Multinational Top-up Tax and Domestic Top-up Tax

MTT45420 - Particular entities and adjustments: Insurance: Profits adjusted to be before tax

As described in MTT21110, the adjusted profits are intended to reflect the member’s profit before tax. The underlying profits are the profits after tax in the relevant financial statements. Section 138 therefore adjusts the underlying profits to remove items in the income tax expense, as well as any income taxes that are accounted for above the line.

Life insurance companies may accrue taxes arising on policyholder income. In such cases, the member’s tax expense in their financial statements may reflect both the taxes borne on their income (often referred to as ‘shareholder income’) as well as any taxes borne on behalf of policyholders. As with any other type of company, the adjusted profits are intended to be based on the profit before any taxes on income. This avoids distortions in the ETR calculation.

The general provision to exclude covered taxes from the underlying profits is in Section 138(2)(a). However, policyholder taxes are specifically excluded from the definition of covered taxes under Section 173(2)(e).

Instead, a specific provision in Section 138(2)(e) ensures that policyholder taxes are excluded from the underlying profits. Policyholder taxes may include withholding taxes as well as corporation tax (or equivalent taxes in other territories). In other words, it does not necessarily matter how the tax is brought into charge and whether policyholder taxes are included within the income tax line of the financial statements.

The reference in Section 138(2)(e) to “to the extent that Section 152(2) applies in relation to those taxes” means that the quantum of the adjustment will generally be equal to the adjustment made under Section 152(2).

In turn, Section 152(2) adjusts the underlying profits by the amount of tax that would have been included in the member’s covered taxes if the exclusion in 173(2)(e) did not apply. In other words, the adjustment to the underlying profits under Section 138(2)(e) will generally be equal to both the adjustment to the underlying profits for the recharge of policyholder tax under Section 152 and to the policyholder taxes excluded from the member’s covered tax balance under Section 173.

Together, the operation of section 152 and 138 should exclude amounts in relation to policyholder tax such that the adjusted profits of the member only include amounts attributable to the shareholders.