IFRS 17 and tax challenges
KPMG has been reporting extensively on IFRS 17, which is required to be adopted by insurance companies reporting under IFRS on or after 1 January 2023. IFRS 17 introduces a completely new financial reporting standard for insurance and reinsurance contracts. The new standard will also affect US insurers that report to a foreign parent under IFRS, as well as US-parented groups that control foreign subsidiaries or branches that report locally under IFRS.
For companies that operate globally, the implementation of IFRS 17 raises tax challenges in addition to accounting, finance, and actuarial challenges, because tax considerations are embedded in many IFRS 17 provisions. Cash flow from taxes – both direct and indirect – may affect the measurement of the IFRS 17 liabilities and should be analyzed by jurisdiction.
Tax liabilities in some jurisdictions are determined based on the local financial reporting results. Companies operating in these jurisdictions may face a material acceleration or deceleration of current tax payments due to IFRS 17, creating volatility in current taxes. Tax laws may change as countries seek to prevent double taxation or mitigate other impacts of the new standard. Additionally, deferred tax may be affected if IFRS 17 is not applied across the whole group and/or the local tax base differs from the local accounts. Consolidation adjustments, such as the elimination of cross-border reinsurance, should be carefully considered, particularly if tax rates differ materially between jurisdictions.
For US groups with foreign subsidiaries subject to IFRS 17, implementation of the new standard could change local cash tax payment amounts, which in turn, could affect the amount and utilization pattern of foreign tax credits in the US. For insurers already wrestling with foreign tax credit challenges arising from the GILTI regime in the US, introduction of complexity and change under IFRS 17 may require even more extensive analysis, including modeling, to evaluate.
Operational aspects of tax reporting and compliance will likely need updating to reflect IFRS 17 requirements. Automated models will need to be adjusted for the new standard. New data may be required for deferred tax calculations, and different jurisdictions may become sensitive to assumptions around deferred tax asset recoverability testing. Reporting and disclosures may need to be updated to reflect local jurisdictions reporting under IFRS 17 even if a US parent or US subsidiaries continue to report under US GAAP, US Statutory, or both.
While some parent entities lead centralized IFRS 17 programs to help ensure consistent application of policies by their foreign subsidiaries and/or branches, tax considerations and local reporting require a local focus.
There is much to be reviewed and understood as IFRS 17 is implemented, both regarding initial implementation – such as the treatment of restatement losses resulting from the adoption of IFRS 17 – and ongoing reporting. Tax considerations should be an integral part of this work, both to avoid unanticipated effects as well as to identify potential opportunity.
We would like to thank Philip Jacobs and Gordon Gray for their valuable contribution to this article. If you have any questions regarding this topic or other related matters, please let us know how we can help.