United States: What Insurers Need To Know About Two Recently Proposed Treasury Regulations

This month the Treasury Department issued proposed regulations that affect many taxpayers making payments to foreign counterparties. This Special Bulletin focuses on the provisions of the proposed regulations or their preambles that specifically deal with or would be of concern to the insurance industry.

One set of proposed regulations1 concerns the Foreign Account Tax Compliance Act, or FATCA, a statute that generally provides for a 30% withholding tax on payments of U.S. source income to foreign entities, unless the entities (if they are so-called financial institutions) register with the IRS and provide information regarding their U.S. account holders or provide information regarding their substantial direct or indirect U.S. owners (if they are not financial institutions).2

The second set of proposed regulations3 concerns the new corporate minimum tax (the BEAT tax), which can impose a 10% or 11%4 tax on modified taxable income, if that tax is greater than the regular tax on unmodified taxable income.5 Modified taxable income is generally taxable income increased by certain deductible payments that a domestic corporate taxpayer makes to a related foreign person.6

The BEAT tax is not imposed unless those deductible payments to related foreign persons equal or exceed 3% (for certain taxpayers 2%) of all its deductible payments and the corporation and its affiliates have average annual gross receipts that equal or exceed $500 million.

FATCA Proposed Regulations

The FATCA proposed regulations have a number of important provisions that affect all taxpayers, including the elimination of any withholding on gross proceeds from U.S. stocks and securities (which was scheduled to go into effect in 2019) for noncomplying foreign entities and a further deferral of withholding on so-called foreign passthru payments (which have not been defined, but are meant to protect against foreign financial institutions avoiding the FATCA rules).

As specifically concerns the insurance industry, the proposed regulations would provide that there is no FATCA withholding on insurance premiums, unless the insurance contract is cash-value insurance, which generally means insurance (other than indemnity reinsurance or certain term life policies) under which the holder has the right to terminate the policy and receive more than $50,000. Withholding on premium payments had generally been deferred under the final regulations until 2017 for so-called offshore obligations (but was required beginning in 2017).

In providing this exemption, Treasury sought to eliminate the administrative burden associated with documenting insurance carriers, intermediaries and syndicates of insurers for FATCA purposes for insurance contracts that do not have a cash value, especially because some of that information will be captured as a result of amendments made by the Tax Cuts and Jobs Act of 2017 to provisions applicable to passive foreign investment companies. According to the preamble, these proposed regulations can be relied on for all open tax years.

BEAT Minimum Tax Regulations

The proposed regulations dealing with the BEAT tax have important provisions for all affected taxpayers, including an exclusion from base erosion benefits for payments to a foreign affiliate if, generally speaking, the payment is included in the foreign affiliate's income from a U.S. business (so-called effectively connected income, or ECI).  There is also a provision that resolves a statutory ambiguity by providing that the base erosion percentage for NOLs is determined using the base erosion percentage in the year the NOL arose.

A number of provisions in the proposed regulations are of particular interest to insurance companies, and the preamble to the proposed regulations asks for comment on other possible provisions. These are briefly discussed below.

Determining If Taxpayer Is Subject to the BEAT Tax

In determining whether a taxpayer is subject to the BEAT tax, it is necessary to determine if it (together with members of its "aggregate group" of corporations) has average annual gross receipts of at least $500 million.7 Consistent with the statute, the proposed regulations would not allow any reduction in gross receipts for reinsurance premiums paid or accrued by an insurance company.8 

No Netting to Determine Base Erosion Benefits

The proposed regulations provide that base erosion benefits are determined on a gross basis, even if the parties are contractually or legally permitted to make or receive payments on a net basis.9 As an example, they state that "any premium or other consideration paid or accrued by a taxpayer to a foreign related party for any reinsurance payments is not reduced by or netted against other amounts owed to the taxpayer from the foreign related party or by reserve adjustments or other returns."

However, the preamble does ask for comments on whether reinsurance contracts that provide for settlement on a net basis should be distinguished in this regard from other commercial contracts. Insurance companies may want to comment on this provision, as there are some good arguments for allowing netting.

Qualified Derivative Payments

There is a special rule in the statute (Code section 59A(h)) that qualified derivative payments (QDPs) are not base erosions payments. The statute as well as the proposed regulations provide that derivatives do not include insurance contracts for this purpose.10 

953(d) Companies

The preamble to the proposed regulation makes it clear that no special provision is required to exclude from the definition of related foreign corporation a so-called 953(d) company, because it is treated for purposes of the Code as a U.S. corporation under Code section 953(d).

Insurance Company That Is an Affiliate of a Bank or Dealer

An affiliated group (as defined in Code section 1504(a)(1)) that includes a bank or registered securities dealer is subject to the 1% higher BEAT tax rate (and the 2% rather than 3% test for being subject to the BEAT tax). The proposed regulations would apply the higher rate to any member of an aggregate group, including an insurance company, that has a bank or registered securities dealer that is a member of the affiliated group, but would exclude all the members of an aggregate group or affiliated group if the gross receipts of the bank or dealer are less than 2% of the group's receipts.11

Life vs. Nonlife Companies

Base erosion benefits are defined to include not only deductible payments to foreign related parties but also premium payments to a related foreign person "which are taken into account" under Code sections 803(a)(1)(B) or 832(b)(4)(A).12

The reason for this special provision is presumably to treat life and nonlife insurance companies in a similar matter even though nonlife companies (but not life companies) compute their gross income with a reduction (rather than a deduction) for premiums paid for reinsurance.

The preamble to the proposed regulation notes that complete comparability is not provided by this provision since nonlife companies can also reduce their gross income by losses (see Code section 832(b)(3)), and it asks for comment on whether a life company should have the equivalent treatment. Life companies may want to comment.  

Reliance and Opportunity to Comment

The preamble to the proposed regulation states that "[u]ntil finalization, a taxpayer may rely on these proposed regulations for taxable years beginning after December 31, 2017, provided the taxpayer and all related parties of the taxpayer (as defined in proposed §1.59A-1(b)(17)) consistently apply the proposed regulations for all those taxable years that end before the finalization date." Written comments or a request for a public hearing on the proposed regulation must be received by February 19, 2019.

Footnotes

1 83 Fed Reg pp. 64757-64768 (December 18, 2018).

2 FATCA is contained in sections 1471-1474 of the Internal Revenue Code of 1986, as amended (the "Code"). There are already extensive final regulations in effect under those Code provisions, and the US has entered into Intergovernmental Agreements (so-called IGAs) with many countries that modify the FATCA rules but generally continue to require either the entity or the government to report to the IRS.

3 83 Fed Reg pp. 65956-65997 (December 21, 2018).

4 The BEAT tax rate goes up to 12.5% or 13.5% in taxable years after 2025. For 2018 the BEAT tax rate is 5% or 6%. The rate is one percent higher for any taxpayer that is a member of an affiliated group that includes a bank or registered securities dealer.

5 The BEAT can be applicable in more situations than might at first be obvious, because most tax credits cannot be taken against the BEAT (including foreign tax credits). Until 2025, the research credit and 80% of the low income housing credits and certain renewable energy credits may be taken against the BEAT tax.

6 The statute is Code section 59A. More exactly, modified taxable income is computed without regard to the deduction for "base erosion benefits" (including the base erosion percentage of NOLs). Base erosion benefits include payments or accruals (a "base erosion payment") to foreign related parties and include the deduction for depreciation with respect to depreciable property acquired by a "payment" to a foreign related party. The proposed regulation would treat noncash payments for depreciable property including stock issued in a nonrecognition transaction as payments for purposes of the BEAT tax. A base erosion payment also includes "any premium or other consideration paid by the taxpayer to a foreign person which is a related party of the taxpayer for any reinsurance payments which are taken into account under sections 803(a)(1)(B) or 832(b)(4)(A)". See also Code section 59A(c)(2)(A)(iii)(setting out the base erosion benefit from this base erosion payment).  Relatedness is generally determined using a 25% or greater overlap of ownership, with constructive ownership rules. There is also a special base erosion benefit for certain payments to expatriated entities which reduce gross receipts (if the entity expatriated after November 9, 2017).

7 An aggregate group is generally a group of corporations with 50% common ownership. Foreign corporations are generally included in the group only to the extent of their US effectively connected income. For more details, see Proposed Reg. §1.59A-1(b)(1).

8 Prop. Treas. Reg. §1.59A-2(d)(2).

9 Prop. Treas. Reg. §1.59A-3(b)(2)(ii). 

10 See Code section 59(h)(4)(C) and Prop. Treas. Reg. §1.59A-6.

11 Prop. Treas. Reg. §1.59A-2(e)(2).

12 See Code section 59A(d)(3).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions