Menu
Tax Notes logo

Insurer Asks IRS, Treasury to Reconsider Withholdable Payment Reg

JUL. 11, 2017

Insurer Asks IRS, Treasury to Reconsider Withholdable Payment Reg

DATED JUL. 11, 2017
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Aon
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Insurance
  • Jurisdictions
  • Tax Analysts Document Number
    2017-62533
  • Tax Analysts Electronic Citation
    2017 TNT 137-54
    2017 ITR 9-69
  • Magazine Citation
    The Insurance Tax Review, Sept. 2017, p. 383
    53 Ins. Tax Rev. 383 (2017)

Foreign Account Tax Compliance Act (FATCA)

Non-Cash Value Insurance Premiums as Withholdable Payments

Document for discussion with the US Department of the Treasury,
National Economic Council and Office of Management and Budget

July 11, 2017

Prepared by Aon

Agenda

  • Aon’s Request to the US Treasury and IRS

  • Summary of FATCA’s Adverse Impact on the P&C Insurance Industry

  • Burdens without Benefit

    • Operational Uncertainty

    • Administrative and Financial Burdens on the Industry and IRS

    • No Significant Benefit or Advancement of FATCA Policy Objectives

  • Proposed Amendment to Treasury Regulation § 1.1473-1

  • Appendices

    • FATCA Policy Rationale

      • Congressional Intent and Final Regulations on US Financial Accounts

      • Congressional Intent and Final Regulations on Withholdable Payments

Aon’s Request to the US Treasury and IRS

  • As a leading global property and casualty (“P&C”) insurance and reinsurance broker with operations in more than 120 countries that are conducted by more than 50,000 employees, Aon respectfully asks the Treasury and the Administration to reconsider the language of Treasury Regulation § 1.1473-1. As currently drafted, this regulation imposes an undue financial and administrative burden on the global P&C insurance industry without providing any significant benefit or advancing the policy objectives of the Foreign Account Tax Compliance Act (“FATCA”)

    • Treasury Regulation § 1.1473-1 currently treats premium payments made with respect to non-cash value insurance contracts (i.e., P&C insurance premiums) as “withholdable payments” under FATCA

    • This potentially subjects these premiums to a 30% withholding tax when they cover US risks (and are thus US-source)

    • To avoid application of withholding tax, brokers, insurance companies and policyholders must comply with expensive and burdensome recordkeeping and documentation requirements that do not provide any actionable or useful information to US tax authorities

  • Aon therefore recommends an amendment to Treasury Regulation § 1.1473-1(a)(4)(iii) to include “premiums for insurance and reinsurance contracts that are not cash value insurance contracts” among the class of non-financial payments that are excluded from the definition of withholdable payment

  • This revision would be consistent with the legislative history under FATCA, which indicates that Congress intended for insurance premiums1 on non-cash value insurance contracts to be excluded from the definition of withholdable payment

A Typical Foreign-to-Foreign Transaction

  • In the typical foreign-to-foreign transaction, none of the parties are located in the US:

    • Aon’s Greek office in Athens places global liability insurance for a Greek olive oil producer

    • Aon places this risk with multiple carriers, using many markets which may further involve multiple carriers and syndicates (i.e., groups of carriers that work in a particular market like Lloyd’s)

  • The Greek olive oil producer may sell into unknown distribution channels, and that may or may not have the potential for resale into the United States to US customers

    • At the time the policy is purchased, the potential for “US risk” is therefore unknown and cannot be quantified. In that circumstance, the regulations presume that the risk is 100% US-source

  • Even for brokers such as Aon, US risk in policies is often not actually known but estimated, as pricing of the premium is determined by the carrier(s) based on their proprietary modeling which usually reflects blended rates

    • If foreign-issued policies are reinsured by foreign carriers, US risk becomes even harder to track

Summary of FATCA’s Adverse Impact on the Insurance Industry

Inclusion of insurance premiums on non-cash value policies as withholdable payments under FATCA has created significant burdens for the global insurance industry with no substantive benefit for industry or government stakeholders

Operational Uncertainty

  • US risk may be unknown to non-US policyholders who sell into distribution channels they don’t own or control

  • Insurance brokers also often cannot reliably identify US risk component in P&C and reinsurance policies as they have access to different market information than carriers who set premiums based on proprietary modeling

  • FATCA requires withholding agents to assume 100% of the premium payment is attributable to US risks absent actual knowledge

  • Withholding on premium payments could void or cancel policies under their terms, and inadvertently cause loss of coverage

Administrative & Financial Burdens

  • Brokers must collect and validate millions of pages of documentation each year, which must be securely stored until limitation periods expire

  • Compliance requires significant investments in system modifications and ongoing employee training

  • Insureds and carriers also incur substantial expense to achieve compliance

No Benefits

  • P&C insurance policies are pure indemnity contracts with no investment component or opportunity to evade taxes

  • The information collected by withholding agents does not provide information to the IRS useful to implement the policies of FATCA

Burdens without Benefit — Operational Uncertainty

  • FATCA compliance often requires non-US persons to determine in-scope premium payments under US tax law even if paid to other non-US persons

    • Insurance premiums are sourced based on the location of the risks insured

    • Non-US persons are now required to identify “US-source” risks under US law, which can be especially challenging under P&C policies that often do not specify disaggregated risk by geographic location

  • As the FATCA withholdable payment requirements are burdensome and confusing when applied to global P&C policies, there is the possibility that:

    • Coverage may be suspended or cancelled upon withholding by a withholding agent making an assumption about US risk that differs from any estimate made by the carrier

    • The pool of marketable non-US insurance carriers may be reduced to only those who provide FATCA documentation to potential buyers even if US risk is not actually present

  • Although the transitional relief that temporarily excluded from FATCA reporting insurance premiums paid by non-US withholding agents to non-US carriers expired on 1/1/2017, there is still:

    • Confusion by non-US withholding agents and carriers as to how FATCA applies to them when they do not sell or reinsure cash value policies or annuity contracts

    • Belief by carriers that the Intergovernmental Agreements entered into between their governments and the US intended to exclude non-cash value policies to achieve the same result as the Common Reporting Standard (“CRS”)

    • Potential that US insurance brokers and their non-US affiliates are at a competitive disadvantage compared to purely non-US brokers who have no obligations related to non-cash value policies under CRS, and who may not comply with FATCA because they:

      • Do not understand that P&C premiums relating to US risks could be in scope under FATCA even if transacted between all non-US persons, and/or

      • Are not compelled to comply with US tax laws as they have no other operations subject to the US tax jurisdiction

Burdens without Benefit — Administrative and Financial Burdens on the Industry and IRS

  • Aon has entered into 44 Qualified Intermediary (“QI”) Agreements with the IRS to alleviate the burdens on clients and to maintain its commercial viability as compared to non-US brokers

    • This creates further administrative burdens on both the IRS and Aon to administer this program

  • Even under the QI program, Aon must comply with overwhelming documentation requirements and costs

    • Approximately $500 billion of P&C insurance premium transacted globally is in scope for FATCA

    • Aon alone uses over 80 different broking systems, and modification of a single system to comply with FATCA has cost as much as $500,000

    • Preparation of withholding statements and distribution of Aon and carrier certificates is a manual process in many countries and can involve collecting 100+ pages of withholding statements and certificates from 10+ carriers and syndicates for one premium payment alone, and Aon processes 1,000,000+ payments globally on an annual basis

      • This voluminous documentation must be maintained and securely stored until relevant statutes of limitations have expired and generally for at least six years

Burdens without Benefit — No Significant Benefit or Advancement of FATCA Policy Objectives

  • Non-cash value insurance policies are pure indemnity contracts with no investment component, cash value or opportunity to evade taxes by hiding money or monetary assets

    • Congress intended to limit the scope of withholdable payments to those payments that presented a meaningful risk of US tax evasion

  • The data collected and stored does not provide information to the IRS that is useful to implement the policies of FATCA

    • Because P&C insurance companies are generally NFFEs, the withholding certificates they provide at most identify their own 10% or greater US shareholders, which is typically already known to the IRS due to controlled foreign corporation (“CFC”) reporting requirements

    • It is not practicable to review 1,000,000+ payments processed by Aon annually as a supporting compliance measure

Proposed Amendment to Treasury Regulation § 1.1473-1

  • To address these burdens that are imposed on the insurance industry that do not further the FATCA policy objectives as set forth by Congress, Aon respectfully recommends the following proposed amendment to Treas. Reg. § 1.1473-1(a)(4):

    § 1.1473-1(a)(4) Payments not treated as withholdable payments

    The following payments are not withholdable payments under paragraph (a)(1) of this section —

    * * *

    (4)(iii) Excluded nonfinancial payments [§ 1.1473-1(a)(4)(iii)]

    Payments for the following: services including wages and other forms of employee compensation (such as stock options), the use of property, office and equipment leases, software licenses, transportation, freight, gambling winnings, awards, prizes, scholarships, and interest on outstanding accounts payable arising from the acquisition of goods or services, and premiums for insurance and reinsurance contracts that are not cash value insurance contracts. Notwithstanding the preceding sentence, excluded nonfinancial payments do not include: payments in connection with a lending transaction (including loans of securities), a forward, futures, option or notional principal contract, or a similar financial instrument; premiums for cash value insurance contracts or annuity contracts; amounts paid under cash value insurance or annuity contracts; dividends; interest (including substitute interest described in § 1.861-2(a)(7)) other than interest described in the preceding sentence; gross proceeds other than gross proceeds described in paragraph (a)(4)(iv) of this section; investment advisory fees; custodial fees; and bank or brokerage fees.


Appendices

FATCA Policy Rationale — Congressional Intent regarding US Financial Accounts

  • Congress enacted FATCA in 2010 out of concern that US persons could evade US taxation by holding financial accounts outside the US

    • FATCA therefore requires foreign financial institutions (FFIs) and some non-financial foreign entities (NFFEs) to report on financial accounts they hold for US persons

  • Congress identified:

    • Financial accounts mainly as depository and investment accounts, and anticipated that the Secretary would also identify cash value insurance policies and annuity contracts as financial accounts

    • Banks and other depository and custodial institutions as FFIs, and anticipated that the Secretary would also identify the insurance companies issuing cash value policies and annuity contracts as FFIs

  • The Congressional Joint Committee on Taxation specifically stated:

    • “It is anticipated that the Secretary may prescribe special rules addressing the circumstances in which certain categories of companies, such as certain insurance companies, are financial institutions, or the circumstances in which certain contracts or policies, for example annuity contracts or cash value life insurance contracts, are financial accounts or United States accounts for these purposes.”

      • Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” under consideration by the Senate, JCX-4-10, February 23, 2010, at page 44 (“JCX-4-10”)

  • The Final Regulations do, in part, comport with this Congressional intent by:

    • Including only cash value insurance contracts and annuity contracts in the definition of Financial Account in Treasury Regulation § 1.1471-5(b)(i)(iv)

      • Thus making non-cash value insurance contracts non-reportable, even if held for US persons

    • Designating non-US insurance companies that issue cash value insurance contracts and annuity contracts as FFIs in Treasury Regulation § 1.1471-5(e)(1)(iv)

      • Thus requiring issuers of cash value insurance contracts to report with respect to such contracts when held for US persons

FATCA Policy Rationale — Congressional Intent regarding US-Source Withholdable Payments

  • FATCA enforces its reporting provisions by requiring the remittance of a 30% withholding tax by withholding agents on US-source withholdable payments made to non-compliant recipients

    • Compliance requires collection of withholding certificates identifying any substantial US owners of the payee or of financial accounts maintained by the payee

      • A “substantial U.S. owner” of a corporation is any 10% or greater shareholder, by vote or value

  • However, Congress also intended to limit the scope of withholdable payments to those payments that presented a meaningful risk of US tax evasion

    • Congress believed that requiring FATCA withholding on payments posing a low risk of tax evasion that would likely be made in the ordinary course of a person’s trade or business would impose unwarranted administrative burdens

  • The Congressional Joint Committee on Taxation specifically stated:

    • “The provision [requiring a withholding agent to deduct and withhold a tax on any withholdable payment] does not apply to . . . [the] class of payments identified by the Secretary as posing a low risk of U.S. tax evasion.”

      • JCX-4-10, at 46

    • “It is anticipated that the Secretary may exclude certain payments made for goods, services, or the use of property if the payment is made pursuant to an arm’s length transaction in the ordinary course of the payor’s trade or business.”

      • JCX-4-10, at 46

FATCA Policy Rationale — Final Regulations regarding Withholdable Payments

  • The Final Regulations that include premiums for non-cash value insurance as withholdable payments do not comport with this Congressional intent:

    • Treasury Regulation § 1.1473-1(a)(4)(iii) makes all premiums for any kind of insurance and reinsurance policies withholdable payments

      • This is much broader than the types of contracts that Congress intended to be Financial Accounts (i.e., only insurance contracts with cash value and annuity contracts)

    • Non-cash value insurance policies and non-annuities do not resemble financial accounts and do not provide opportunities for investment returns

      • Thus, they are unlikely to present a risk of tax evasion

    • Requiring payors to treat such premiums as withholdable payments presents administrative burdens very similar to the Congressional concerns that led to the exclusion of specific categories of nonfinancial payments that are generally made in the ordinary course of a payor’s trade or business

      • Non-cash value insurance policies typically are purchased in the ordinary course of an insured’s business

Thank you

FOOTNOTES

1 Please note that any reference in this document to “insurance premiums” also includes reference to “reinsurance premiums”

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Aon
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Insurance
  • Jurisdictions
  • Tax Analysts Document Number
    2017-62533
  • Tax Analysts Electronic Citation
    2017 TNT 137-54
    2017 ITR 9-69
  • Magazine Citation
    The Insurance Tax Review, Sept. 2017, p. 383
    53 Ins. Tax Rev. 383 (2017)
Copy RID