Korean insurers face tax challenges amidst IFRS 17 adoption: Report

The sudden increase in reserves has triggered calls for regulatory adjustments.

Insurers are confronting a significant tax crisis this year, with potential tax liabilities soaring due to the adoption of the new accounting standard, IFRS 17, within just two years of its implementation, reported Business Korea.

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Since the inception of IFRS 17, the surge in cash surrender reserves recognised as expenses annually has been substantial, sparking discussions about revising reserve accumulation levels. 

Whilst cash surrender reserves were historically exempt from taxation as they represented liabilities to be refunded to policyholders upon contract termination, the sudden increase in reserves has triggered calls for regulatory adjustments.

The National Tax Service initiated an investigation into why corporate tax revenues did not proportionately increase despite insurers reporting record-high net profits following the implementation of IFRS 17. 

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Last year, insurers accumulated a net profit of KRW13t in the first year of IFRS 17 implementation. 

The significant increase in cash surrender reserves was cited as one reason for the disparity in tax revenue growth compared to net profits.

These reserves, earmarked for reimbursing policyholders upon contract termination, were traditionally excluded from taxation.

Amending tax laws to address this issue is challenging, so financial authorities are considering revising supervisory regulations to lower the accumulation rate of reserves. However, this move could undermine the principle of protecting policyholders.