Tense talks expected over new rule exempting investment-linked policy premiums
The insurance industry is gearing up for battle with the Inland Revenue Department over a new international rule that could cost the government more than $100 million in lost taxes annually.
The dispute involves industry revenues from increasingly popular investment-linked insurance products, which the department views as taxable premiums but insurers say should be exempt under new accounting rules set to be implemented worldwide next year.
Some insurers have told the South China Morning Post that they anticipate tense, protracted talks with tax officials over the issue.
'Both sides will stand firm,' said Tim Lui Tim-leung, a tax partner of PricewaterhouseCoopers. 'The government stands to lose a huge source of tax income, while the insurance companies could add an equivalent amount to their bottom lines.'
The proposed change by the International Accounting Standards Board, or rule IFRS4, does not classify policyholder contributions to investment-linked insurance products as premium income. Under Hong Kong law, insurers argue, that would exempt policyholder contributions to the funds - $14.5 billion last year - from tax.
The Inland Revenue Ordinance provides special treatment to life insurance companies under a rule enacted in 1947. Owing to the complexity in determining profits on insurance revenue, the government imposes the standard profits tax, now 17.5 per cent, on a flat 5 per cent of aggregate annual premium income.
