How to Avoid the Hidden Costs of Corporate Income Tax Liability
You’re arranging an insurance program for a multinational company (MNC). You’ve considered your risk exposures, but have you thought about how much corporate income tax liability could cost you in the event of a loss at a foreign subsidiary?
It turns out that corporate income tax liability – often ignored at insurance strategy and placement stages – is the most significant hidden cost facing MNCs. Increasingly, MNCs are facing scrutiny from local authorities for unpaid premium-related taxes in places such as Canada, the US, Switzerland, and certain EU member states. An MNC could find itself at a loss of millions of dollars as a result of corporate income tax liability, if it is operating in a country where nonadmitted insurance is not permitted.
You may feel safe in the knowledge that you have a local policy to cover some of your liability exposure and a master policy in your home country to cover the rest of your potential maximum loss. However, what you may not know is that if this led to a loss for which you needed to transfer funds to your foreign subsidiary by way of capital injection, it could be challenged by the local tax authorities for additional taxes, such as corporate income tax. This could lead to double taxation and an unbudgeted cost for your company.
Structuring Insurance Policies to Avoid Tax Liability Surprises
Luckily, you can take the following steps at the insurance placement stage to avoid surprising hidden costs down the line:
- Evaluate the foreseeable expected/potential maximum loss that each group entity (that has significant operations) could suffer – particularly if the MNC is resident in a country that does not allow nonadmitted insurance.
- Arrange local policy limits equal to this foreseeable expected/maximum potential loss. Where possible, ensure that the local policy wording mirrors the master policy wording, subject to any local laws/regulations and translation issues.
You could also consider the following with regards to your insurance coverage:
- Use a financial interest cover clause in the master and excess policies after understanding the full implications for the MNC.
- Negotiate a tax warranty and indemnity clause to be included in the master policy to mitigate any potential net adverse corporate income tax impact on the insured group.
- Implement a premium allocation methodology for the master and excess policy premiums, based on exposure and the likelihood of a loss exceeding the local policy limits.
- Consider the use of a captive (re)insurance vehicle to support the global insurance program and the appropriate local policy limits.
Taking these steps can help you ensure that the insurance program is “fit for purpose,” the potential loss is appropriately covered, and any potential tax issues are mitigated.