Accounting for taxes

considering the
impact of IFRS 17 —
What insurers need
to know now
Contents

Executive
03 summary

IFRS 17 measurement
04 models

Future local
06 tax reporting

Impact of IFRS 17 on
08 the accounting for
income tax under IAS 12

Group tax
10 reporting

Opening balance
11 adjustments
Executive summary

What are the things to consider for insurer?

The implementation of IFRS 17 on or after It should be noted that in some countries,

1 January 2023 is the most significant change taxable profits may be calculated based upon
in reporting of financial statements for insurers an accounting profit calculated in accordance
in the past decade. with either IFRS or local GAAP. Where those
bases diverge on the introduction of IFRS 17,
Taxes may have an effect on the measurement different entities in the same country may be
of the insurance liabilities under IFRS 17. taxed on different bases, depending upon the
The implementation of the IFRS 17 standard, GAAP adopted.
however, has also implications on the
calculation of current and deferred taxes. EY teams are supporting insurers by
considering the impacts of IFRS 17 on their
Some direct and indirect tax cash flows are in income tax accounting. We see tax involvement
the scope of the IFRS 17 measurement model in the following stages of the IFRS 17 financial
and play a role when determining the fulfilment reporting process.
cash flows to assess the IFRS 17 technical
• I► FRS 17 measurement models
assets and liabilities. The type of applicable
taxes varies significantly across jurisdictions • IFRS 17 tax accounting
and must be analyzed on a local country • Future local tax reporting
basis. When implementing the requirements, • Future group tax reporting
insurers should consider both technical and
• Opening balance adjustments
operational aspects.
To recognize the IFRS 17 impact on the
Additionally, current and deferred income
reporting process, insurers must analyze the
taxes of insurers are significantly affected by
respective tax impact on each stage for their
the new concept of accounting for insurance
company and adjust their operating model
contracts. Multinational groups may find
regarding policies, processes, people, and
that implementation of the new standard has
data and systems:
different impacts on their tax accounting in
different territories. • Adjusting group policies, data and systems
with regard to tax reporting and tax
In tax regimes where taxable profits are accounting requirements under IFRS 17 and
calculated based upon an accounting profit expected future tax payments for IFRS 17
calculated in accordance with IFRS, the measurement models
adoption of the new standard will have • Alignment of manual and automatic processes
current tax consequences. The same applies for income tax reporting taking potential tax
in jurisdictions with a local GAAP basis which impacts from local tax regimes into account
is aligned to IFRS and the tax authorities will
• I► ntegration of tax in IFRS 17 projects and
adopt IFRS 17. This will also be the case where
reporting process by creating awareness from
the tax regime specifies the basis for calculating
internal stakeholders
taxable profits, and that tax base invokes
IFRS or an IFRS-aligned local GAAP as the • Training of tax, finance and accounting teams
measurement basis for items whose accounting
When multinational groups adopt IFRS 17 in
treatment will be impacted by IFRS 17.
their group tax reporting process, they need
In cases where taxation is not based on the IFRS to find a balance between a standardized
profit, deferred taxes will arise on the valuation group-wide approach and considering different
difference between IFRS 17 accounting and tax impacts for their local business units.
local tax accounts.

Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now | 3
1 IFRS 17 measurement models

According to the IFRS 17 standards, tax cash flows must be The mentioned applicable taxes are dependent on the
taken into account when determining the fulfilment cash flows definition of the local tax jurisdiction and may vary
to assess the IFRS 17 assets and liabilities: significantly across countries and between different types of
business. Insurers need to perform detailed analysis based on
• T
► ransaction-based taxes and levies that arise directly from
the nature of the specific tax charge and the related policy
existing insurance contracts or can be attributed to the
terms (e.g., whether the tax payments are in a fiduciary
insurance contracts on a reasonable and consistent basis
capacity or income taxes that are specifically chargeable to
(IFRS 17.B65 (i))
the policyholder).
• P
► ayments by the insurer in a fiduciary capacity to meet
tax obligations incurred by the policyholder, and related Difficulties may arise in allocating certain taxes e.g.,
receipts (IFRS 17.B65 (j)) unrecoverable indirect taxes to the respective cash flows. For
pass-through taxes, the impact on the financial statements
• I► ncome tax specifically chargeable to the policyholder
arises solely from timing difference between the receipt
under the terms of the contract (IFRS 17.B65 (m))
and the payment of the tax, and may be immaterial in
Tax cash flows to consider in this regard may be, among certain cases.
others, value-added tax or goods and services tax on
premiums, commissions and claims, withholding taxes on
outbound reinsurance payments or claim/benefit payments
or other local levies such as stamp duties or insurance
premium levies.

Explicitly excluded in the standards are income taxes,

that cannot be directly attributable to the fulfilment of
an insurance contract such as corporate income taxes.

4 | Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now
Key questions
• ►Which transaction-based taxes and levies
are attributable to the policyholder?
• ►How can the insurer track expected and
actual tax payments?
• ►When is an income tax specifically
chargeable to the policyholder under the
terms of the insurance contract?

Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now | 5
2 Future local tax reporting

IFRS 17 only refers to certain tax cash flows that are included For entities where the adoption of IFRS 17 will have a current
in the Fulfilment Cash Flows (FCFs) but does not contain tax impact, there will be:
specific requirements regarding the income tax positions of
• A
► transitional impact from the adjustment to opening
an insurer itself.
retained earnings or other comprehensive income (OCI)
on implementation; plus
Therefore, the principles and requirements of the applicable
IFRS tax standard (IAS 12) continue to apply after the effective • A
► n ongoing impact on periodic tax calculations
date of IFRS 17. This applies to “all domestic and foreign taxes
which are based on taxable profits.”1 The tax expense/tax To limit the impact of IFRS 17 on current tax payments, in a
income comprises current tax expenses (current tax income) number of countries there are discussions about the possibility
and deferred tax expenses (deferred tax income).2 of spreading any transitional tax effects over a certain time
period. The discussions about the applicable time period differ
Current taxes are calculated based on the taxable profit or loss between the countries and the applicable insurance line of
determined by the tax laws (substantially) enacted by local business. In Canada, for example, discussions on this point
tax authorities. Where taxable profits or losses are calculated have been moving toward five years for general insurance
based upon an accounting profit calculated in accordance and ten years for life insurance linked to the average policy
with IFRS, the adoption of the new standard will have current duration. Similar timelines have been proposed by the
tax consequences. Current (cash) tax impacts may arise for insurance industry in the UK to the tax authorities to recognize
those insurers operating in countries like e.g., the UK, Canada, a spread of 10 years. Final timelines are still outstanding.
Singapore or Australia having adopted IFRS 17 for their
account as the calculation of the current tax is based on the The industry also needs to account for any uncertain tax
accounting profit prepared under IFRS. IFRS 17 will have an positions arising from the transition adjustments and new
immediate effect on the current income taxes and the local tax potential tax law changes.
return process.
To align with IFRS reporting processes, new tax law changes
Insurers may currently face significant uncertainty in need to be substantially enacted by 1 January 2023.
determining the taxable income for the calculation of current Otherwise, the local tax filing basis remains as enacted by local
taxes. In most countries, the tax regime position may not be tax law, and separate accounting records for local statutory
known in sufficient detail so that in formulating accounting and tax reporting purposes need to be maintained.
systems and policies, insurers may have to take a view.
The adoption of IFRS 17 as a tax filing basis may lead to
But presumably the expectation is that there will be clarity
significant adjustments of the current income tax calculation
before IFRS 17 becomes effective.
process. The precise implementation will be determined by the
Most tax authorities are still consulting with the industry rules set by the local tax legislator and may differ from country
on potential alignment of tax, regulatory and statutory to country. Therefore, insurers need to monitor the legislation
reporting standards. process in the operating countries closely and consider the tax
implications of IFRS 17 on the current income taxes at a single
Key topics that are still under discussion in some territories country level.
include the IFRS 17 insurance liabilities are recognized in
full for tax purposes, the tax treatment of the Contractual
Service Margin (CSM) and any timing differences regarding
the recognition of profitable vs. onerous contracts.

1
IAS 12.2
2
IAS 12.6

6 | Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now
Key questions
• ► Will IFRS 17 be adopted in the operating
countries as the tax filing basis for current
income taxes?
• ► Is there already any discussion by the
legislator or fiscal authorities and if yes, what
is the direction of travel and if so, should the
company or group engage in the discussion?
• ► Do uncertain tax positions arising from
transition adjustments and the ongoing
treatment of new items under IFRS 17
need to be considered?

Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now | 7
3 Impact of IFRS 17 on the accounting
for income tax under IAS 12

Deferred taxes are the amounts of income taxes payable • Determination of taxable or deductible temporary
or recoverable in future periods based on taxable, or differences: The reassessment of temporary differences
deductible temporary differences, or unused tax losses or from IFRS 4 accounting to IFRS 17 requires reassessing
credits carried forward.3 whether or not the temporary differences result in an
obligation to pay income taxes in future periods in case
Temporary differences arise as a result of differences between of a taxable temporary differences or can be utilized
the carrying amount of an asset or liability in the balance against taxable profit in future profits in case of deductible
sheet and its local tax base.4 temporary differences.

For tax reporting purposes, the restatement of IFRS 17 • Taxes on income presented outside profit or loss: When
insurance assets and insurance liabilities leads to impacts on income items are recognized outside profit or loss because
the recognition of deferred taxes. Companies applying IFRS 17 of accounting policy choices such as the OCI option on
need to adjust their tax reporting processes and calculation of insurance finance income/expense, insurers must consider to
deferred taxes to comply with IAS 12. what extent potential current and deferred tax consequences
should also be presented in other comprehensive income.
In financial statements prepared under IFRS 17, temporary
differences may change as a result of the restatement The determination of temporary differences may differ from
of insurance assets and insurance liabilities, while the country to country given different local tax laws and therefore
corresponding local tax base does not change. The new each analysis needs to consider country specific differences.
accounting model for insurance contracts therefore affects the
Deferred tax assets are only recognized to the extent that
temporary difference between the carrying amount of IFRS 17
they are recoverable.5 This is the case when it is probable that
balance sheet positions and the corresponding local tax base.
sufficient taxable profit will be available which enables the
A technical analysis is necessary to determine the allocation of
utilization of the DTA.
IFRS 17 accounts to the corresponding tax base.
Sources of expected taxable profit need to be reassessed
The reassessment of temporary differences is determined by
considering potential changes through IFRS 17 to determine
several considerations:
the recoverability of DTAs.
• R
► ecognition of building blocks: The carrying amount of
insurance assets and liabilities must be examined in their Insurers will need to implement the results of the technical
separate building blocks like Future Cash Flows, Time Value analysis within their tax reporting processes and tax systems.
for Money, Risk Adjustments and Contractual Service Tax reporting tools may need to be amended based on the
Margin and compared to the corresponding tax base. A technical analysis. Usually the comparison between IFRS and
similar process should be applied where an insurer uses tax base is done on account level, thus the mapping for tax
the premium allocation approach, following the amounts reporting on account level needs to be amended to a new IFRS
recognized under the premium allocation approach. 17 chart of account.

3
IAS 12.15, IAS. 12.24
4
IAS 12.5
5
IAS 12.56

8 | Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now
Key questions
• ► Which temporary differences arise from the
transition and how are they treated?
• ► How is the carrying amount of the insurance
asset or liability to be mapped to the local
corresponding tax base?

Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now | 9
4 Group tax reporting

In terms of consolidation group tax reporting, the set up and that temporary differences referring to the respective local tax
execution of a group-wide consistent approach considering base are identified and recorded properly at local level which
local differences between accounting regimes adopted IFRS 17 can be cross-referenced for group tax reporting purpose.
and other countries applying a tax base other than IFRS 17 is
a challenge. IFRS 17 transition adjustments may affect on the
reconciliation of the group’s effective tax rate including
Compliant and consistent tax accounting methodologies must different taxation regimes and determining potential uncertain
be developed and adopted for all jurisdictional levels to ensure tax positions on the group’s financial statement.

Key questions
• How can the entity monitor and
achieve compliance in each jurisdiction
where business units are operating
while maintaining efficiency and cost
effectiveness?

10 | Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now
5 Opening balance adjustments

Potential differences between IFRS 17 and IFRS 4 opening both standards IFRS 9 and IFRS 17 for their 2023 financial
balance sheet on the IFRS 17 transition date can lead to statements. However, IFRS 96, includes an exception from
changes in the amount of deferred tax assets or liabilities. the requirement to restate comparatives whereas IFRS 177
These transition adjustments must be considered in the requires the restatement of 2022 comparative information.
opening balance sheet adjustments for implementation and If insurers choose to restate comparatives for IFRS 17
comparative period. only, mismatches may occur between financial assets
and insurance liabilities. Such mismatches will also come
Most insurers apply the temporary exemption from applying with a tax effect that should be considered for the 2022
IFRS 9 for periods prior to 1 January 2023 and will implement comparatives.

Key questions 6

7
IFRS 9.7.2.15
IFRS 17.C2(b)

• ►What is the impact of the transition

adjustments on current taxes and/or
deferred taxes?

Accounting for taxes considering the impact of IFRS 17 — What insurers need to know now | 11
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