ABI Guide to Good Practice for Unit Linked Funds

Further to the consultation Process, the ABI has now issued a revised guide to good practice in unit linked funds.  From a quick run through the tax sections nothing substantive has changed since the draft guide that was issued prior to consultation.  So the overall position remains that there is little in the way of clear guidance.  (For instance the guide does get in to the nitty - gritty of two year carry backs for deemed gains or what to do where the shareholder benefits from CGT losses in a unit linked fund that are not reflected in the price of that fund.)

There is however, quite a bit about documentation required and I would suggest that firms should be looking at what formal documentation they have on allowing for tax in the unit price and considering whether this meets the good practice guidance. 

Solvency 2 and Deferred TAX

The PRA have issued have issued a Supervisory statement on solvency 2 and deferred tax.

Key points:-

The supervisory statement applies to recognizing  deferred tax in the solvency 2 balance sheet and the tax effects of a 1:200 shock.

The statement makes an explicit link between recognizing deferred tax assets for solvency 2 and the rules for recognizing deferred tax assets under International accounting standards (IAS 12).  IAS 12 applies a probable test for recognizing deferred tax assets, i.e. a deferred tax asset should be recognized if it is more likely than not that a timing difference or tax loss can be utilized against future profits .  There is no concept of a valuation allowance in IAS 12 and if it's more likely than not that a loss can be utilzed then a deferred tax asset can be recognized in full.  Accordingly under solvency ii there will be much more scope to recognize deferred tax assets than in PRA returns as prepared currently, where there is an assumption that deferred tax assets will not be recognized.

As in IAS 12, firm's are able to consider the use of management actions (i.e. tax planning) in determining whether it is possible that deferred tax assets can be recognized.

The PRA provide quite a lot of guidance on how the probable test for recognizing a deferred tax asset should be applied.  There is a specific reference that models should have a "sufficient level of granularity to address the relevant detail of all applicable tax regimes."  I think this will require tax departments to assist / sign off on in the preparation of actuarial models that calculate deferred tax.

The PRA does not expect a tax losses to be recognized in a firm's SCR calculation, if the notes to its statutory accounts disclose that: it has unrecognized tax losses; and those tax losses were not recognized because it was considered not probable that future profits would arise against which they might be utilized. Although the supervisory statement does say that this expectation of non recognition can be refuted.

There is a specific reference to companies and supervisors applying judgement to the recognition of deferred tax assets.  This seem to me to be the challenge that companies face. When financial markets crash tax departments generally put quite a lot of effort into determining what deferred tax assets they have available for recognition in GAAP accounts and there will generally be quite a lot of discussions, to and froing with the auditors etc.  But my impression of the solvency 2 process is that it doesn't lend itself to judgement because the sheer volume of data bring churned out is too large.   

This Blog

Just a quick housekeeping post on the future of this blog.  When I started the life assurance tax blog I said I would do a couple of posts a week for a year and reconsider whether to continue with the blog at that point.  There are now 112 posts on the blog and its just over a year since I started so I decided to take stock.

My experience with the blog is that its been fine to do and I personally find it a useful aide memoire.  That said the blog doesn't get that many readers and it hasn't been successful as a way of generating feed back and / or client work.  So I'm going to keep the blog going and available to all but I'm afraid that the volume of posts and the average length of posts will decline, so the focus will be more on quick updates.

It did occur to me that an alternative would be to split the blog between a pay and a non pay area.  Then I would have the quick updates as free to air, but to access longer pieces there would be a subscription (perhaps £1,000 a year). Obviously I could tailor the subscription section to the subscribers and maybe take requests to cover certain topics.  The introduction to life tax series is something that I would expand if there was some subscription income to be had. If you would be interested in the subscription option or if you have any other thoughts on the future of the blog then please email me richard.bentley@bentleyforbesconsulting.co.uk.

Emerging Markets Series of DFA Investment Trust Company v Dyrektor Izby Skarbowej w Bydgoszczy (Case C-190/12)

This is an ECJ Case that caught my eye.  Like a number of cases it involves an EU government (Poland in this case) turning up at the ECJ to argue that treating non  - domestic tax payers on a different basis to equivalent domestic tax payers is not a restriction on the free movement of capital.  And the ECJ rejects their arguments.  

What distinguishes this case is that the investor suffering Polish withholding tax was resident in the USA.  But the ECJ still found that the withholding tax was a restriction on the free movement of capital. The ECJ noted that there was a procedure for the exchange of information between Poland and the USA and therefore the effectiveness of fiscal supervision was not grounds for supporting the Polish government's claims.