Tax implications of allocating insurance premiums to foreign subsidiaries
Dammit, Jim, I’m an insurance broker not a tax consultant. In the same way that Bones McCoy was forced by Captain James T. Kirk to provide advice or services that fell outside the scope of his chosen field of expertise, I recently found myself discussing the hairy issue of foreign tax liabilities with the finance team of a multinational company.
Their longtime practice of allocating the premiums paid for global coverages (e.g. Umbrella Liability, Excess Products Liability, Difference In Conditions/Difference In Limits, etc.) was being called into question by none other than their friendly neighborhood broker turned international tax guru. Leaning on knowledge that I gleaned from meetings with my broker partners around the world, I forged ahead with the bold opinion that it may not make sense to allocate such premiums going forward.
Foreign tax authorities are looking deeper into the expense line items in the financials of foreign entities and asking questions about the “insurance” line item. For example, The Canada Revenue Authority (CRA) states in its Excise Tax Act that a 10% tax “is applicable if persons resident in Canada place insurance against risks in this country with insurers…authorized under Canadian laws or the laws of any province to transact the business of insurance, if the contract is entered into or renewed through a broker or agent outside Canada.” The CRA has made the argument that it will tax the premiums allocated to the Canadian subsidiary by its parent company headquartered outside of Canada.
Canada is just one example of a worldwide trend in foreign governments trying to earn tax revenue on premiums paid outside their country for risks based in-country.
But then again, I’m an insurance broker and not a tax a consultant. If you are allocating premiums to foreign subs, I encourage you to please take this matter up with your tax consultant in order to determine if these allocation practices are costing you money.