Mervyn Skeet, Head of Taxation at the ABI , sets out why there is no need for the government to rush ahead on implementing global tax reforms.
As we move towards the end of the year, we are faced with some familiar issues but in our increasingly global world, there are some international tax developments in the frame with high stakes involved. The UK Government will deliver an Autumn Statement and medium-term fiscal plan on the 17 November and needs to balance the books. But at the same time, a year after the international community reached an agreement on a two-pillar solution to reform international tax rules, the complex debates on how to implement the two pillars continue.
For the insurance industry, it is the implementation of Pillar Two that currently has the most significance. Although the OECD project started with the two pillars being closely linked, Pillar Two has moved ahead and could now be implemented in the UK and other countries significantly before Pillar One and perhaps even if Pillar One is never implemented. The OECD published Model Rules for Pillar Two in December 2021 and Commentary on those rules was released in March 2022. The public consultation that followed did not seek comment on the policy choices made in the Model Rules or the Commentary themselves, but that did not stop the ABI and many others pointing out some obvious flaws that needed to be addressed.
Fast forward seven months and the discussions continue at the OECD. One of the key workstreams for the OECD and the 130+ countries in the Inclusive Framework, is developing guidance on more than 20 issues with the Model Rules that have been identified as priority areas to fix. Some of these priorities are very important to the insurance industry and we continue to push for resolution of the issues we have identified including those related to investment subsidiaries backing policyholder liabilities and Restricted Tier One Capital. These issues must be solved before the rules are implemented in order to make them workable.
This work on guidance is crucial to ensure that the model rules operate as intended and is expected to be completed by the end of 2022. It must be completed before any country implements Pillar Two into local legislation otherwise there will be expensive additional preparatory work for businesses and government authorities will have to draft additional regulations. It makes no sense for any country to implement Pillar Two into domestic legislation now based on the current position, when it is almost certain to be amended in the next couple of months. This seems to be the case in most jurisdictions, even if it is somewhat as a result of other issues. The EU has so far not been able to get agreement for a directive and the US has implemented a different form of minimum tax that does not comply with the Pillar Two rules. While the results of the recent US elections are not yet complete, current predictions suggest there may be a change in the leadership of the House of Representatives, which may make it more difficult to pass compliant Pillar Two rules in the near term.
We have been arguing for some time that the UK should pause its implementation of Pillar II. At present, the UK is moving faster than any other member of the G7 to implement the new rules, and before the crucial international guidance is agreed and completed. We believe that the UK needs to continue the international work with other countries on guidance for Pillar Two. It needs to ensure there is equity and fairness in both pillars, and for both to be implemented in a consistent way across all jurisdictions, rather than implementing the Pillar Two rules before anyone else. The message is simple: get the guidance finished at international level before rushing to implement in the UK.