Three years after implementation, the complex nature of Statement of Statutory Accounting Principles (SSAP) No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10, continues to bring doubt and uncertainty to insurance companies, especially those without internal tax departments. The guidance provided in SSAP No. 101 creates a highly complex tax calculation that is very labor intensive. The lack of available tax provision software to perform this calculation means insurance companies are forced to interpret the guidance on their own and incorporate it into a self-developed tax provision template.
There are several areas that can create increased complexity within the calculation, or can oftentimes be overlooked if the calculation is not performed by a team with a tax background. These include the following:
- Tax character: The distinction between a life and non-life insurance company is important as the SSAP No. 101 calculation is generally in line with the tax return calculation. This means different carryback periods between life and non-life companies, as well as the recognition that capital deferred tax assets cannot be offset by ordinary income.
- Alternative minimum tax (AMT): AMT must be considered in all areas of the calculation. Taxes recoverable in the carryback period may be limited by AMT and the reversal pattern of available AMT credit carryforwards should be evaluated when projecting future taxable income, as well as when offsetting deferred tax liabilities against deferred tax assets.
- Consolidated return matters: Reporting entities that are part of a consolidated tax return filing have special considerations related to the amount of taxes that are considered as recoverable at the separate entity level. The taxes paid by the reporting entity could be reduced pursuant to the consolidated group’s tax sharing agreement. The tax-sharing agreement must also be considered when determining the usage of any tax attributes, such as net operating losses, tax credits, etc., at the separate entity level.
- Mergers and acquisitions: Pre-acquisition versus post-acquisition periods must be considered when looking at taxes recoverable in the carryback period. Mergers and acquisitions can also create two separate tax years within one calendar year, which can impact the tax provision calculation.
Building these intricacies into the tax provision template can be challenging for insurance companies, especially for those without the time and/or resources to delve into the guidance under SSAP No. 101, as well as the related Q&A which provides added insight and example calculations. There is plenty of room for error, especially when companies are working through any of the significant areas described above.
For insurance companies that are assigned the task of developing internal SSAP No. 101 templates, there are some best practices to keep in mind. These include the following:
- Build in cross-checks/proofs throughout the template: While crosschecks and proofs cannot guarantee a complete and accurate tax provision calculation, they can help to ensure there are no formula errors and items are flowing correctly. Spreadsheet controls over access and changes should also be formalized.
- Use rate reconciliation to verify total tax: The rate reconciliation, which is used to reconcile the statutory tax rate to the effective tax rate, is helpful in assessing the accuracy of the tax provision calculation. If there are holes in the rate reconciliation, it most likely means there is an error in the calculation.
- Perform a high-level analysis of the tax footnote: Once the tax provision calculation is final, it is important to take a step back and analyze the results as disclosed in the tax footnote against expectations. It is also helpful to review other footnotes within the annual statement or financial statements to ensure the tax provision is accurately capturing all necessary tax adjustments.
Insurance companies that lack the internal resources to develop and maintain a SSAP No. 101 template may benefit from the support of an experienced specialist. With the highly complex nature of SSAP No. 101, it is important to have a solid understanding of the guidance, especially those items that can create greater uncertainty.
For more information on this topic, or to learn how Baker Tilly’s insurance specialists can help, contact our team.