following: FSI-HQ company to be taxed at services the concessionary rate of 10% on • Claims management and • At least one dedicated marine income derived from the provision processing services hull and liability underwriter with of qualifying headquarter services to at least five years of relevant its approved network (which must be • Loss adjusting services

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 15 • Policy issuance, processing, exemption on income derived by the YIP Yoke Har administration, renewal and SPRV, fixed recovery of goods and Partner – Tax Financial Services collection services services tax on business expenses PricewaterhouseCoopers of the SPRV, stamp duty remissions • Risk modeling and related Singapore on asset transfers and withholding services tax exemption on certain over- Among the qualifying criteria for this the-counter financial derivatives incentive are the following: payments that the SPRV may be liable to pay to a non-resident person GOH Chiew Mei in connection with the securitisation Manager – (a) the QPC must employ Tax Financial Services and maintain at least eight transaction. PricewaterhouseCoopers professional earning more than Singapore S$3,500 per month Potential reduction in effective tax rate? (b) the QPC must provide the processing services to at least As can be observed, Singapore has Both Yoke Har and Chiew Mei specialise in two countries outside Singapore. a slew of attractive tax incentives insurance and have extensive experience to attract insurance business advising insurance companies in areas of activities to Singapore. Each of these corporate taxation, product taxation, mergers Approved Special Purpose and acquisitions, tax due diligence and Vehicle engaged in asset incentives has its own qualifying restructuring transactions. Yoke Har is also securitisation transactions criteria which can be a minefield the Asia Pacific Insurance Tax Leader in (ASPV Scheme) to navigate. To benefit from these PricewaterhouseCoopers. incentives, insurers will need to The ASPV Scheme, which has been understand their own commercial in existence since 2004, grants circumstances and their ability certain tax concessions to an to restructure their business or approved Special Purpose Vehicle otherwise use the incentives. With the right planning and structure, (SPV) that is set up for the purpose For further information, please contact: of a securitisation transaction. To these tax incentives could potentially YIP Yoke Har further support the development be used to reduce a global or +65 6236 3938 of Singapore as an alternative risk regional insurer’s effective tax rate. [email protected] transfer and structured finance Paul LAU centre in Asia, the ASPV Scheme +65 6236 3733 [email protected] was extended to include insurance- related risks in 2007. Anuj KAGALWALA +65 6236 3822 [email protected] Thus, where insurance risks are Nur Adila BTE ABBAS transferred into a Special Purpose +65 6236 3729 Reinsurance Vehicle (SPRV) under a [email protected] securitisation transaction approved GOH Chiew Mei by the MAS, certain tax concessions +65 6236 3714 [email protected] may be available to the SPRV during the incentive period. These TAN Chiew Yen +65 6236 3614 concessions will include income tax [email protected]

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 16 Taiwan New developments in tax for insurance companies

The Taiwan Ministry of Finance the insurance companies, while been approved by the FSC. In this (MOF) recently announced a number expressing their willingness to regard, the NTA has indicated that of changes to its tax regulations cooperate and adhere to SFAS current investment-linked insurance and accounting standards. We No.40, requested to postpone the policies should be in relation to discuss below some of the proposed date further to 2012. Ultimately, those taken out by individuals changes affecting insurance 2011 was agreed by both parties. rather than by groups. It follows companies. These will include new that Item 5 of Article 83 under the accounting standards for insurance From a tax perspective, insurance Assessment Rules Governing Profit- companies, changes to the tax companies will need to review the Seeking Enterprises concerning tax treatment of various insurance changes that SFAS No. 40 may have deductibility of group life insurance policies and the tax treatment of on its accounts that are used for tax payment will not be applicable to losses carried forward. reporting purposes. It would then group investment-linked insurance need to understand and assess premiums. Statement of Financial the tax consequences of those Accounting Standards No.40 accounting changes. The earlier Legal ruling requires tentatively set to apply in this is done, the better prepared investment-linked insurance 2011 for Insurers the insurance companies would be. assets to be subject to 2011 is not that far away. estate tax Following discussions between the Financial Supervisory Commission Group investment-linked An administrative court has ruled and (FSC) and members of the insurance insurance premiums may not set precedence that payments from industry, Statement of Financial be tax-deductible for profit- investment-linked insurance policies Accounting Standards No.40 seeking enterprises are to be included in a deceased’s (SFAS No.40): Rules Regarding estate and subject to estate tax. The the Accounting Treatment of The National Tax Administration case involved a deceased person Insurance Contracts looks set to (NTA) has indicated that profit- who, in the two years prior to his or be implemented starting 2011. seeking enterprises which pay for her death had begun to pay heavy SFAS No.40 which requires greater investment-linked insurance policies premiums in an investment-linked life financial transparency has induced as benefits to their employees insurance policy. The NTA, in keeping strong concerns amongst some cannot deduct the related premiums with the principle of fairness in insurers that capital inadequacies will as expenses for tax purposes. taxation and the need for efficiency become more apparent and lead to The NTA does not consider group in the overall system, decided to greater pressures to recapitalise. investment-linked insurance include the value of the mutual funds policies as group life insurance underlying the investment-linked According to sources, the FSC had (i.e. policies with premiums which insurance policy in the deceased’s previously invited life and non- are tax deductible). Pursuant to a estate which is subject to estate tax. life insurers to discuss the timing public ruling by the Executive Yuan’s of the implementation of SFAS FSC, the only type of investment- Unapproved foreign No.40. The Accounting Research linked insurance policies currently insurance policy payments and Development Foundation, approved by the FSC is the ones subject to estate tax responsible for the implementation taken up by individuals. At present, of SFAS No.40, had recommended group investment-linked insurance The MOF has indicated that receipts that the accounting standard be policies and group investment-linked of life insurance payments made implemented in 2010. However, annuity insurance policies have not on foreign insurance policies,

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 17 that is policies issued by foreign This change would be welcomed Richard Watanabe insurance companies, that have by a number of foreign insurers Tax Partner and Territory Industry Leader not been approved by the FSC who have experienced tax losses PricewaterhouseCoopers are not exempted from estate tax. as they are still in expansionary or Taiwan Estate executors have to include investment phases in the Taiwan life insurance payments from such market. Enactment of proposed policies in the deceased’s net estate provisions as set forth in this which is subject to tax. The MOF newsletter is still currently under said the exemption of life insurance discussion in the Taiwan Legislative Richard is a financial services tax partner payments in Item 9 of Article 16 Yuan. It is difficult to predict when of PricewaterhouseCoopers Taiwan who of the Estate and Gift Tax Act relevant legislation will be passed has advised on many complex deals and was mainly to accommodate the and we will be closely monitoring transactions such as mergers and acquisitions, corporate restructuring, international and rules stipulated by the Insurance progress and providing updates as Taiwan tax planning and global transfer pricing Act. Payments from life insurance we move ahead. services, to local and international insurance contracts with identified beneficiaries companies. and who are exempted from estate tax are limited only to those defined by Article 112 of the Insurance Act. Otherwise, payments from life insurance contracts that have not been approved by the FSC (and as such have not met the requirements stipulated within Article 112 of the Insurance Act) will still need to be included in the deceased’s estate and subject to estate tax.

Losses carried forward period to be extended

The Executive Yuan has the intention of extending the tax losses carried forward period of profit-seeking enterprises from the current five years (starting from the year losses are incurred) to ten years. According For further information, please contact: to the MOF documents, there is a Richard WATANABE global trend of extending losses +886 2 2729 6704 carried forwards and many countries [email protected] – including Hong Kong, Malaysia, Rosamund FAN +886 2 2729 6666 ext 23702 Singapore and others – no longer [email protected] limit the time losses carried forward CHIEN Ying-Te will expire. +886 2 2729 6666 ext 23667 [email protected]

Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 18 PwC Asia Pacific Insurance Tax Country Leaders

Australia Peter KENNEDY +61 2 8266 3100 [email protected] China Matthew WONG +86 21 6123 3052 [email protected] Hong Kong Rex HO +85 2 2289 3026 [email protected] India Gautam MEHRA +91 22 6669 1155 [email protected] Indonesia Margie MARGARET +62 21 528 90862 [email protected] Japan Tetsuo IIMURA +81 3 5251 2834 [email protected] Korea David Jin-Young LEE +82 2 709 0557 [email protected] Malaysia Frances PO +60 3 2173 1618 [email protected] New Zealand Paul MERSI +64 4 462 7272 [email protected] Pakistan Soli R PARAKH +92 21 2416434 [email protected] Philippines Alex Cabrera +63 2 459 2002 [email protected] Singapore YIP Yoke Har +65 6236 3938 [email protected] Taiwan Richard WATANABE +88 6 2 2729 6704 [email protected] Thailand Somboon WEERAWUTIWONG +66 2 344 1247 [email protected] Vietnam VAN Dinh Thi Quynh +84 4 946 2231 [email protected]

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Asia Pacific Insurance Tax News PricewaterhouseCoopers November 2008 19 pwc.com

PricewaterhouseCoopers has exercised professional care and diligence in the preparation of this publication. However, the information contained herein is intended to be a general guide and should not be used or relied upon as a substitute for specific professional advice. While every effort has been made to ensure accuracy, no liability is accepted by PricewaterhouseCoopers or nya employee of the firm on any grounds whatsoever to any party in respect of any errors or omissions, or any action or omission to act as a result of the information contained in this publication.

PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.