Multinational Top-up Tax and Domestic Top-up Tax

MTT45450 - Particular entities and adjustments: Insurance: Covered taxes

A member carrying on life assurance business recognises returns that must be contractually paid over to policyholders within its financial statements as income.

Under some tax regimes, including the UK’s ‘I-E’ regime, life insurance companies are subject to corporation tax on investment income, even though it is earned on behalf of policyholders. Typically, the insurance company will then pass on this tax to policyholders through a recharge. The effect of this is to accelerate the tax so that the income economically belonging to policyholders is taxed as it accrues, rather than on the maturity of the relevant policy.

Multinational Top-up Tax and Domestic Top-up Tax are designed to ensure that large groups pay at least 15% on their profit in each territory. The investment income earned on behalf of policyholders is not economic income of the group, but rather income of the policyholders, and so does not form part of the group’s adjusted profits. It would be inappropriate to include taxes borne on behalf of policyholders in the member’s covered taxes because this would enable an insurer to avoid a top up tax even when the effective tax rate it pays in respect of its adjusted profits is lower than 15%.

Paragraph 173(2)(e) of Finance (No.2) Act 2023 consequently excludes those taxes (including withholding taxes) that are recharged to the policyholder by a member carrying on life assurance business from the definition of Covered Taxes.

The amount of tax that is excluded through Paragraph (e) should be determined based on the local tax return. In the UK, this is determined based on the allocation of profits between the policyholder and the shareholder and only those taxes charged at the policyholder rate are excluded.

The covered tax balance will therefore include the amount of corporation tax charged at the shareholder rate on the shareholder share of the company’s profit (adjusted for deferred tax balances).

Other insurance taxes

Section 173(1)(c) includes taxes that are imposed as a substitute for taxes on profits within the covered tax definition. This ensures that withholding taxes on income are included within covered taxes. These can include withholding taxes on gross premium income, such as the Federal Excise Tax in the United States.

However, indirect taxes such as Insurance Premium Tax in the UK are not included.