Remedying an aberration in taxing insurance premiums

One of the recent issues of concern to the AmCham Taipei Insurance Committee, as discussed in Suggestion 2 of the 2015 Taiwan White Paper, has been the increase in the business tax for financial institutions that took effect in July 2014, raising the rate from 2% to 5%. For insurance companies, the tax is levied on premium income.

At the time of the measure’s enactment, the Legislative Yuan’s Finance Committee requested that the government authorities impose a sunset provision on the increase, defining a limited period during which it would remain in effect before the lower rate would be restored. But the Ministry of Finance’s response was that the adjustment was necessary to collect additional revenue to help meet shortfalls in Taiwan’s fiscal conditions, and that the need was expected to continue.

Although industry understands the financial pressures on the government, it has sought to remind the authorities of the negative implications of the current tax policy for the health of the domestic insurance market and for Taiwan’s reputation within the international insurance industry.

One major problem with the new tax structure is that it is based on methodology that disproportionately affects protection-oriented life insurance policies as opposed to investment-type products. That result is directly counter to the government’s stated objective of seeking to encourage consumers to increase their health and accident protection coverage to reduce the potential burden on families and on society. “There’s a ripple effect on the economy when family members have to take on the role of caretaker and their productivity is impacted,” notes Arthur Cozad, CEO and general manager of Cigna Taiwan, and a co-chair of AmCham Taipei’s Insurance Committee. “It’s in the interest of government and society to ensure that more people are well protected in case of adverse eventualities.”

In addition, in what undoubtedly is an unintended consequence, the tax burden also falls disproportionately on five foreign life insurance companies whose business scope focuses primarily on protection products. Those five companies cumulatively have less than a 6% share of the market, yet as a group are paying more than 30% of the total tax increase.

Another basic difficulty with the tax increase is its retroactive nature. Companies are now being asked to pay 5% tax on insurance policies that were written – prior to the tax hike – with premium levels calculated on the basis of the 2% tax rate then in force, and with the amount of tax embedded within the pricing. Now the additional 3% tax bite eats sharply into profit margins. As a result, what was already a challenging environment for many insurers has become even more unfavorable.

The affected companies note several possible ways in which they could be provided with some relief, though that would likely require legislative action:

  • Adopting a “grandfather clause,” applying the new tax rate only to premium income from policies signed after the tax hike went into effect – and thus avoiding the problem of retroactivity.
  • Exempting income from protection-oriented products from the premium tax.
  • Adopting the practice of most countries around the world of allowing the amount of tax to be listed separately and explicitly, rather than being included within the overall premium, which cannot be changed in mid-policy. With a clear distinction between premium and tax, it becomes more feasible for insurers to have the option of passing any increase in tax rates along to policyholders.

Embracing one of the above proposed solutions would amplify the social benefits that accrue from protection insurance, while also enhancing the investment climate for the insurance industry.

Part 5 of 7 in a Special Report on  the Taiwan Insurance Industry, produced by the Insurance Committee of the American Chamber of Commerce in Taipei and sponsored by Ace Life, AIG Taiwan Insurance, Allianz Taiwan Life, Cigna Taiwan Life, PCA Life, Prudential Life, and Zurich Insurance (Taiwan).

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