fully interactive pdf - AIG.com

GloBal SolutionS CuStoMizedincome taxtax liability and CapitalNot only does the absence of a local policy potentially impact the ability of a multinational to obtain claim servicesin-country, but if a claim payment cannot be made locally there may be tax ramifications as well.Consider:A company’s European subsidiary suffers a $30 million propertyloss. The loss is covered by a global policy negotiated andpurchased in the U.S. by the U.S. parent company. As no localpolicy was purchased the carrier may be unable to remit claimpayment directly to the subsidiary in Europe, and may insteadpay the parent company in the U.S. — a move that has materialtax ramifications.Since the parent company did not actually sustain the loss, theproceeds could be taxable income to the parent company. Thehighest U.S. corporate income tax rate is 35 percent, whichtranslates to a potential $10.5 million tax liability. In addition, ifthe subsidiary is not sufficiently capitalized to absorb the loss onits own, necessitating that funds be contributed by the parent tothe subsidiary, the funds could be considered taxable income tothe subsidiary as well. For example, if the subsidiary is subject toa 25 percent income tax rate under local law, the parentcompany may need to provide the subsidiary with $40 million toincome tax QuestionsWhen crafting a program for multinationalexposures, consider:– Will the claim need to be paid in-country?– If the global policy cannot respond bypaying the claim locally and must insteadpay the parent company, will the parentincur tax liability in its home country?– Will the parent need to make a capitalcontribution to the local subsidiary; if so,will the local subsidiary incur tax liability?– Can the local operation survive if theparent does not infuse capital to make itwhole for a loss?fully compensate it for the loss after tax. As a result, the total organizational tax liability in this example would be$20.5 million ($10.5 million for the parent and $10 million for the subsidiary).Proof of insuranceSatisfying local authoritiesDepending on the nature of a multinational’s local operations, alocal policy issued by a locally licensed carrier may be needed tofulfill contractual and/or other obligations.Consider:A large South American-based pharmaceutical company and itssubsidiaries sponsor clinical trials around the world. Following oneclinical trial sponsored by the parent company in Europe, 50individuals sustain bodily injury and are on the verge of litigation.The local subsidiary, which sponsors most of the clinical trials inthis same country, has a local insurance policy that expresslyprovides clinical trials coverage. The parent company (and sponsorof this trial) only has a global policy issued in South America.Proof of insurance QuestionsWhen crafting a program for multinationalexposures, consider:– Are local operations required to obtaininsurance from locally licensed carriers?– Does a contractual counterparty,government entity or other party need tobe shown evidence that coverage has beenobtained locally?– Will failure to provide evidence of locallyobtained insurance breach contractualcovenants or trigger any commercial,contractual or reputational consequences?7