Insurers need to consider impact of proposed CIT regime on regulatory capital, says PwC
Accounting firm PwC has warned Bermuda-based companies that may be subject to the proposed corporate income tax to analyse potential accounting implications in their year-end 2023 financial reporting.
They should also consider the impact of the proposed CIT regime on insurers’ regulatory capital requirements and the effect on mergers and acquisitions and other transactions.
PwC also urged affected companies to submit comments on the Bermuda Government’s third consultation paper by the deadline on Thursday, November 30.
PwC managing partner Arthur Wightman said in a social media post: “In a major step for Bermuda the introduction of a Corporate Income Tax is expected to have several implications to consider for those in scope, not least some immediate accounting and financial reporting impacts for this year-end.”
It noted that the government plans to bring its first CIT bill to Parliament in December with the goal of making the 15% tax on multinational enterprises with revenues of at least €750 million effective beginning in 2025.
“Insurance MNE groups that may become subject to the CIT should be aware of Bermuda’s tight deadline to enact it,” PwC said. “In light of the deadline, they should analyse the third PCP to assess how the proposed tax could affect their Bermuda Constituent Entities (BCEs) and assess whether to provide comments to the Bermuda Government.
“Comments with respect to the third PCP have been requested by November 30, 2023. The Bermuda Government intends to table the CIT bill for debate with a view to enactment prior to December 31, 2023.
“In anticipation of enactment, affected MNE groups should analyse the potential tax accounting implications of the proposed CIT for 2023 year-end financial reporting. The impact of the proposed CIT regime on Bermuda insurance companies’ regulatory capital requirements also should be considered, along with the impact on M&A or other transactions.
“Additionally, insurance MNEs should monitor the CIT rules and expected guidance over the coming weeks and months as a part of determining whether to elect out of the Economic Transition Adjustment (ETA) and make other available tax elections. The third PCP changes many of the default positions with respect to available elections.”
PwC noted that Bermuda entities that were members of MNE groups with limited international presence under the GloBE rules would be excluded from the Bermuda CIT. The third PCP has now clarified that this exclusion will not apply to entities that are subject to the GloBE IIR.
PwC noted: “Including entities that are subject to the IIR is consistent with Bermuda’s stated objective of collecting taxes that otherwise would be payable to other jurisdictions.
“While the exclusion has been narrowed so that entities subject to the IIR are subject to the Bermuda CIT, the opposite is not true. Entities that are not subject to the IIR or the UTPR may be subject to Bermuda CIT.
“Bermuda MNE groups are expected to be subject to the Bermuda CIT even if they do not contain entities located in jurisdictions that have adopted GloBE rules beyond the initial five-year exclusion for in-scope groups with a limited international presence.”
With regard to lass carry forwards, PwC noted that the third PCP specified that the matching adjustment and opening tax loss carryforward cannot apply to pre-ETA periods, unless the entity has elected out of the ETA. In addition, a BCE cannot claim a 10-year spread deduction for IFRS 17 and LDTI transition losses, unless it elects out of the ETA.
“Affected MNE groups will need to analyse and compare the different transition options, and determine which combination of elections they intend to make,” PwC said.
PwC also noted that the consultation confirmed that adjusted creditable foreign taxes will generally follow the approach in the GloBE rules to calculate adjusted covered taxes for a constituent entity (including allocations from main entities in the case of permanent establishments and CFC regime taxes).
“It also confirms that there is no carryback or carryforward of unused credits. The third PCP also notes that the government continues to consider its rules regarding the allocation of CFC regime taxes.”
PwC said MNE groups with non-Bermuda taxes (such as US federal income taxes or excise taxes) allocated to their Bermuda constituent entities should consider the available tax elections in terms of how they affect their ability to use foreign tax credits in a given year and monitor developments regarding the allocation of CFC regime taxes.