MTT45460 - Particular entities and adjustments: Insurance: Recaptured deferred tax liabilities
Section 184(4)(g) of Finance (No.2) Act 2023 includes insurance reserves and insurance policy deferred acquisition costs.
An insurance company collects premiums from policyholders, which is invested into assets to generate earnings from which claims can be paid in the future. When a premium is collected, an insurance company will know that some portion of the premium and earnings on such premium will be needed to pay claims, generally in a subsequent period. Many tax authorities allow a deduction for an amount of collected premiums that is reserved for the payment of future claims.
The amount allowed as a tax deduction in some territories is determined by reference to the amount of reserve requirements set by insurance regulatory agencies, which require insurance companies to hold a certain amount of assets in high-grade, liquid investments to ensure they can pay policyholder claims.
Such regulatory capital requirements typically exceed accounting reserves by a significant amount. The difference between these accounting and tax reserves creates temporary differences that may be sustained over long periods, especially in the case of life insurance where policies are held for significant periods of time.
Deferred tax liabilities in respect of insurance reserves are therefore included within the list of exceptions (see MTT27400) and therefore do not need to be recaptured even if they do not reverse within 5 years. This means the ETR in the year that the deferred tax liability accrued will not need to be recalculated and there is therefore no need to track the reversal of these deferred tax liabilities.
Items relating to in-force contracts (for example, as part of an insurance business acquisition) are where the insurer may recognise the difference in the fair value of the acquired insurance contracts and insurance obligations assumed on acquisition. This item is commonly known as either value of business acquired, present value of in-force business, acquired value of in-force business, or value of business in-force. It may be presented together with another item, such as deferred acquisition costs, or as a separate item in financial statements for reporting purposes. In either case, to the extent recognised, it is intended that such assets and liabilities are within the scope of the exception at Section 184(4)(g) and therefore not subject to recapture.
These items are amortised over a definite period and can lead to material timing differences depending on local tax rules. The long-term nature of some insurance contracts such as life insurance can also lead to significant timing differences, as a result of differences in tax rules and how insurance contracts are valued under different accounting standards.