Q&A

Question

1) For tax receivables from tax authorities in EU member states, are withholding taxes considered tax receivables for the purposes of calculating the capital requirement for counterparty default risk?

2) If withholding taxes relating to tax authorities in EU member states, are stressed under the Counterparty default SCR, should the Solvency II balance sheet value also have a counterparty default adjustment applied?

3) If withholding taxes relating from tax authorities in EU member states are not stressed under the Counterparty default SCR, should they be included under market risk and, if applicable, underwriting SCR calculations?

EIOPA answer

1. Withholding taxes from tax authorities in EU member states might result in a tax receivable or a deferred tax asset in the Solvency II balance sheet. If it results in a tax receivable then (as per Q&A1549) the counterparty default risk module is applicable. If it results in a deferred tax asset then the counterparty default risk module is not applicable when determining the Basic Solvency Capital Requirement.

2. The counterparty default adjustment applies only to amounts recoverable from reinsurance contracts and special purpose vehicles. Withholding taxes, whether resulting in a tax receivable or in a deferred tax asset in the Solvency II balance sheet, would not fit into these categories.

3. As per the above, if withholding taxes result in a deferred tax asset then (as per Article 83(1)(b) of Commission Delegated Regulation (EU) 2015/35) it should not be changed in value in any scenario based calculations when determining the Basic Solvency Capital Requirement.

If it results in a tax receivable, then it should be included in the calculation of the capital requirement for counterparty default risk on type 2 exposures. It should not be included in the spread risk sub-module or the market concentrations risk sub-module.

If withholding tax results in a tax receivable and its value is impacted by other market risks, for example equity risk, it should be included in the respective market risk sub-modules.

Provided the value of the tax receivable is impacted by underwriting risks the same approach applies for the relevant underwriting risk (sub-)modules.