How adoption of FRS 117 will impact insurers in Singapore

With taxation to be based on MAS returns, insurers should prepare for financial statements changes and corporate income tax consequences.

In Singapore, taxable profits are generally calculated based on accounting profits determined in accordance with the Financial Reporting Standard (FRS). The adoption of FRS 117 Insurance Contracts or Singapore Financial Reporting Standards (International) ((S)FRS(I)) 17 Contracts (collectively referred as FRS 117), which takes effect for annual reporting periods beginning on or after 1 January 2023, will bring a significant change in reporting of financial statements (FS) and corporate income tax (CIT) consequences for insurers.

Currently, apart from the participating fund of life insurers, insurers are taxed based on surplus and rely on the FS for the preparation of their corporate income tax computations (hereafter referred as computations).

Filed with the Monetary Authority of Singapore (MAS) for regulatory purposes, insurance statutory returns (i.e., MAS returns) provide the insurers’ income and expense information by types of insurance funds and lines of business.

With the adoption of FRS 117, insurers will recognise contractual service margin in the FS instead of premium income and claim expenses that have been used to ascertain the profits of insurers. It was announced in the Singapore Budget 2022 that MAS returns instead of the FS will be used as the basis for preparing computations for insurers in Singapore after the adoption of FRS 117. The change will take effect from the Year of Assessment (YA) 2024 (or YA 2025 for insurers whose financial year end is not 31 December).

What are the consequential tax changes for insurers?

The use of MAS returns for preparing computations is generally a welcome move. The basis of taxation of insurers in Singapore will be aligned with their regulatory reporting in Singapore. However, the change to using MAS returns that are not prepared in accordance with FRS will give rise to several issues, which will need to be considered by the insurers. The Inland Revenue Authority of Singapore (IRAS) has issued an e-Tax guide on 21 October 2022 to provide more clarification. Some of the transitional tax adjustments are listed below:

Insurers with non-Singapore dollar functional currency

The MAS returns are prepared in Singapore dollar (SGD) regardless of the functional currency of the insurers. For tax purposes, insurers with non-SGD functional currencies prepare their computations in their respective functional currencies based on the FS. With the adoption of FRS 117, the IRAS will accept insurers filing their computations in SGD regardless of their functional currency. Insurers are expected to use reasonable exchange rates obtained from reliable sources to translate the non-SGD functional currency to SGD in MAS returns. In addition, insurers are required to convert their existing non-SGD currency tax balances such as unabsorbed tax losses to SGD based on exchange rates stipulated by the IRAS.  

Insurers whose financial year end (FYE) is not 31 December

Other than captive and marine mutual insurers^[1], all other insurers are required to prepare the MAS returns on a calendar year basis. Insurers with non-December FYE will need to change their CIT computations to calendar year basis and YA 2025 will be the transitional YA. The below diagram shows the transitional YA for an insurer with 31 March FYE:

Taxability or deductibility of policy liabilities

The taxability or deductibility of the net increase or decrease in policy liabilities is currently based on the actuary’s certification reported in the MAS returns. With the adoption of FRS 117, the IRAS has confirmed that there will be no change in the above basis when MAS returns are used as a tax base for preparing computations.

For insurers whose current policy liabilities accepted for tax purposes are based on the amount reflected in the FS, a one-time tax adjustment will be made to use the policy liabilities figures reported in the MAS returns starting from the YA of using MAS returns as the tax base.

Tax treatment for financial instruments

Currently, FRS 109 tax treatment is the default tax treatment for taxpayers who have adopted FRS 109 for accounting purposes. Insurers that have elected to apply the temporary exemption from the application of FRS 109 will need to adopt FRS 109 on the day they first adopt FRS 117 for accounting purposes.

Financial instruments in the MAS returns are valued and reported using the mark-to-market (MTM) valuation basis, regardless of the accounting classification under FRS 109. With the adoption of MAS returns as the basis of preparing CIT computations, the MTM tax treatment will be the default tax treatment^[2] for financial instruments of insurers, except participating fund of a life insurer.

A one-time tax adjustment is expected to transit insurers to the default MTM tax treatment. One such adjustment is the tax adjustment to tax or claim deduction on the accumulated unrealised gains or losses of financial instruments on revenue accounts that were recognised in Other Comprehensive Income but were reported in Form A2 of the MAS returns in the prior years. Insurers would need to consider the following transitional adjustments and corresponding tax implications:

• Transition from pre-FRS 39 tax treatment to FRS 39 tax treatment if the insurer has previously opted out of the FRS 39 tax treatment
• Transition from FRS 39 tax treatment to FRS 109 tax treatment
• Transition from FRS 109 tax treatment to MTM tax treatment

To ease the transition for insurers with cash flow issues, an instalment plan of up to 18 months may be provided to affected insurers upon request.

Tax adjustment required from the use of MAS returns (other than those relating to FRS 109 financial instruments)

Immovable properties are reported at estimated market value in the MAS returns. Insurers will need to make yearly tax adjustments in their computations to exclude any unrealised gains or losses from immovable properties. Upon disposal of the immovable property that is determined to be revenue in nature, the amount of gain to be taxed or the loss to be allowed should be ascertained by deducting the cost of the property from its sale price.

Investments in subsidiaries and associates are reported at market value or net realisable value. Insurers will need to make yearly tax adjustments in their computations to exclude any unrealised gains or losses from their investments in subsidiaries and associates. Upon disposal of the investments that are determined to be revenue in nature, the amount of gain to be taxed or the loss to be allowed should be ascertained by deducting the cost of the investments from their sale price.

Captive and marine mutual insurers 

For captive and marine mutual insurers, their MAS returns are currently prepared based on financial year, which aligns to the FS. In this regard, these insurers are able to continue preparing their computations on a financial year basis.

As captive insurers are not required to prepare the full set of MAS returns, one consideration is whether the current set of MAS returns is sufficient for the preparation of CIT computations going forward. The IRAS is expecting captive insurers to provide a breakdown of their investment income similar to Form Annex A2-3 of the MAS returns, which is currently not prepared by captive insurers. We foresee that this will not materially impact captive insurers as most of them do not invest in financial instruments.

More details on the transitional adjustments are available in the e-Tax guide.

Tax accounting

Globally, the implementation of IFRS 17 will have a cash tax and deferred tax impact at both group and local statutory level. Tax laws may change as countries seek to prevent double taxation or mitigate other impact of IFRS 17. In addition, deferred tax may be affected if IFRS 17 is not applied across the whole group or the local tax base differs from the local accounts, such as Singapore.  

What’s next for insurers?

With tax authorities globally still working to publish local tax rules in the short to medium term, the tax landscape will continue to change during the duration of IFRS 17 implementation and beyond. Apart from assessing the impact of IFRS 17 on their current and deferred income tax calculations and reporting, insurers will also need to evaluate their current policy, data and systems, processes and human resources as listed below in order to be aligned and ready to handle the new standard. 

   1. Policy

• Group policy for treatment of tax payments under IFRS 17 measurement models with principles that can be implemented locally within the group parameters
• Group tax reporting requirements under IFRS 17 regime
• Tax accounting framework for transition and ongoing deferred tax calculations at local and group level

 2. Data and systems

• Gap analysis of source data for local statutory and tax and regulatory reporting versus requirements for Group IFRS reporting purpose (e.g., granularity of data needed for current and deferred tax calculations)
• Rationalisation and standardisation of tax chart of accounts and accounting entries

 3. Processes 

• Standardising and simplifying tax reporting packages for local statutory tax provision and IFRS consolidation
• Tax technical support for analysis of local tax payments to be included in fulfillment cash flow, opening balance sheet adjustments, reconciliation of accounting and tax base differences, current and deferred tax calculations under IFRS 17 and impact analysis based on dry-run results
• Procedure manual and process flows for income tax reporting at local and group level

 4. People

• IFRS 17 tax awareness sessions to gain support from internal stakeholders 
• Tax accounting training on IFRS 17 to upskill the finance and tax team.

The co-authors of this article are May Tay, Partner, Financial Services Tax from Ernst & Young Solutions LLP and Leow Yuet Yong, Director, Financial Services Tax from EY Corporate Advisors Pte. Ltd.