6. Tax

6.1 General principles

• L1-144. Deferred taxes, as recognised on the consolidated GAAP or SAP balance sheet (“consolidated GAAP”), are also recognised on the ICS balance sheet. DTA and DTL on the consolidated GAAP are reported the same way on the ICS balance sheet, whether that be two numbers or a single number.
• L1-145. There are two areas of the ICS that are tax affected:
  • • Differences in valuation between the consolidated GAAP and the ICS balance sheet (ICS Adjustment), made in accordance with section 3.1; and
  • • The ICS insurance capital requirement.
• L1-146. The ICS applies a group level calculation using a group effective tax rate (G-ETR) to calculate the change in deferred tax resulting from the ICS Adjustment and the tax effect on the ICS insurance capital requirement.
• L1-147. The method to calculate the G-ETR is specified in the Level 2 text.
• L2-339. The G-ETR is calculated as a weighted average effective tax rate, weighted using the previous three-year average of GAAP earnings before tax on a sub-group/entity level basis. The scope of the weighted average calculation is limited to insurance-related activities, and GAAP earnings before tax is floored at zero.
• L2-340. Statutory tax rates that have been enacted or substantially enacted as of the reporting date are used for the G-ETR calculation.  

6.2 Deferred tax resulting from the ICS Adjustment

• L1-148. The valuation adjustments made to the consolidated GAAP in order to derive the ICS balance sheet give rise to corresponding adjustments to deferred tax assets and liabilities. Any additional DTAs, created as a consequence of the ICS Adjustment, are subject to an utilisation assessment. The conditions of calculation and recognition of those deferred tax adjustments, including the utilisation assessment, are specified in the Level 2 text.
• L2-341. The adjustment to deferred tax is determined for each balance sheet line item that has been adjusted in order to arrive at the ICS balance sheet. Line items may yield an adjustment to deferred tax asset, deferred tax liability or no adjustment to deferred tax depending on the tax treatment of the line item. No adjustment for tax is made where the change in a line item, or component of a line item, does not result in a temporary tax difference (eg equity line items, line items representing permanent tax differences such as items that may not be expensed or generate revenue that is exempt for tax purposes). These line items or components of line items are excluded from the deferred tax adjustment calculation.
• L2-342. The deferred tax adjustment is calculated on a line by line basis. For all lines or components of lines, other than MOCE, where the adjustment creates a tax impact, the deferred tax is then calculated by multiplying the tax effected difference between consolidated GAAP and ICS balances by the G-ETR (as specified in paragraphs L2-339 and L2-340). The sum of DTA and the sum of DTL resulting from this line by line calculation are reported separately. The consolidated GAAP deferred tax is adjusted by the net outcome of the deferred tax resulting from the ICS Adjustment.
• L2-343. The MOCE is included as an ICS Adjustment and creates a DTA on the ICS balance sheet.

6.2.1 Utilisation assessment of DTAs recognised from the ICS Adjustment

• L2-344. Before the utilisation assessment, the DTA recognised from the ICS Adjustment is the sum of DTAs resulting from the line by line calculation specified in paragraph L2-342 and the DTA on MOCE specified in paragraph L2-343.
• L2-345. The DTA recognised from the ICS Adjustment after the utilisation assessment is limited to
  • a. The sum of DTLs resulting from the line by line calculation specified in paragraph L2-342;
  • b. Consolidated GAAP DTL;
  • c. GAAP DTL netted from assets deducted from Tier 1 capital resources, as specified in paragraph L1-63; and
  • d. Consolidated GAAP DTA.
• L2-346. The consolidated GAAP DTL and DTA referred to in paragraph L2-345 are limited to DTL and DTA reported from insurance-related activities.

6.3 Tax effect on the ICS insurance capital requirement

• L1-149. The mitigating effect of tax is taken into account when determining the ICS capital requirement. That tax effect on the ICS capital requirement is based on the increase in net DTA that would result from an instantaneous operational loss equal to the ICS capital requirement before tax, post diversification and post management actions. Any increase in net DTA is subject to a utilisation assessment as specified below.
• L2-347. The ICS insurance capital requirement is reduced by the amount of utilisable tax effect.
• L2-348. By default, the utilisable tax effect on the ICS insurance capital requirement is calculated as:

• L2-349. When deemed appropriate by the group-wide supervisor, a limit to the utilisation of the tax effect on the ICS insurance capital requirement may be set. The utilisable tax effect on the ICS insurance capital requirement is then calculated using the following formula: