The unknown tax impact of IFRS 17
14 April 2021
Understanding the tax impact of IFRS 17 has been a real challenge for insurers.
We know in broad terms that the tax impact is likely to have a material impact on financial results and/or cash paid on transition. On an ongoing basis, however, the devil is likely to be in the detail. Like most tax authorities globally, the UK has not yet given an indication on how insurers may be taxed on transition for example.
In November we surveyed UK insurers on transition approaches. The survey included two key questions on tax.
- Most groups are expecting a material impact on their tax base due to IFRS 17, regardless of whether transitional rules are in place.
- In the UK, HMRC are beginning to engage with insurance groups on whether any transitional rules will be introduced for tax given the potentially large amounts that might arise on day one.
- There is no guarantee that such rules will be in place however, as this will require agreement from Government who will want to understand with some confidence the impact these rules would have on tax revenues.
- Indications are that getting this agreement may be more difficult than had been hoped, mainly due to the current pressure on Government revenues.
- Our results (in the graph above) suggest transitional spreading would reduce, but not eliminate, the impact of implementation.
- When loss-absorbing capacity of deferred tax is considered, the ability to spread the transitional impact lessens but does not remove the tax impact of IFRS 17.
- Our survey shows that continuing uncertainties in this area (and on other tax issues related to IFRS 17) are causing issues in modelling both the impact of transition and the future tax profile.
- IFRS 17 is likely to push the UK insurance industry into a structural tax loss position on transition, leading to other key tax considerations, such as capital adequacy, loss offsets and the increased importance of forecasting.
- Our findings suggest that most groups are hamstrung by this uncertainty. Many are waiting before progressing with their detailed assessments and planning.
- IFRS 17 is likely to require even more changes to tax governance processes, in addition to the many challenges that tax teams are already facing.
- There are immediate steps that insurance groups should take to reduce the cost of their IFRS 17 project making sure that R&D tax credits and the super deduction have been appropriately considered and plans put in place where relevant.
Overall, the impression from the survey responses is that understanding the tax impact of IFRS 17 is still a work in progress. Most groups are either in the middle of undertaking their initial gap analysis or have only a broad understanding of the tax implications of the transition.
At this stage, as well as engaging actively with tax authorities, it’s important that tax teams are working as part of the wider IFRS 17 teams to factor tax into the modelling and transition. The key reasons for this is to ensure that there is not a material unexpected impact on transition and to ensure that tools are in place to allow the business to forecast tax effectively.