Keeping up with Tax - Insurance - February 2023
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Keeping up with Tax - Insurance February 2023 Click to launch
Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Introduction
We are delighted to share with you another edition of Keeping Up with Tax for Insurance and our first for 2023.
As we emerge from year end, 2023 promises a series of changes in the tax landscape ranging from the go-live of
IFRS 17 to finalised legislation for Pillar 2, to name but a couple of areas we are seeing teams grapple with as
part of their 2023 work plans.
We have recently seen increased levels of scrutiny in a broad range of governance areas. With that in mind this
month’s edition includes a discussion from Emmet Bulman on the evolving nature of tax risk, the drivers of this
and why these risks should be high on the agenda of the Chief Risk Officer (“CRO”) and the steps CROs should
take to mitigate these risks.
I hope you find this article insightful, as well as the wider FS tax articles. As always, please get in touch with me or
your PwC team if there is anything that you would like to discuss further.
Andrew Rosam
Insurance Tax Market Leader
M: +44 (0) 7718 339 569
E: andrew.c.rosam@pwc.com
PwC | Keeping up with Tax - Insurance – February 2023 2
Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Why the operational and conduct risk impacts of tax
should be high on the Chief Risk Officer’s agenda
Introduction Traditional view of tax risk and how it has been
evolving
The nature of tax risk is evolving driven by a number
of factors ranging from the changing nature and Increasingly, tax can give rise to operational and
requirements of tax law and approach of tax conduct risks across the organisation beyond what
authorities, greater product tax complexity, would have traditionally been considered as tax risk. In
increased focus from regulators, the emergence of addition, there is a continuing theme that regulators
the ESG agenda, to how insurers are seeking to are becoming increasingly interested in tax related
manage their tax affairs. matters and have recently shown that they have an
appetite to penalise and fine financial institutions that
This has broadened the nature of tax risk to have engaged in, or facilitated, tax evasion or
encompass a wider range of operational and aggressive avoidance.
conduct risks that go beyond what would
traditionally have been considered as tax risk with The traditional view of tax risk was that it was
this having been viewed primarily as a technical risk considered to have been the exclusive preserve of the
relating to the incorrect application of tax law rather tax function and not high on the CRO’s agenda, was
than a broader operational or conduct risk. viewed as primarily a technical risk relating to an
incorrect application of tax law rather than being an
A key issue linked to this is that a range of the tax operational or conduct risk, that fell to be managed by
related risks that can arise in respect of this broader subject matter experts in the tax function.
tax agenda occur beyond the boundaries of the tax
function across a wider range of business and However there has been a rapidly evolving regulatory
functional areas. In addition the tax function may landscape that has emerged in recent years, at Global,
frequently lack the level of resource and broader EU and National level, that is framing the requirements
skill set to effectively manage this wider range of and expectations of financial institutions in dealing with
risks, though will still be well placed to understand a broader set of tax risks covering tax evasion,
what the risks are and where they arise. aggressive avoidance and structural reform for
example, which broadens the nature of tax risks faced
As a result of this the Chief Risk Officer (CRO) to cover operational, financial crime and hence
should, working with the tax function, be looking to conduct risk.
ensure that the broader Operational, Conduct and
Financial Crime Risk Frameworks of the The evolving tax risk landscape – bringing it to life
organisation take into account and address the
evolving nature of tax risk and how it increasingly A number of factors are resulting in the nature of tax
permeates an increased number of areas across risk increasingly moving beyond the technical into the
organisations. This should result in insurers being in realm of the conduct and operational risk. These
a more robust position to mitigating the increasingly include:
material impacts and consequences of not Changing nature and requirements of tax law.
effectively dealing with these risks.
There has been an increasing clamp down on tax
In this article we explore these issues in more detail evasion and aggressive avoidance with Financial
in terms of discussing the evolving nature of tax risk, Institutions (FI’s) required to report data in respect of
the drivers of this and why these risks should be their customers as well as increased requirements in
high on the agenda of the CRO and the steps CROs respect of implementing more robust controls in
should take to mitigate these risks. respect of their tax related interactions with customers
/ clients. (e.g. CCO rules in the Criminal Finances Act
2017 in the UK). Ensuring compliance with these rules
requires effective process and controls to be in place
well beyond the tax function and also increase the
focus on organisations' behaviours and conduct.
PwC | Keeping up with Tax - Insurance - February 2023 3
Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Why the operational and conduct risk impacts of tax
should be high on the Chief Risk Officer’s agenda
(continued)
Greater product tax complexity. How insurers manage their tax affairs.
The growing complexity of products offered by insurers As insurers transform to drive operational efficiency
combined with ever evolving tax rules increases the and meet new requirements, tax functions are
level of tax complexity. Resulting errors in the product / reassessing their mandates. More tax related
client domain can result in significant costs in terms of processes are likely to be undertaken outside of the
wider remediation costs with potential damage to tax function (e.g. in Compliance, Financial Crime and
brand/reputation given the risk here is primarily with Operations) leading to greater dependency on the
the customers. More rigorous operational processes quality and accuracy of data and the robustness and
are required in respect of the review and assessment resilience of systems across the organisation. Robust
of new products and services offered along with operational risk processes are needed to manage
greater involvement of the tax function in ongoing these more dispersed end to end processes and as a
product approval processes. result operational resilience becomes a key issue
going forward.
Increased focus from regulators.
Some regulators have brought a consideration of tax What are the impacts of getting it wrong
risk into their wider conduct related frameworks such
as the Senior Managers Regime in the UK which gives Failure to appropriately address these broader risks
rise to the need to ensure that tax is a factor in the related to tax are varied, can be material and in
wider conduct risk framework of the institution. In extreme cases could be existential in nature and can
addition an increased focus on operationalisation of have have a number of potential impacts including:
transfer pricing off the back of various structural reform ● Penalties and fines - in some cases unlimited;
initiatives have resulted in transfer pricing being
● Corporate criminal convictions;
increasingly important in terms of its impact on the
financial performance of key entities within groups. ● Reputational damage and adverse publicity;
This highlights the need for the robustness of ● Potential adverse effect on customer transaction
operational processes to ensure the effective levels and flows; and
embedding of transfer pricing into underlying financial ● Potential for regulatory censure and in extreme
and operational systems. circumstances the withdrawal of regulatory
Emergence of the ESG agenda. licences.
The emergence of the broader ESG agenda has It is therefore critical that Insurers consider their wider
resulted in needing to be seen to be conducting one’s approach to managing tax risk to ensure they continue
tax affairs in an ethical and socially friendly manner to effectively address evolving risks, issues and tax
with insurers needing to demonstrate the societal authority and regulatory expectations.
benefits they are delivering through contributing to
Why should the CRO be interested – Is this not
sustainable public finances and improving the social
covered by the tax team?
fairness of tax systems. Insurers’ tax strategies
therefore need to reflect broader ESG strategy, A range of the tax related risks that can arise in
embedding the need to include tax related ESG respect of this broader tax agenda occur beyond the
considerations in their wider risk framework and boundaries of the tax function across a wider range of
considering how they will comply with tax related ESG business and functional areas which need to be
reporting and compliance requirements. covered by the organisation’s broader risk framework.
Approach of tax authorities. In addition the tax function will frequently lack the level
of resource and broader skill set to effectively manage
Tax authorities are now in possession of vast amounts
this wider range of risks but will still be well placed to
of data in respect of taxpayers and their customers
understand what the risks are and where they arise.
and are making use of more sophisticated technology
and analytics in reviewing this data. This will result in One can look at different types of risks and can identify
insurers needing to have a greater understanding of areas where tax functions may be well placed to
the data that is potentially available to tax authorities manage the risks faced but that in other areas this is
and what messages it potentially communicates. This not the case. This can be seen by looking at different
will lead to more robust data governance and levels of activities as one moves beyond the tax
management arrangements in respect of tax data function into other areas of the organisation.
being required and more effective controls over the
generation, analysis, and communication of tax data
and information throughout the organisation.
PwC | Keeping up with Tax - Insurance - February 2023 4Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Why the operational and conduct risk impacts of tax
should be high on the Chief Risk Officer’s agenda
(continued)
Level 1: Risks which relate to the organisation's Work with a range of key stakeholders to ensure a
own tax affairs and are managed by the tax coordinated approach is taken
function.
The CRO should work with key stakeholders from
These relate to risks that arise in respect of technical areas such as tax, finance, legal, operational risk and
positions and interpretations in respect of the various financial crime compliance as well as the business to
tax returns that are prepared by the tax function. ensure a coordinated approach is taken to issues
faced.
Level 2: Risks arise in respect of the organisation’s
own tax affairs but are managed by functional and Define mandate, roles and responsibilities.
business areas outside of the tax function. coordinate approach is taken
Risks here can relate to areas such as: These teams should work to ensure that the mandate,
roles and responsibilities, authorities and interactions
● Operationalisation of transfer pricing policies /
between them are clearly defined, understood and
calculations in the finance team.
effectively and efficiently designed.
● Failure to identify and address all tax risks arising
from the launch of new products by business teams. Enhance / upgrade the existing Tax risk control
framework that is in place
Level 3: Risks arise in respect of customers' tax
affairs which are managed by functional and Ensure appropriate enhancements and updates are
business areas outside of the tax function. made to the existing Tax Control Framework (‘TCF’)
and related reasonable procedures that are in place
Risks here can include: and ensure this leverages as much as possible and is
● Onboarding of customers who are engaging in tax consistent with the firm’s wider enterprise wide and
evasion. operational risk frameworks.
● Facilitating aggressive tax avoidance by customers
through the provision of the organisation’s products Obtain assurance over operation of the framework
and service.
Focus on gaining assurance around the effective
● Failure to comply with CRS / FATCA rules as a operation of such frameworks through regular risk
result of issues in the functions managing those based testing and assurance activities with all control
processes. deficiencies communicated to those impacted with
progress to resolution monitored.
As one works through the levels the role of the tax
function and its traditional skill set becomes less Identify key resources and organisational design
relevant and the role of functional and business areas to embed the framework
across the broader organisation comes more to the
fore. That said, one important consideration is that the These teams should work to ensure that the mandate,
tax function will still have a good idea of what the risks roles and responsibilities, authorities and interactions
are that need to be managed and where they arise between them are clearly defined, understood and
even if they cannot manage them directly. effectively and efficiently designed.
Monitor and horizon scan for emerging risk
How should CROs respond?
Key also to ‘horizon scan’ and consider material tax
Given the material increase in potential tax related loss events that arise in the market to feed into risk
operational and conduct risk, the fact that these risks assessment and mitigation activities.
can arise across the organisation, and that the tax
function is not often best placed to manage these risks
means, that CROs should should be looking to ensure
that the broader risk framework of policies, reasonable
prevention procedures and controls as well as structural
and organisational design to implement this framework
takes into account the evolving nature of tax risk. In
doing so they should act collaboratively with the tax
function seeking their inputs and insights. Key activities
include:
PwC | Keeping up with Tax - Insurance - February 2023 5Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Why the operational and conduct risk impacts of tax
should be high on the Chief Risk Officer’s agenda
(continued)
There are a number of key structural and The Takeaway
organisational design considerations that should also
be addressed when considering how broader tax Given the evolving nature of tax risk, how it can arise
operational and conduct risk is effectively considered across the organisation and the fact that the tax
which involves taking into account the firm’s wider function frequently lacks the level of resource and
financial crime, operational and tax risk frameworks. broader skill set to effectively manage this wider
Key areas for consideration include: range of risks that arise it is key that the CRO and
their team engage and assess how the wider risk risk
● The setting of a tax risk appetite;
frameworks, tools, techniques and skill sets of the risk
● Integrating consideration of tax risks into existing function can be brought to bear to effectively manage
KYC / CDD processes; this broader tax risk profile.
● Reflecting a consideration of wider tax risks into
financial crime and operational risk assessment Immediate next steps that should be taken include
processes; mobilising an appropriate mix of cross functional
stakeholders to carry out a current state assessment
● Incorporating the management of conduct and
of the organisation’s current tax risk profile and
operational tax risks into the organisation’s Three
approach to managing this. This should explore the
Lines of Defence model;
issues and themes that we have highlighted as well
● Consideration of new product development / as current and evolving tax authority and regulatory
suitability criteria in the context of conduct risk expectations.
considerations;
● Looking at transaction monitoring and red flag This should then inform an implementation plan
processes; highlighting the areas where actions or improvements
● Training and upskilling of staff; and are required as well as any required structural and
organisational design considerations to give effect to
● Considering how a consideration of broader conduct those identified areas of improvement.
and operational tax risks are woven into existing
assurance, monitoring, testing and reporting This should result in the organisation being well place
processes. to identify and understand what risks it faces and
where these arise, ensure steps are taken to address
these risks, that the appropriate organisational design
steps have been taken and that the combined tax and
broader risk management capabilities of the
organisation are being brought to bear in addressing
what is evolving and increasingly complex area of risk
that needs to be managed.
Contact
Emmet Bulman
Director, Financial Services Tax
M: +44 7483 417209
E: emmet.bulman@pwc.com
PwC | Keeping up with Tax - Insurance - February 2023 6Introduction Why the operational and FS Tax Insurance Contacts
conduct risk impacts of tax
should be high on the Chief
Risk Officer’s agenda
Contacts
For additional information please contact:
Stuart Higgins Rob Gooding
Partner, UK Tax Clients and Partner
Markets Leader M: +44 (0) 7815 643 891
M: +44 (0) 7725 828 833 E: robert.gooding@pwc.com
E: stuart.higgins@pwc.com
Colin Graham Lindsay Hayward
Partner – Global Financial Services Partner
Tax Leader M: +44 (0) 7702 678 458
M: +44 (0)7764 132 271 E: lindsay.hayward@pwc.com
E: colin.graham@pwc.com
Andrew Rosam Susie Holmes
Partner, Insurance Tax Partner
Market Leader M: +44 (0) 7841 561 428
M: +44 (0) 7718 339 569 E: susie.holmes@pwc.com
E: andrew.c.rosam@pwc.com
Ben Flockton Richard Mander
Partner Partner
M: +44 (0)7968 241 792 M: +44 (0) 7740 242 198
E: benjamin.flockton@pwc.com E: richard.c.mander@pwc.com
Jonathan Howe Brent Hadley
Partner Director
M: +44 (0)2072 125 507 M:+44 (0) 7730 147 650
E: jonathan.p.howe@pwc.com E: brent.c.hadley@pwc.com
Hazell Hallam Sharon Blain
Partner Director
M: +44 (0)7711 562 076 sharon.blain@pwc.com
E: hazell.hallam@pwc.com +44 (0) 7590 352 384
Katharine Adlard Sarah Robinson
Director Director
M: +44 (0) 7725 706 688 M: +44 7715 034 006
E: katharine.s.adlard@pwc.com E: sarah.robinson@pwc.com
PwC | Keeping up with Tax - Insurance – February 2023 7Introduction IFRS 17 FS Tax Insurance Contacts
Mike Trigg Stephen Kemp
Director Senior Manager, Editor
M: +44 (0) 7715 033 786 M: +44 7483 456 286
E: michael.trigg@pwc.com E: stephen.d.kemp@pwc.com
Dan Moynes
Senior Associate, Editor
M: +44 (0) 7483 325 751
E: daniel.moynes@pwc.com
PwC | Keeping up with Tax - Insurance – February 2023 8Thank you
This publication has been prepared for general guidance on matters of interest only, and does not constitute
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