Senator Concerned About Expense Allocation Approach Under FTC Regs

Hon Steven T Mnuchin
Secretary of the Treasury
U.S. Treasury Department
3300 Main Treasury Building
1500 Pennsylvania Avenue, N.W.
Washington. DC 20220

Dear Secretary Mnuchin:

I am writing regarding regulations recently proposed by the Treasury Department regarding the allocation of life insurance company expenses for purposes of the foreign tax credit (REG-105495-19).

As you know, I serve on the Senate Committee on Banking, Housing, and Urban Affairs where I sit on the Subcommittee on Securities, Insurance, and Investment. I am very concerned that the regulations as proposed are at odds with the way life insurance companies run their businesses and create a strong potential for some taxpayers to artificially inflate their foreign tax credit by shifting expenses and assets and liabilities around within the corporate group.

The life insurance companies with which I am familiar typically operate their life insurance businesses through a corporate group of affiliated companies that are managed to maximize the overall profits of the group's life insurance business. These companies in the group are commonly owned. They typically manage their assets and liabilities on a group basis, using a single investment department. To provide risk diversification and additional capacity for future growth, cap loss exposure, and manage statutory capital, these life insurance groups move investments around within the group and undertake reinsurance transactions between companies in the group.

Against this business backdrop, I was very concerned to learn that Treasury has proposed to allocate life insurance reserve and related expenses for foreign tax credit purposes, not on a group-wide basis that would reflect the economic reality of how the insurance group is run, but rather on a separate company-by-company basis for the members of the group. This means that the foreign tax credit result for the insurance group will be different, depending upon whether the group's overall insurance business is run by a single company or is split up among several companies in the group and whether the group has undertaken internal reinsurance transactions to move risks and capital around within the group. That result makes no sense to me from a business perspective

In describing the separate company-by-company approach to expense allocation for foreign tax credit purposes, the preamble to the proposed regulations states that "the Treasury Department and the IRS are concerned that this method may create opportunities for consolidated groups to use intercompany transactions to shift their section 818(f) expenses and achieve a more desirable foreign tax credit result." The preamble goes on to say: “Accordingly, the Treasury Department and the IRS request comments on whether a life subgroup method more accurately reflects the relationship between section 818(f) expenses and the income producing activities of the life subgroup as a whole, and whether the life subgroup method is less susceptible to abuse because it might prevent a consolidated group from inflating its foreign tax credit limitation through intercompany transfers of assets, reinsurance transactions, and transfers of section 818(f) expenses."

I share these concerns. The taxpayer's foreign tax credit for its life insurance business taken as a whole should not vary depending whether it has moved assets and liabilities of that overall business around among the life companies within its corporate group. The proposed regulations seem to throw the door wide open for aggressive tax planning on the foreign tax credit, which will only diminish the U.S. tax revenue that should be properly collected for the fisc from overseas operations.

I look forward to working closely with you and the Treasury Department as it deliberates over what the final regulations should look like.

Sincerely,

David A. Perdue
United States Senator

cc:
Hon. David Kautter, Assistant Secretary (Tax Policy)
Lafayette “Chip" Harter, Deputy Assistant Secretary (Tax Policy) — International Tax Affairs
Douglas Poms, International Tax Counsel

Hon. Charles Rettig, Commissioner of Internal Revenue
Michael Desmond, Chief Counsel, IRS