Solvency II – Tax? Not my cup of tea!
The reality is, that under Solvency II taxes do concern every insurance undertaking, since (deferred) taxes can have a significant impact on the Solvency Capital Requirements (SCR) and in consequence on the solvency ratio. One way the solvency ratio could be impacted, is through the recognition of the SCR buffering effect of the loss absorbing capacity of deferred taxes (LACDT). The LACDT is an adjustment which can be applied to the SCR as specified in Article 108 of the Solvency II Directive and corresponding Delegated Acts. This adjustment reflects the potential compensation of unexpected losses through a simultaneous change in deferred taxes. Nevertheless, insurance undertakings should demonstrate, by assessing their sources of future taxable income, that these deferred taxes are recoverable.
Among industry players it has been observed that approaches regarding tax modelling, recoverability testing and treatment of tax groups and fiscal unities differ strongly. Therefore the overarching purpose of this paper is to stipulate general but sound principles for the treatment of deferred taxes under Solvency II and provide good practice standards for the recoverability testing of the LACDT. In addition, this document shall support to develop and foster a common basis with regards to the treatment of deferred taxes and the LACDT, with the intention to create a level-playing field within the industry.
The CRO Forum welcomes feedback and comments on the paper.