Insurance companies present complex challenges in corporate taxation (CT). In certain jurisdictions, there are distinct rules or assessment methods for the taxation of insurance businesses. This article aims to provide insights into insurance taxation under the UAE’s corporate tax law, particularly as it relates to insurance companies’ financial statements under IFRS 17. Future articles in this series will address topics such as reinsurance, investments, insurance returns, Pillar 2, and more. This first article focuses specifically on insurance contract liabilities, using a standalone general insurance company as an example.
A key area in insurance companies’ financial statements is insurance contract liabilities and assets. From an IFRS 17 perspective, these balances are considered operating items. They are reflected in two main line items in the financial statements “FSLIs”, the Liability for Remaining Coverage (LRC) and the Liability for Incurred Claims (LIC). The income statement impact of these FSLIs appears under insurance revenue and insurance service expenses. These FSLIs include various components such as unearned premiums, discounting, actuarial reserves, provisions for onerous contracts, salvage and subrogation adjustments, outstanding claims, paid claims, provisions for bad debts, risk adjustment, and the contractual service margin, among others. As seen, many of these elements are accounting provisions or discounting based on the underlying premiums and claims received.
The key impact of CT law here is consideration for the applicability of the realization basis of accounting. According to Corporate Tax Section 20.4, there are two options for applying the realized basis of accounting: one applies to all assets, and the other to capital assets only. Article 8.2 of Ministerial Decision 134 of 2023 states that banks and insurance companies are only permitted to use the second option — the realization basis for capital items.
Since the FSLIs in question are not capital in nature but may be long-term, we believe that the realization basis, by definition, does not truly apply here. Since some accountants consider all long term assets/liabilities as capital in nature, however, the balance sheet for insurance companies is typically not presented in a way that supports the recognition of capital items on such a basis. Companies may, however, provide such a split between long-term and current items in the notes to their financial statements.
Opting for the realized basis introduces another complication: the provisions for liabilities and discounting may not be accepted as tax-deductible expenses. As a result, claims will only be considered realized when paid, and premiums will be taxed when received. This would require significant effort from the company to prepare tax-adjusted financial statements. Additionally, these tax adjustments would impact the deferred tax account, as they represent temporary differences.
Therefore, we believe that if FTA agrees on such liabilities to be capital in nature, not choosing the realized basis under Article 20 of the CT law would be more advantageous for the company in terms of the effort required. The primary intent of this provision was to support cashflows for taxes. However, since cohorts from different underwriting years are presented together in any given tax year, the impact on cash flows is not expected to be a major concern for insurance companies.
Another item that may be affected by these accounting treatments is the insurance finance expense in the income statement, or the other comprehensive income (OCI), depending on the choices made by the company. This includes the unwinding of the discount for insurance contract liabilities and assets. These items are subject to Articles 29 and 30 of the CT law, which relate to interest expenses. However, Article 30.6 of the CT law excludes the interest cap for insurance companies, meaning these expenses will be tax-adjustable under an unrealized basis, but will not exist under a realized basis.
We also believe due to the nature of these FSLIs transitional relief, as per Ministerial Decision 120 of 2023, is not available.
We expect that using IFRS 17 based financial statements, no changes will be required in computing taxable income from aforementioned accounts under un-realized basis. However, if the realization basis is agreed by FTA and option exercised, then for long term portions of these FSLI balances, adjustment may be required to remove discounting and provisions impact from reported expenses and revenue.
