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CLHIA Response to OECD Discussion Draft "BEPS Action 4 Approaches to Address BEPS Involving Interest in the Banking and Insurance Sectors"

Release Date: 09/08/2016
Staff Reference: Noeline Simon

The Canadian Life and Health Insurance Association (“CLHIA”) is pleased to provide comments on behalf of its members on the Discussion Draft "BEPS Action 4 Approaches to Address BEPS Involving Interest in the Banking and Insurance Sectors".

The CLHIA is the national trade association for life and health insurers in Canada. Our member companies account for 99% of Canada’s life and health insurance business and provide a wide range of financial security products such as life insurance, annuities and supplementary health insurance to 28 million Canadians. Canadian life insurers operate in over 20 countries around the world and three Canadian life insurers rank among the top 15 global life insurers by market capitalization. A quarter of the CLHIA’s members operate as subsidiaries or branches of foreign insurers or reinsurers from the United States and Europe. The CLHIA is also a member of the Global Federation of Insurance Associations (GFIA) based in Brussels.

The CLHIA supports the OECD’s broad objectives in combating aggressive tax planning, including through commercially excessive leverage and inappropriate interest deductions. However, any measures adopted by the OECD need to be proportionate and well-targeted such that they do not result in inappropriately restricting interest expenses, which could negatively impact the efficiency of commercial insurance operations and the availability and cost of insurance coverage for consumers. In addition, it is critical that, as noted by the OECD in paragraph 6 of the Discussion Draft, any approaches adopted by the OECD "should not conflict with or reduce the effectiveness of regulatory capital rules intended to reduce the risk of a future financial crisis".

We strongly recommend that the OECD's proposed measures reflect the following considerations with respect to life insurance companies and groups:

• the important role of the strong and comprehensive regulatory system within which the life insurance industry operates which:
• requires financial institutions to hold minimum amounts of equity, and
• restricts their ability to place an excessive level of debt in regulated entities (see paragraphs 5 and 18 of the discussion draft)
• commercial constraints which require life insurers to maintain high credit ratings and adequate long-term or permanent capital, thereby limiting debt leverage that is commercially excessive
• the low level of BEPS risk - paragraph 26 of the discussion draft states “excessive leverage in a bank or insurance company has not been identified as a key risk at this point in time and so it is anticipated that, in the majority of cases, this [BEPS] risk will be low.”

Responses to the questions raised by the OECD are included in the attached Appendix. The CLHIA's recommendations:
• are intended to ensure the OECD’s proposed measures are proportionate, and targeted, to the BEPS risks
• preserve the safety and soundness of the life insurance sector, and
• address only life insurance groups where life insurance and related activities (such as asset management) are the primary activities of the group.

Our recommendations may be summarized as follows:
• in the absence of specific BEPS risks arising from insurance structures (for which insurance specific rules may be indicated), countries should apply the general interest restriction rules to insurance groups
• all third party interest on debt that qualifies as regulatory capital (or on debt used to fund regulatory capital) should be excluded from the net interest expense subject to the rule.

(Original signed by)

Noeline Simon
VP, Taxation and Industry Analytics