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Firm Seeks Retention of Gross Basis Calculation in BEAT Regs

FEB. 19, 2019

Firm Seeks Retention of Gross Basis Calculation in BEAT Regs

DATED FEB. 19, 2019
DOCUMENT ATTRIBUTES

February 19, 2019

CC:PA:LPD:PR (REG-104259-18)
Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington, DC 2004

Re: REG-104259-18 Relating to Proposed Regulations under Section 59A

Dear Sir or Madam:

We appreciate the opportunity to comment on the proposed regulations issued on the Base Erosion and Anti-Abuse Tax (“BEAT”) under section 59A of the Internal Revenue Code of 1986 (“Code”)1 and published in the Federal Register on December 21, 2018. We submit these comments on behalf of our client, The Travelers Companies, Inc. (“Travelers”) Travelers is one of the leading U.S. providers of property and casualty insurance for auto, home and business. They have approximately 30,000 employees in their U.S. operations and a few select international markets. Throughout its 160-year history, Travelers has been a true innovator in the insurance industry — adapting over the decades to changes in risks, technologies, consumer behaviors, and legal and regulatory requirements.

Travelers applauds the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) for issuing proposed regulations that do not permit netting with respect to reinsurance agreements. The rule's preamble expressly states that “the BEAT statutory framework is based on including the gross amount of . . . base erosion payments . . . in the BEAT's expanded modified taxable income base without regard to reciprocal obligations or payments that are taken into account in the regular income tax base, but not the BEAT's modified taxable income base.”2 Some taxpayers have argued that, in the context of modified coinsurance (“Modco”) contracts in which amounts paid to and from a reinsurer are settled on a net basis, the BEAT should only apply to the net cash settlement payment.3 As discussed further in these comments, Travelers believes that the proposed regulations are correct in rejecting netting, and that applying the BEAT to reinsurance payments on a gross basis is consistent with the plain language of the statute, Congress's clear intent, and sound tax policy. Thus, Travelers encourages Treasury to retain this rule when it issues final regulations related to Code section 59A.

I. Introduction

In 1989, 13 of the top 15 property and casualty (“P&C”) reinsurers serving the U.S. market, measured by premiums collected, were members of U.S.-parented groups.4 Foreign-headquartered reinsurers in the top 15 collected only 15 percent of total premiums in the industry. By 2015, however, only four U.S.-parented reinsurers could be found in the top 15, and the share of industry premiums collected by the 11 foreign-headquartered reinsurers in the top 15 had risen from 15 percent in 1989 to 73 percent in 2015. Similarly, when looking at P&C stock companies serving the U.S. market, one discovers that while in 1990 foreign companies in the top 25 stock companies earned 5.6 percent of industry premiums, that portion had risen to 35.2 percent by 2016.5

What caused this decline in the share of premiums collected by U.S.-parented groups, with its implications for the U.S. tax base? While there likely are multiple causes, U.S. tax consequences stand out as a major factor. During the roughly quarter century described above, a U.S. insurer could deduct premiums paid to a foreign affiliated reinsurer in a low- or no-tax jurisdiction, and thus generate tax savings by shifting taxable income from the United States to those foreign jurisdictions. By contrast, premiums paid to a U.S. reinsurer would be subject to U.S. tax in the reinsurer's hands, offsetting the tax savings achieved by the deduction. The lack of a level playing field with respect to the tax treatment of U.S. and foreign reinsurers certainly has played a role in the steady offshoring of the U.S. reinsurance industry to low-tax jurisdictions.

Policymakers in both Congress and the executive branch identified this tax-induced distortion more than a decade ago and since then have been attempting to level the playing field. Rep. Richard E. Neal (D-MA) recognized that the Code's treatment of affiliated reinsurance disadvantaged U.S. reinsurers, and he introduced legislation in 2008 to close this loophole.6 He subsequently reintroduced similar legislation in every Congress through the 114th Congress.7 Former Chairman of the Ways and Means Committee, Dave Camp (R-MI), included a modified version of Rep. Neal's legislation in the comprehensive tax reform legislation that he introduced in 2014.8 On several occasions, Treasury included a proposal to close the loophole as part of the President's annual budget request.9 Finally, in December 2017, Congress enacted and President Trump signed into law Public Law No. 115-97, commonly known as the Tax Cuts and Jobs Act (“TCJA”). Among other provisions, the TCJA denies a deduction for reinsurance premiums and other consideration paid or accrued to a foreign related party, for purposes of calculating the tax under new Code section 59A.10

II. Statutory Authority

Congress enacted the BEAT as part of the TCJA to curb base erosion through the use of deductible payments made to foreign affiliates and thereby level the playing field between U.S.-and foreign-owned companies.11 Congress expressly made the BEAT applicable to reinsurance payments made by a U.S. insurance company (the “cedant”) to a related foreign reinsurance company (the “reinsurer”).12 We believe that the plain language of the statute unambiguously applies the BEAT to gross reinsurance payments, and that the legislative history reinforces the plain language.

A. Background

1. Overview of Modco Transaction

Coinsurance is a form of reinsurance under which the assuming company receives a proportionate share of all of the risks and cash flows of an insurance policy issued by the ceding company to an insured. Thus, the reinsurer assumes its share of the claims, surrender values, dividends, and policy loans and receives a proportionate part of the premium collected by the ceding company and the assets and reserves held by ceding company. The reinsurer also pays an expense allowance to reimburse the ceding company for a share of its acquisition and maintenance expenses.

Modco differs from coinsurance in that the ceding company retains the assets and reserves relating to the reinsured policies. Thus, the ceding company is required to pay interest to replace that which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. Thus, for example, in the case of a Bermuda reinsurer, the income shifted from the United States to Bermuda does not have to be supported by assets owned in Bermuda.

2. The BEAT Provision

a) Statute

The TCJA sought to curb base erosion by imposing a minimum tax on base eroding payments. Under the BEAT provision, an applicable taxpayer is required to pay a minimum tax equal to the excess of 10 percent13 of the “modified taxable income” of the taxpayer for the taxable year over an amount equal to the regular tax liability reduced by certain disallowed tax credits.14 To determine its modified taxable income, the applicable taxpayer computes its taxable income for the year without regard to any “base erosion tax benefit” with respect to any “base erosion payment” or the base erosion percentage of any allowable net operating loss deduction.15

The term “base erosion payment” is generally defined as “any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowed under this chapter.”16 The term “also include[s] any premium or other consideration paid or accrued 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).”17 The definition of “base erosion tax benefit” parallels the definition of “base erosion payment.” Thus, it includes:

(i) any deduction described in subsection (d)(1) which is allowed under this chapter for the taxable year with respect to any base erosion payment,

* * *

(iii) in the case of a base erosion payment described in subsection (d)(3) —

(I) any reduction under section 803(a)(1)(B) in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity insurance, and

(II) any deduction under section 832(b)(4)(A) from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid for reinsurance.18

Section 803(a)(1) provides:

For purposes of this part, the term “life insurance gross income” means the sum of the following amounts:

(1) Premiums. —

(A) The gross amount of premiums and other consideration on insurance and annuity contracts, less

(B) return premiums, and premiums and other consideration arising out of indemnity reinsurance.

Section 832(b)(4)(A) provides:

(4) Premiums earned. —

The term “premiums earned on insurance contracts during the taxable year” means an amount computed as follows:

(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.

b) Legislative History

Congress intended the BEAT to reduce the ability of foreign-owned U.S. companies to erode the U.S. tax base by making deductible payments to foreign affiliates to level the playing field between U.S.- and foreign-parented groups operating in the United States. The Senate Budget Committee Print explains the reason for the BEAT:

Foreign-owned U.S. subsidiaries are able to reduce their U.S. tax liability by making deductible payments to a foreign parent or foreign affiliates. This can erode the U.S tax base if the payments are subject to little or no U.S. withholding tax. Foreign corporations often take advantage of deductions from taxable liability in their U.S. affiliates with payments of interest, royalties, management fees, or reinsurance payments. [Emphasis added.] This provision aims to tax payments of this kind. This type of base erosion has corroded taxpayer confidence in the U.S. tax system.

Moreover, the current U.S. international tax system makes foreign ownership of almost any asset or business more attractive than U.S. ownership. This unfairly favors foreign-headquartered companies over U.S. headquartered companies, creating a tax-driven incentive for foreign takeovers of U.S. firms. Furthermore, it has created significant financial pressures for U.S headquartered companies to re-domicile abroad and shift income to low-tax jurisdictions. Since 2000, the number of U.S.-headquartered multinationals among the 500 largest public companies has decreased by over 25 percent.

* * *

This provision aims to level the playing field between U.S. and foreign-owned multinational corporations in an administrable way. To the extent that corporations with significant gross receipts are able to utilize deductible related party payments to foreign affiliates to reduce their U.S. corporate tax liability below l0-percent, the Committee intends that the base erosion and anti-abuse tax function as a minimum tax to preclude such companies from significantly reducing their corporate tax liability by virtue of these payments.19 [Emphasis in original.]

Notwithstanding that the Senate clearly intended to treat reinsurance payments as base erosion payments, section 59A(d)(3) was added in Conference, presumably to clarify this intent, even if reinsurance payments were treated as reductions in gross receipts rather than deductible payments.20

B. Discussion

1. The Statute Applies to Gross, Not Net, Payments

As acknowledged by Treasury in the preamble to the proposed regulations, amounts of income and deduction are generally determined on a gross basis under the Code, and the BEAT statutory framework, in particular, includes the gross amount of base erosion payments in the modified taxable income base.21 This is clear from the language of the statute and the legislative history.

The best evidence of Congressional intent is the language of the statute itself.22 Section 59A(d)(3) provides that that the term “base erosion payment” includes “any premium or other consideration paid or accrued 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).” [Emphasis added.] The terms Congress chose describe all payments moving in one direction from the taxpayer to the foreign related person, while not describing offsetting or reciprocal payments.23 The term “any” is defined as “one or some indiscriminately of whatever kind;. . . every — used to indicate one selected without restriction.”24 The term “any” modifies payments “by the taxpayer to a foreign person,” suggesting that the statute is referring to every such payment, without offset. The term “consideration” is defined as “recompense, payment; the inducement to a contract or other legal transaction, specifically an act or forbearance or the promise thereof done or given by one party in return for the act or promise of another.”25 Although both parties to a contract provide some consideration, the statute clearly refers only to that consideration provided “by the taxpayer to a foreign person.”

The use of “paid or accrued” incorporates normal tax accounting concepts regarding when an amount is taken into account for tax purposes.26 The phrase is used throughout the Code to refer to the timing of income and deductions under either the cash or accrual method of accounting; it does not provide taxpayers a means to reduce their tax liability by choosing how cash changes hands under a private agreement.27

The legislative history also evidences an intent that the BEAT applies to gross, not net, payments to foreign related parties.28 The Senate Budget Committee stated:

Foreign-owned U.S. subsidiaries are able to reduce their U.S. tax liability by making deductible payments to a foreign parent or foreign affiliates. This can erode the U.S tax base if the payments are subject to little or no U.S. withholding tax. . . . This provision aims to level the playing field between U.S. and foreign-owned multinational corporations. [Emphasis added.]29

By repeatedly referring to “deductible payments” and “any amount [or premium or other consideration] paid or accrued,” the statutory language and legislative history clearly focus on gross payments. There is nothing in the statute or legislative history to indicate that Congress intended the BEAT to apply only to enumerated transactions in which there was a net loss. Indeed, where Congress intended that section 59A apply on a transactional or contractual basis, it expressly provided so, as it did in the case of qualified derivative payments.30 In addition, Congress exempted from the BEAT payments that were subject to U.S. withholding tax under section 1441 or 1442, which are imposed on a gross rather than net basis.31 One can infer that, if Congress was concerned with payments that avoid gross withholding tax, then the backstop to such avoidance likely would be applied on a gross basis.

2. Purportedly Analogous Provisions Do Not Warrant a Different Interpretation

Taxpayers that have been arguing for section 59A to apply on a net basis have claimed that other insurance related provisions support measuring reinsurance payments on a net basis.32

First, section 848 requires capitalization and amortization of specified policy acquisition costs. Section 848(d) defines “net premiums” as “the excess (if any) of — (A) the gross amount of premiums and other consideration on such contracts, over (B) return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts.” The regulations under section 848 provide that, in determining net premiums for Modco arrangements, net consideration includes the amount of payments, reserve adjustments, and loan transactions, as well as any investment income transferred as a result of a reserve adjustment or loan transaction.33 The netting computation in section 848 was promulgated under Treasury's authority in section 848(d)(4)(B) to prescribe rules necessary to ensure that premiums and other consideration with respect to reinsurance are treated consistently by the ceding company and reinsurer. Treasury Regulation section 1.848-2(f) was prompted by a concern that section 848 capitalization requirements could be avoided through reinsurance arrangements.34 Congress' concerns about avoiding taxes through base erosion point to the opposite rule here.

Second, section 4371 imposes an excise tax on insurance or reinsurance issued by a foreign person. The amount of excise tax imposed on foreign reinsurance is one cent on each dollar, or fraction thereof, of the premium paid on the reinsurance policy.35 In a private letter ruling, the IRS ruled that amounts returned through experience refunds, terminal experience refunds, and reserve adjustments constituted return premiums that reduce the premium that is subject to the section 4371 excise tax, but that amounts returned through policy expense allowances and reimbursements of state premium taxes are not return premiums that reduce the excise tax.36 This ruling does not support a netting approach for section 59A, because it was interpreting the term “return premiums,” which appears in sections 803(a)(1)(B) and 832(b)(4)(A), but is not incorporated into section 59A(c)(2)(A)(iii)(I) and (II).

For the reasons discussed herein, we believe that Treasury's rejection of a netting rule in the proposed regulations is consistent with the plain language of the statute and its legislative history.

III. Policy Considerations

While we believe that both the plain language of the statute and the intent of Congress are clear that the law applies on a gross basis, even if Treasury had the authority to provide netting, we also believe that relevant policy considerations weigh heavily in favor of applying the BEAT on a gross basis.

A. Netting in the Related Party Context

We appreciate that, on the surface, the concept of netting has an intuitive appeal derived from general business and accounting principles. Concepts like profit and taxable income generally are calculated net of expenses. But those general principles do not apply in this specific circumstance. The transactions at issue are exclusively between related parties, and not necessarily at arm's length. This means that foreign-parented reinsurers have a great deal of discretion in structuring cross-border payments between U.S. and foreign affiliates in the same worldwide group, and thus a great deal of discretion in determining the “net” amount. Yet, these transactions often merely move money from the left hand to the right hand, and usually from a high-taxed affiliate to a low-taxed affiliate.

The legislative purpose of section 59A was to level the playing field between U.S.- and foreign-owned multinational corporations. That purpose is only advanced by applying section 59A on a gross basis. Take, for example, the illustration in the Feb. 20 Brownstein Memo, where Company USA has $25 taxable income before reinsurance and a $20 reinsurance settlement that consists of $200 of ceded premiums, $50 of ceded net investment income, ($10) of expense allowance, ($140) of ceded reserves, ($85) of surrender benefits, and $5 of interest maintenance reserve. The Feb. 20 Brownstein Memo takes the position that the BEAT add-back should be the net payment of $20 rather than the gross deductible payments of $255,37 as the gross payment would result in a BEAT tax that exceeds taxable income.

The example, however, illustrates why applying the BEAT on a gross basis is necessary to place U.S.- and foreign-owned multinational corporations on a level playing field. If Company USA were to reinsure with a related U.S. company, the reinsurance transaction would generate $255 in deductions for Company USA but would generate an offsetting $255 income to the related U.S. company. That $255 of income escapes regular tax where the reinsurance is with a related foreign company, because there is a $255 deduction but no offsetting inclusion. Indeed, that was the goal of such foreign reinsurance pre-TCJA: “Modco arrangements involving related foreign reinsurers have historically been used to shift income to jurisdictions like Bermuda rather than for their other benefits.”38 And this is precisely what Congress aimed to shut down.

B. Tax Reform Is Working

One of the most fundamental premises of tax reform involves combining a lower, competitive U.S. tax rate with measures intended to expand the U.S. tax base. Thus, for example, reducing the corporate tax rate from 35 percent to 21 percent, while virtually eliminating the tax advantage enjoyed by foreign affiliate reinsurance (by requiring a gross calculation), has the potential to bring substantial income back into the United States and restore the United States as a platform for providing reinsurance to domestic and foreign customers. Whether tax reform is succeeding in this objective can be seen by considering whether the long-term trend towards increasing foreign reinsurance of U.S. risks has halted or even reversed itself. Slightly more than one year after the enactment of the TCJA, the anecdotal and statistical evidence is promising.

1. Cross-Border M&A and Inversions

In October 2017, a couple of months before enactment of the TCJA, Assurant Inc. announced an acquisition of Warranty Group that would allow it to offshore its headquarters to Bermuda.39 Assurant shareholders would own 77 percent of the combined company, coincidentally just below the 80 percent threshold necessary to have the foreign incorporation disregarded under the anti-inversion rules.40 On January 9, 2018, slightly more than two weeks after President Trump signed the TCJA into law, Assurant announced that the two companies were modifying the deal so that the combined entity would remain a U.S. corporation.41 In the announcement, Assurant explained, “This change follows recently enacted U.S. tax legislation and allows Assurant to simplify the overall deal structure and optimize the transaction financing mix.”42

In another striking example of how the TCJA and the BEAT have reversed the exodus of insurance companies out of the United States, in 2018 American International Group., Inc. (“AIG,” a U.S. insurance company) acquired Validus, Ltd. (a Bermuda insurance company) for $5.6 billion.43 Such a deal, bringing a Bermuda insurer and reinsurer underneath a U.S. parent, would have made little sense for U.S. tax purposes prior to the enactment of the TCJA. Post-tax reform, however, acquisitions of Bermuda companies by U.S. companies — with the combined company remaining a U.S. tax resident — is fast becoming a recurring theme.

2. Capacity and Pricing Have Remained Steady

In addition, foreign reinsurers have opposed levelling the playing field with arguments that such measures would diminish capacity and lead to higher prices. But early returns reveal that those fears have been unwarranted. In the first nine months of 2018, capacity fell two percent relative to the end of 2017.44 But industry analysts have attributed even that modest decline to rising interest rates and a strengthening U.S. dollar — not to U.S. tax reform.45

And that modest change in capacity has not resulted in higher insurance premiums for U.S. risks. The Marsh Global Insurance Market Index (“GIMI”) tracks year-over-year changes in commercial insurance on a quarterly basis. According to the GIMI, global prices rose by 1.4 percent year-over-year at the end of the third quarter of 2018.46 This compares to a price decrease of 0.4 percent in the U.S, market over the same time period.47 So far, it is hard to argue that the TCJA or the BEAT has had any discernible effect on U.S. insurance prices.

3. The Other Side of the Level Playing Field: Foreign-Based Insurers Still Maintain Competitive Effective Tax Rates

In addition to the promising trends in the M&A market and with respect to capacity and pricing, the trade-off struck by the TCJA between a lower rate and a broader base continues to allow foreign-headquartered insurance companies to achieve competitive effective tax rates on their U.S. income. Arguments that applying the BEAT on a gross basis would make Modco arrangements untenable ignore the fact that such arrangements can be restructured into different types of contracts that provide the same reinsurance coverage without the significant BEAT impact.48 In the case of foreign reinsurance, “restructuring” generally means booking a larger share of the income in the United States — exactly what Congress intended — and involves little more than modifying certain contract terms. Modifications such as reducing quota shares and switching from quota share arrangements to excess of loss arrangements can mitigate or eliminate BEAT liability while shifting income back into the United States.

This happy coincidence — combining the opportunity for self-help while expanding the U.S. tax base — is not merely theoretical. Foreign reinsurers have already taken steps to mitigate or eliminate their BEAT liability by reducing the extent to which deductible premiums have the effect of stripping earnings out of the United States. For example, of 14 companies that previously paid quota shares (generally ranging from 35 percent to 75 percent) to foreign affiliates, ten (10) restructured by cancelling their quota shares for 2018, while an 11th company reduced its quota share substantially.49 This is strong evidence that the plain language of the statute is working correctly to achieve Congressional intent.

Financial statements required to be filed with the Securities and Exchange Commission, and earnings calls with investors and analysts, confirm that foreign reinsurers are taking these and other steps to keep their effective tax rates manageable while achieving a more level playing field between U.S. and foreign reinsurers. For example, in its Form 10-Q for the third quarter of 2018, Athene Holding Ltd. stated that:

[D]uring the three months ended March 31, 2018, we restructured our affiliated modco arrangements to ensure that they would not be subject to the BEAT in the event we do not receive guidance that the BEAT applies on a net basis, and during the three months ended September 30, 2018, we implemented additional reinsurance arrangements common in the insurance industry to further mitigate the potential effect on our results of operations should the BEAT apply on a gross basis [emphasis added].50

Providing more specificity on Athene's October 25, 2018 third quarter earnings call, Athene's Chief Financial Officer (“CFO”) stated that, “For the full year 2018, we expect that our overall tax rate including income tax, the BEAT and excise tax will be approximately 8% to 9%. We expect this rate will increase slightly to approximately 9% in 10% in 2019.”51

Similarly, a participant on a January 31, 2018 Chubb Ltd. earnings call asked about the impact of the BEAT by saying, “I understand the U.S. rate went down, but I would have thought some of the inter-company stuff had to go up.”52 In response, Chubb's Chairman and CEO stated, “[T]he reduction in the U.S. tax rate [to 21 percent] more than offset the negatives of the reduction in affiliate.”53

Likewise, the CFO of James River Group Holdings Ltd. explained on an earnings call that,

[W]e've made some changes for our corporate structure which we believe will minimize the impact of the new U.S. tax law on our results. The outcome of this is that we anticipate our effective tax rate in 2018 will be in line with our effective tax rates over the last five or so years or more specifically in the low double-digit range. . . . Instead, Carolina Re [a Bermuda company] will be owned by our U.S. companies and will make a 953(d) election to be a U.S. taxpayer.54

Finally, on a May 10, 2018 earnings call, FGL Holdings' CFO explained that,

While we see clarification from tax authorities on the issue of gross versus net calculations for affiliated reinsurance, the company . . . has put a tax planning strategy in place under IRS code Section 953(d) to have its Bermuda based F&G Re Ltd. subsidiary treated as a U.S. taxpayer. The election will maintain flexibility for our International platform to ensure we have no exposure to the BEAT tax during this interim period.

If the BEAT tax question results in a gross calculation, we would recapture this business from Bermuda and have no exposure to BEAT relative to the 21% we've currently booked. . . . In parallel to the 953(d) election, we continue to work on third-party strategies and opportunities, which would not be subject to BEAT, to leverage the International platform and over time reduce our effective tax rate to about 15%.55

These success stories reveal how, in practice, the reduction of the statutory corporate rate from 35 percent to 21 percent and the enactment of the BEAT work in tandem to encourage more income and activity to be located in the United States while maintaining globally competitive effective tax rates.

IV. Conclusion

As discussed, the plain language of Code section 59A requires that the gross amount of premiums and other consideration paid or accrued for reinsurance with a foreign related party be included in modified taxable income, regardless of whether such payments represent a deduction or a reduction in gross income. The statutory text does not leave room to allow for netting in cases such as Modco arrangements. The legislative history reinforces that statutory text, confirming that Congress intended to level the playing field between U.S. and foreign reinsurers by requiring this outcome. Finally, policy considerations justify requiring a gross basis calculation, as only through gross basis do foreign affiliate reinsurers face effective tax rates in line with domestic reinsurers — i.e., a low, competitive effective tax rate on income subject to the tax in the United States, rather than non-taxation through the shifting of income offshore. For the reasons, we urge Treasury to retain the rule in the proposed regulations that requires a gross basis calculation when it promulgates the final regulations.

Very truly yours,

Steptoe & Johnson, LLP (o/b/o The Travelers Companies, Inc.)
Washington, DC

cc:
Hon. David J. Kautter, Assistant Secretary (Tax Policy), U.S. Department of the Treasury Hon. Charles P. Rettig, Commissioner, Internal Revenue Service
Lafayette “Chip” G. Harter III, Deputy Assistant Secretary (International Tax Affairs), U.S. Department of the Treasury
Douglas L. Poms, International Tax Counsel, U.S. Department of the Treasury William M. Paul, Acting Chief Counsel and Deputy Chief Counsel (Technical), Internal Revenue Service
Daniel McCall, Acting Associate Chief Counsel (International), Internal Revenue Service Brett York, Associate International Tax Counsel, U.S. Department of the Treasury
Kevin C. Nichols, Senior Counsel, Office of the International Tax Counsel, U.S. Department of the Treasury
Angela J. Walitt, Attorney-Advisor, U.S. Department of the Treasury

FOOTNOTES

1Internal Revenue Code (“IRC”) § 59A. Hereinafter, all references to “section” are to the Internal Revenue Code of 1986, as amended.

2Preamble to Proposed Treas. Reg. § 1.59A-3, 83 Fed. Reg. 65,956, 65,968 (Dec. 21, 2018).

3See, e.g., Memorandum dated Oct. 17, 2018 from Paul D. Clement, Kirkland & Ellis LLP, and Russell W, Sullivan, Brownstein Hyatt Farber Schreck, LLP to Brent McIntosh, General Counsel, U.S. Department of Treasury, republished in 2018 Tax Notes Today 221-12 (Nov. 14, 2018) (hereinafter “Oct. 17 Kirkland Memo”); Memorandum dated Feb. 20, 2018 from Brownstein Hyatt Farber Schreck, LLP and McGuireWoods LLP to Brett York, Attorney-Advisor, U.S. Department of Treasury, republished in 2018 Worldwide Tax Daily 124-2 (Jun. 27, 2018) (hereinafter “Feb. 20 Brownstein Memo”).

4Dowling & Partners, 49 IBNR Weekly 2 (December 22, 2016).

5Dowling & Partners, 25 IBNR Weekly 2 (June 22, 2017).

6See H.R. 6969 (110th Cong.).

7See H.R. 3424 (111th Cong.), H.R. 3157 (112th Cong.), H.R. 2054 (113th Cong.), H.R. 6270 (114th Cong.).

8See H.R. 1 (113th Cong.).

9See, e.g., General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals, p. 45 (February 2010).

10See Pub. L. No. 115-97, section 14401.

11IRC § 59A.

13For the first taxable year beginning after December 31, 2017, the rate is only 5 percent, and for taxable years beginning after December 31, 2025, the rate is increased to 12.5 percent. IRC §59A(b)(1)(A), (b)(2)(A).

16IRC § 59A(d)(1). While the Code often requires control to determine related-party status, for BEAT purposes only 25-percent ownership, by vote or value, is required. IRC § 59A(g).

18IRC § 59A(c)(2)(A)(i), (iii).

19Sen. Budget Comm. Prt. 115-20, at 396 (Dec. 2017).

20H.R. Conf. Rep. No. 115-466, at 657 (Dec. 2017).

21Preamble to Proposed Treas. Reg. § 1.59A-3, 83 Fed. Reg. at 65,968.

22Perrin v. U.S., 444 U.S. 37 (1979).

23Taxpayers that have been arguing for section 59A to apply on a net basis have pointed to a private letter ruling issued by the IRS as concluding that the term “reinsurance payment” includes payments going to the domestic cedant. See P.L.R. 9141001 (May 17, 1991). This reliance is unfounded. The ruling was considering whether annual allowances to reimburse the ceding company for current expenses and premium taxes must be capitalized. Though the ruling referred to up-front ceding commissions once in passing as “reinsurance payments,” it was hardly defining the meaning of that term, nor was it addressing the question of netting.

26See Treas. Reg. § 1.461-1.

27Taxpayers that have been arguing for section 59A to apply on a net basis have placed a great deal of significance on the phrase “arising out of indemnity insurance” in section 59A(c)(2)(A)(iii)(I), arguing that Congress chose a broader phrase to account for both inflows and outflows as part of a reinsurance contract. See Feb. 20 Brownstein Memo; Oct. 17 Kirkland Memo. However, that phrase is merely incorporated from section 803(a)(1)(B) in much the same way as the language in section 59A(c)(2)(A)(iii)(II) (which does not include that phrase) is incorporated from section 832(b)(4)(A). There is nothing in the legislative history to indicate that Congress intended to accord independent significance in copying such language from sections 803 and 832.

28Taxpayers that have been arguing for section 59A to apply on a net basis point to a statement filed by Senator Graham after the bill was reported out by the Conference Committee, in which he indicated his understanding that the base erosion payment was limited to the net amount paid to the foreign reinsurer. However, Senator Graham was a member of neither the Senate Finance Committee nor the Conference Committee, and no member of either committee confirmed his understanding.

29Sen. Budget Comm. Prt. 115-20, at 396.

32See Feb. 20 Brownstein Memo; Oct. 17 Kirkland Memo.

33Treas. Reg. § 1.848-2(f)(5), (f)(9), Ex. 4.

34Preamble to Prop. Treas. Reg. § 1.848-2(f), 56 Fed. Reg. 58,003, 58,005 (Nov. 15, 1991).

35I.R.C. § 4371(3).

36P.L.R. 9302011 (Oct. 13, 1992).

37The Feb. 20 Brownstein Memo stated that the gross add-back would be $250, which seems to omit the $5 interest maintenance reserve.

38Alexander Lewis, Memo Obtained via FOIA Reveals Lobbying Efforts on BEAT, 2018 Worldwide Tax Daily 124-2 (Jun. 27, 2018).

39Allison Prang, Assurant to Buy Warranty Group for $1.9 Billion, WALL STREET JOURNAL (Oct. 18, 2017), available at https://www.wsj.com/articles/assurant-to-buy-warranty-group-for-1-9-billion-1508332268.

40See I.R.C. § 7874(b).

41Assurant and the Warranty Group Amend Deal Structure, press release (Jan. 9, 2018), https://www.assurant.com/newsroom-detail/NewsReleases/2018/January/assurant-and-the-warranty-group-amend-deal-structure.

42Id.

43AIG Announces Closing of Validus Acquisition, BUSINESSWIRE (July 18, 2018), https://www.businesswire.com/news/home/20180718005489/en/AIG-Announces-Closing-Validus-Acquisition.

44Reinsurance Market Outlook, AON, 2 (January 2019).

45See id.

47Id.

48For example, the Feb. 20 Brownstein memo described of a hypothetical Modco arrangement purporting to show that gross basis would lead to a 102-percent effective tax rate. See Feb. 20 Brownstein Memo, p. 8.

49See Dowling & Partners 23 IBNR Weekly (June 7, 2018).

50Athene Holding Ltd. Form 10-Q, 3Q 2018.

51Athene Holding Ltd., Q3 2018 earnings conference call (October 25, 2018). Note that in 2019, the statutory BEAT rate rises from 5 percent to 10 percent. IRC § 59A(b(1)(A).

52Chubb Ltd., Q4 2017 earnings conference call (January 31, 2018).

53Id.

54James River Group Holdings, Q4 2017 earnings conference call (February 23, 2018).

55FGL Holdings, Q1 2018 earnings conference call (May 10, 2018).

END FOOTNOTES

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