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Multinational organizations must understand local regulations when structuring global programs

Tax issues stem from organizations designing “program structures that are not fit-for-purpose” for their multinational businesses, stated Sharma.

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The tax landscape in many jurisdictions is shifting, according to Marsh’s Insurance Regulatory & Tax Consulting Practice Global Leader, Praveen Sharma. Amid these changes, it is essential multinationals remain vigilant and aware of any amendments to local tax regulations in order to avoid “unbudgeted surprises”, he said, at Commercial Risk’s “Global Programmes – Europe 2023 Conference” in London on September 13 .

Designing insurance programs

Tax issues stem from organizations designing “program structures that are not fit-for-purpose” for their multinational businesses, stated Sharma.

Global insurance programs must be in line with the business model of the multinational group, Sharma continued. If programs are ill-designed and poorly structured, tax issues may become an unexpected problem for an organization.

It is prudent for an organization to design insurance programs around the three concepts of coverage, cost, and compliance, he said. Cover is non-negotiable, as a risk manager’s primary duty is to protect the assets and people of the organization. However, while remaining compliant to the relevant jurisdiction’s laws, this should be achieved at a cost within the budgetary parameters.

The ideal insurance program will strike the correct balance between these three factors, Sharma said.

Operating across jurisdictions

Multinational organizations also need to recognise the distinctions between global and local insurance policies.

Some domestic insurance regulators can have laws in place that satisfy local needs only, and these may be challenging for multinational corporations that have cross-border operations. Additionally, in a number of cases, regulators have parochial views for their jurisdiction and want to protect local business, industry, employees, and currency.

Even if local policies are part of the master insurance policy, they are “only compliant to the limit of the local policy,” explained Sharma. They do not, therefore, make a company’s global insurance program compliant. Organizations must ensure they have full and comprehensive coverage for their needs across the geographies they operate in.

Organizations need to understand this and collaborate with all the insurance companies for the consistent legal interpretation of insurance laws, as otherwise it can be costly and may waste time.

Financial interest cover (FINC) clause

Sharma also said that the gratuitous use of financial interest cover (FINC) clause recently could lead to tax authorities beginning to interpret its deployment as a tax avoidance mechanism.

The FINC clause was designed to protect a multinational group and its subsidiary from potential regulatory breach where the law specifically prohibits a local entity from buying insurance from a foreign insurer.

From an insured’s perspective, FINC should only be applied for risks located in areas where non-admitted insurance is strictly prohibited by law. It should not be used freely by insurance companies and multinationals in respect of countries where the law either allows or does not prohibit an entity from procuring insurance from foreign insurers.

If applied incorrectly, multinational organizations can suffer adverse premium and/or corporate income tax issues. Furthermore, there is also the potential for organizations to suffer double taxation.

To rectify the confusion around the use of FINC, the International Underwriting Association (IUA) created a model clause to give clarity and consistency. Published by IUA in April 2022, Sharma worked with, insurers, and legal experts to help dispel the ambiguity surrounding FINC.

Improving resilience

In the session, Sharma also provided tips for organizations wanting to strengthen their global program structures:

  • Gain a strong understanding of internal business models to ensure that a suitable insurance program can be developed.
  • Identify and analyse risk retention or risk transfer options, with the cost/benefit of each option reviewed for multiple scenarios.
  • Ensure consistency in wording is established between local and master insurance policies.
  • Make sure premium allocation methodology is reasonable, robust, and defensible for the business model in question.
  • Identify all premium tax obligations regarding every current policy at master and local levels, as well as, excess layers. 

Such actions can allow risk managers to adequately manage unbudgeted surprises for their firms, Sharma added.

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