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PwC Tax Group Comments on PFIC Regs, Insurance Exception

SEP. 9, 2019

PwC Tax Group Comments on PFIC Regs, Insurance Exception

DATED SEP. 9, 2019
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September 9, 2019

CC:PA:LPD:PR (REG-105474-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

RE: RIN 1545-BO59, 1545-BM69 — Guidance on Passive Foreign Investment Companies

PricewaterhouseCoopers Tax Services Limited appreciates the opportunity to provide comments to the Internal Revenue Service and Department of Treasury regarding the recently issued proposed regulations contained in RIN 1545-BO59, 1545-BM69, Guidance on Passive Foreign Investment Companies (proposed regulations). We are offering comments on behalf of a select group of non U.S. clients who are midsize, non-publicly traded insurers and reinsurers domiciled outside of the U.S. These entities have stakeholders (e.g., ceding insurers, administrators, shareholders and insureds) based in the U.S. and we believe our clients play an important role in the risk management of U.S.-based insureds (both for profit entities and not-for-profit entities) by providing cost-effective insurance coverage which might not be otherwise available. As such, our comments focus on the enabling provisions within the proposed regulations regarding when a foreign corporation is a Qualifying Insurance Corporation (“QIC”) under newly enacted section 1297(f) as it relates to section 1297(b)(2)(B) (“PFIC insurance exception”) for purposes of section 1297(a) and the requirements to meet the “active conduct of an insurance business” test under Prop. Reg. §1.1297-5(c).

We have provided our comments in three sections: first, we comment with respect to the overall impact of the proposed regulations and what is in our view the deviation of those regulations from the Congressional intent of the newly enacted Qualifying Insurance Corporation definition under section 1297(f); secondly, we seek clarity regarding the definition of “applicable insurance liabilities” as set forth in Prop. Reg. §1.1297-4(f)(2); and finally, we comment on the guidance provided under the proposed regulations regarding what constitutes the “active conduct of an insurance business” under §1.1297-5(c).

We believe our clients and the entire non-U.S. insurance and reinsurance industry could be affected by certain aspects of the proposed regulations in a manner which was not intended if the proposed regulations are enacted in their current form. We believe the greater non-U.S. reinsurance industry was not the intended target of the legislative changes to section 1297(b)(2)(B) and section 1297(f) which amended the PFIC insurance exception and added the Qualifying Insurance Corporation threshold test. We believe the broad impact of the proposed regulations will place an unreasonable burden on U.S. shareholders in non-U.S. insurance and reinsurance structures by creating a level of U.S. tax compliance which does not currently exist and the possible acceleration of taxable income to U.S. shareholders. We believe that the proposed regulations unfairly penalize non-U.S. or “offshore” insurers and reinsurers and, if the “active conduct” rules were applied domestically to limit access to Subchapter L of the Code (for example), a significant portion of domestic insurance and reinsurance companies would not meet the standards imposed by the proposed regulations.

In summary, our comments are based upon the following key points:

1. The proposed regulations narrow the scope of the PFIC insurance exception beyond what Congress intended;

2. The definition of 'applicable insurance liabilities' imposes an inappropriate compliance burden on foreign insurance corporations and their U.S. shareholders given the addition of a concept not found in U.S. GAAP, IFRS or Statutory Reporting principles; and

3. The standard for what is the 'active conduct of an insurance business' disregards the normal, commercial business practices of virtually all small insurers (domestic and foreign).

Background on the Offshore Insurance/Reinsurance Business

Insurance is the lifeblood of any developed economy, as it enables individuals, businesses and even governments to transfer risk to further invest and grow. Simply put, without insurance, an economy cannot develop in a sustainable manner.1

Reinsurance is insurance that is purchased by an insurance company from one or more other insurance companies. The Federal Insurance Office stated:

By premium volume, the United States is the largest single-country insurance market in the world. Insurers operating in the United States rely on reinsurers, both foreign and domestic, to support the issuance of new policies, to minimize fluctuations in loss experience, and to limit and diversify individual and portfolio risks, particularly in the case of catastrophes and natural disasters.2

Without a robust global reinsurance industry, the U.S. insurance industry would not be able to offer cost-effective insurance coverage to its insureds which would put domestic economic growth at risk. In 2017, the global reinsurance market size was $247,500 million.3 According to the Reinsurance Association of America, 62.9% of reinsurance premiums paid by U.S.-based insurance companies were ceded to “unaffiliated” non-U.S. reinsurers in 2017 (if “related reinsurers” are included, the number grows to 91.0%).4 Insurance and reinsurance companies are often multinational businesses which effectively distribute global risk of loss over many geographical areas. The reinsurance industry is a global industry.

The Federal Insurance Office stated in a 2014 report:

The global reinsurance market includes organizations and companies that have operated for a century or more, as well as relatively new companies and alternative forms of risk transfer. The U.S. reinsurance sector continues to be an important source of capacity for domestic insurers seeking reinsurance. Non-U.S. reinsurers also play a key role, as U.S. insurers purchase a substantial amount of reinsurance protection from companies domiciled outside of the United States, or which are part of groups headquartered outside of the United States, including in Europe, the Asia-Pacific region, Bermuda, and other jurisdictions. Additionally, in recent years, insurers, reinsurers, and various capital market participants have developed a range of insurance linked securities and special purpose vehicles, which have a growing role in the global risk transfer market.5

We believe Congress recognized the global reality of the insurance and reinsurance marketplace whilst dealing with a number of perceived tax abuses when it enacted the Tax Cuts and Jobs Act of 2017 (“TCJA”). In the TCJA, Congress included two significant changes which touched on reinsurance transactions. First, Congress enacted the Base Erosion and Anti-Abuse Tax (“BEAT”) under section 59A which targeted outbound reinsurance premiums from a U.S. insurance company ceded to a related foreign reinsurance company. Secondly, the TCJA expanded the statutory requirements of a foreign corporation to meet the “PFIC insurance exception” under section 1297(b)(2)(B) as it relates to section 1297(a) in defining a passive foreign investment company (“PFIC”).

Comment #1 — Narrowed scope of PFIC insurance exception beyond Congressional Intent

We believe the 115th Congress in modifying the PFIC insurance exception under section 1297(b)(2)(B) and adding section 1297(f) to the Code was attempting to curtail an abuse the Service had originally identified in Notice 2003-34 in which the Service cautioned taxpayers with respect to purported foreign insurance companies whose main business purpose was capturing investment returns and not underwriting returns (most commonly known as a “Hedge Fund Re”). We do not believe that Congressional intent was to unfairly disadvantage global reinsurance companies and their U.S. shareholders which conducted legitimate risk taking enterprises of reinsurance.

For your reference, Notice 2003-34 (“Notice”) states:

Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain. The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest. This notice alerts taxpayers and their representatives that these arrangements often do not generate the claimed Federal tax benefits.

The Notice focused on foreign corporations (“FC”) owned by U.S. persons which demonstrated the following characteristics and the U.S. persons took the position the FC was an insurance company engaged in an active conduct of an insurance business and was not a PFIC.

  • Some of the contracts do not cover insurance risks.

  • Other contracts significantly limit the risks assumed by FC through the use of retrospective rating arrangements, unrealistically low policy limits, finite risk transactions, or other similar devices.

  • Actual insurance activities, if any, are relatively small compared to its investment activities.

  • FC's portfolio generates investment returns that substantially exceed the needs of FC's "insurance" business.

The IRS stated it will scrutinize these arrangements and will apply the PFIC rules where it determines that FC is not an insurance company for federal tax purposes.

At the Congressional level, several members of Congress had previously introduced legislation similar to section 1297(f) designed to fix the “Hedge Fund Re” problem as follows:

  • In 2014, Representative Camp and Senator Baucus introduced The Tax Reform Act of 2014 which first introduced legislative language designed to curb the abuse identified by the Service in Notice 2003-34. The Bill set out a threshold test (albeit it did not define a “Qualifying Insurance Corporation” in name) which would have required a foreign corporation's “applicable insurance liabilities” to exceed 35% of its “total assets” as shown in the foreign corporation's “applicable financial statements”.

  • In April 2015, at the insistence of Senator Wyden, the IRS issued proposed regulations which would define the term “active insurance business” as used under § 1297(b)(2)(B). The proposed regulations provided definitions for the previously undefined terms “active conduct” and “insurance business” as used in the PFIC Insurance Exception. According to the preamble, the proposed regulations are intended to address situations in which hedge funds establish a purported foreign reinsurance company to defer and reduce the U.S. taxes of their U.S. shareholders by taking advantage of the PFIC insurance exception under §1297(b)(2)(B) which applies to income derived in the active conduct of an insurance business.

  • In 2015, Senator Wyden introduced the Offshore Reinsurance Tax Fairness Act (ORTFA). The ORTFA would amend the PFIC rules by providing a bright line numerical test for determining whether a foreign insurance company meets the insurance exception under the PFIC rules. The ORTFA incorporates the applicable insurance liabilities test previously seen in the Camp and Baucus proposals, although it utilizes a 25 percent threshold as compared to a 35 percent threshold in the prior proposals. Additionally, the ORTFA defines applicable insurance liabilities to include loss and loss adjustment expenses and reserves, similar to the Camp and Baucus proposals, but does not include unearned premiums.

The language in TCJA as it relates to section 1297(f) contains several key concepts and terminology found in both the Tax Reform Act of 2014 and the Offshore Reinsurance Tax Fairness Act (2015).

With respect to the specific legislative history to the TCJA, the Conference Committee Report explaining the provisions of the TCJA specifically cites both Notice 2003-34 and the 2015 proposed regulations6 as the focus of adding the Qualifying Insurance Corporation requirement to tax law.

On December 20, 2018, the Joint Committee on Taxation (“JCT”) released the General Explanation of the Public Law 115-97, or the “Blue Book”, which explains the provisions contained in the Tax Cuts and Jobs Act of 2017. The language in the Blue Book once again highlights the abuse identified in Notice 2003-34 where a purported insurance company assumes very little in the way of risks and avails itself of the active insurance exception.

For these reasons, we strongly believe that the amendments to section 1297(b)(2)(B) and the addition of section 1297(f) had a single legislative purpose which was to curtail “Hedge Fund Re” type transactions. We believe the proposed regulations under Prop. Regs. §1.1297-4 and §1.1297-5 have a broader reach and will negatively affect a greater number of potential reinsurance enterprises and their U.S. shareholders along with inhibiting the launch of new reinsurance enterprises seeking U.S. investment. Over the last several years the domestic economy has enjoyed reasonable rates for insurance; however, the result of an overly broad impact of these proposed regulations may be a reduction in available reinsurance capacity which in turn could result in:

  • U.S. investors leaving the global reinsurance market;

  • Reduced capital and capacity;

  • Higher costs of reinsurance;

  • Higher costs or availability of domestic insurance; and

  • Reduced economic growth.

Comment #2 — Applicable Insurance Liabilities

Section 1297(f)(3) defined the term Applicable Insurance Liabilities with respect to any life or property and casualty insurance business as:

i. loss and loss adjustment expenses, and

ii. reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks and life and health insurance claims with respect to contracts providing coverage for mortality or morbidity risks

Based on our reading of the statute, we understood Section 1297(f)(3)(i), “loss and loss adjustment expenses” to represent the applicable insurance liabilities related to property and casualty risks, inclusive of unpaid claims and loss adjustment expenses payable, loss reserves and accrued loss adjustment expenses. Further, we understood section 1297(f)(3)(ii) to represent the applicable insurance liabilities related to life and health insurance risks, inclusive of unpaid claims and loss adjustment expenses payable, loss reserves and accrued loss adjustment expenses.

The terms used in section 1297(f)(3)(A)(i), “loss and loss adjustment expenses”, is commonly found in accounting principles and financial statement presentation under U.S. GAAP, Statutory Accounting Principles and (although worded slightly differently) IFRS. Under U.S. GAAP, IFRS and Statutory Accounting Principles, the term “loss and loss adjustment expenses” includes both outstanding claims payable (which are no longer a component of the company's loss reserves) and the loss reserves of the insurance company.

Section 1.1297-4(f)(2) of the proposed regulations bifurcates the term “loss and loss adjustment expenses” into i and ii (discussed below) and appear to have limited the definition of applicable insurance liabilities with respect to any life or property and casualty insurance business of a foreign corporation by defining applicable insurance liabilities as follows:

i. Occurred losses for which the foreign corporation has become liable but has not paid before the end of the last annual reporting period ending with or within the taxable year, including unpaid claims for death benefits, annuity contracts, and health insurance benefits;

ii. Unpaid expenses (including reasonable estimates of anticipated expenses) of investigating and adjusted unpaid losses described in paragraph (f)(2)(i) of this section; and

iii. The aggregate amount of reserves (excluding deficiency, contingency, or unearned premium reserves) held for future, unaccrued health insurance claims and claims with respect to contracts providing coverage for mortality or morbidity risks, including annuity benefits dependent upon the life expectancy of one or more individuals.

We believe the expanded definition within the proposed regulations is both unnecessary and confusing and is not required for the following reasons:

1. The term “occurred losses” is NOT a term commonly found in common accounting principles under U.S. GAAP, IFRS or Statutory Accounting Principles,

2. We believe the intent of Congress was to create a preference which would allow U.S. persons subject to the proposed regulations to use the foreign corporation's applicable financial statements for purposes of applying the QIC test, and

3. We believe the deference to widely accepted accounting principles for QIC testing purposes is clearly set in the Preamble to the proposed regulations.

For these reasons, we believe the proposed regulations should omit any limiting language to the statutory definition of “loss and loss adjustment expenses”. We believe that any further restriction on the definition of applicable insurance liabilities would be inconsistent with Congressional intent. The Preamble of the proposed regulations state “because Congress has expressed a preference for widely used standards of financial accounting through its references to such standards in section 1297(f)(4)(A)” which strongly suggests a preference to follow widely accepted accounting principles for QIC testing purposes. The use of 'loss and loss adjustment expenses' (as described in the Statute) allows for a clear reference point to financial statements prepared on a U.S. GAAP or IFRS basis (as well as many local regulatory reporting standards) in order to provide clarity and ease to both U.S. shareholders of foreign insurance companies and IRS agents in order to easily determine the amounts to utilize for QIC testing purposes whilst not creating undue burden on the foreign insurance company.

According to the Preamble, the Treasury and the IRS considered alternatives to govern the cap on applicable insurance liabilities for QIC testing purposes including to the amount of applicable insurance liabilities at the amount that would be permitted to an insurance company subject to the insurance reserve calculation rules under Subchapter L of the Code; however, such an alternative was not included in the proposed regulations as it would place:

An excessive compliance burden on foreign corporations not subject to U.S. taxation which would make it less likely that they would do the work necessary to enable their minority U.S. owners to determine if the corporation is a PFIC. Thus, this alternative was rejected because it could unduly inhibit U.S. investors from placing their funds in profitable foreign corporations that are legitimate active insurance companies, an economically desirable activity in light of the intents and purposes of the statute, relative to the proposed regulations.

We believe the proposed regulations as currently drafted would in fact create an excessive compliance burden and inhibit U.S. investment in profitable foreign insurance companies. The Statute was drafted in a manner to utilize the applicable financial statements of a foreign insurance corporation. The Preamble includes multiple references to the Statute preferring the use of U.S. GAAP or IFRS (International Financial Reporting Standards) for financial reporting purposes given their status as 'rigorous and widely-respected accounting standards.' The proposed regulations then go into further details defining applicable insurance liability which must be determined by a foreign insurance corporation not subject to U.S. taxation.

As noted above, we believe the restrictive language in relation to what constitutes an applicable insurance liability within the proposed regulations does in fact put an excessive compliance burden on the foreign insurance corporation; as such, the language in the proposed regulations should be amended to follow the 'rigorous' financial reporting requirements under U.S. GAAP or IFRS. By updating in this manner, a 'bright line' test is created utilizing readily available information (i.e., the applicable financial statements) which would allow for U.S. shareholders in foreign insurance companies and IRS agents to definitively determine if the foreign insurance company is a QIC.

Comment #3 — Definition of an “Active Conduct of an Insurance Business”

The TJCA amended the PFIC insurance exception under §1297(b)(2)(B) by adding a requirement that a foreign corporation must be a Qualifying Insurance Corporation (as defined in section 1297(f)) in addition to the existing requirement that the foreign corporation engage in the “active conduct of an insurance business”. Like its predecessor, the Tax Reform Act of 1986 which added the PFIC rules to the Code, TCJA provided no statutory guidance with respect to the term “active”.

In 2015, the IRS issued proposed regulations which attempted to define the term “active insurance business” as used under §1297(b)(2)(B). The proposed regulations provided definitions for the previously undefined terms “active conduct” and “insurance business” as used in the PFIC Insurance Exception. According to the preamble of the 2015 proposed regulations, the proposed regulations were intended to address situations in which hedge funds establish a purported foreign reinsurance company to defer and reduce the U.S. taxes of their U.S. shareholders by taking advantage of the PFIC insurance exception under §1297(b)(2)(B) which applies to income derived in the active conduct of an insurance business. Twenty-three sets of comments were provided to the IRS with respect to those proposed regulations and the proposed regulations were never finalized. For clarity and comparison purposes, in the discussion below we will refer to the proposed regulations under REG-108214-15 as the “2015 proposed regulations”.

The proposed regulations have once again attempted to provide clarity on the term “active conduct of an insurance business”. The Preamble states:

To give effect to the active conduct requirement, the 2015 proposed regulations differentiated between activities performed by a corporation through its officers and employees and activities performed by other persons (for example, employees of other entities or independent contractors) for the corporation. The 2015 proposed regulations accomplished this separation by defining the term “active conduct” in section 1297(b)(2)(B) to have the same meaning as in §1.367(a)-2T(b)(3) (now §1.367(a)-2(d)(3)), except that officers and employees would not have included the officers and employees of related entities.

Definition of “Active Conduct”

The proposed regulations (in a deviation from the 2015 proposed regulations) have included the allocated officers and employees of a related entity which is under common control of the QIC. However, the proposed regulations continue to disregard the activities of independent contractors in determining whether the foreign corporation conducts an active insurance business as follows:

Proposed regulation §1.1297-5T(b)(3) Active conduct of an insurance business —

(i) In general. For purposes of determining whether a QIC engages in the active conduct of an insurance business, active conduct is determined based on all the facts and circumstances. In general, a QIC actively conducts an insurance business only if the officers and employees of the QIC carry out substantial managerial and operational activities. A QIC's officers and employees are considered to include the officers and employees of another entity only if the QIC satisfies the control test described in paragraph (c)(3)(ii) with respect to the officers and employees of the other entity. In determining whether the officers and employees of the QIC carry out substantial managerial and operational activities, however, the activities of independent contractors are disregarded.

Active Conduct Percentage

In determining the amount of passive income of a QIC which may be considered non-passive, the proposed regulations have created a waterfall test based on the QIC's “active conduct percentage”. The active conduct percentage is defined under proposed regulation §1.1297-5T(b)(4) as follows:

(i) In general. A QIC's active conduct percentage for a taxable year is the percentage calculated (to the nearest percent) by dividing

(A) The aggregate amount of expenses, including compensation (or reimbursement of compensation) and related expenses, for services of the officers and employees of the QIC (or another entity under an arrangement that satisfies the requirements of paragraph (c)(3)(ii) of this section) incurred by the QIC for the taxable year that are related to the production or acquisition of premiums and investment income on assets held to meet its obligations under the insurance, annuity, or reinsurance contracts issued or entered into by the QIC, by;

(B) The aggregate of —

(1) The amount described in paragraph (c)(4)(i)(A) of this section; and

(2) The amount of all expenses paid for the taxable year by the QIC to a person other than a person whose services for the QIC are covered by the expenses included in paragraph (c)(4)(i)(A) of this section for the production or acquisition of premiums and investment income on assets held to meet obligations under the insurance, annuity, or reinsurance contracts issued or entered into by the QIC.

If the QIC's active conduct percentage is 50% or greater then 100% of the QIC's passive income earned with respect to assets of the QIC that are available to satisfy liabilities of the QIC related to the insurance business is considered non-passive. If the active conduct percentage is less than 50% then 0% of the QIC's passive income earned with respect to assets of the QIC that are available to satisfy liabilities of the QIC related to the insurance business is considered non-passive.

When determining the active conduct percentage, the proposed regulations seem to further narrow the pool of activities and related costs considered in determining whether the QIC engages in the active conduct of an insurance business by reducing available persons from all officers and employees who carry out “substantial managerial and operational activities” to only those whose “substantial managerial and operational activities” relate only to activities “that are related to the production or acquisition of premiums and investment income on assets held to meet its obligations under the insurance, annuity, or reinsurance contracts issued or entered into by the QIC”.

First, we believe that the proposed regulations are too narrow in scope in determining what activities and which costs incurred by the QIC should be considered when determining if a QIC engages in an “active insurance business”. The proposed regulations, in their current form, ignore significant costs of the QIC from consideration, including:

  • Letter of credit fees for securitizing reinsurance transactions,

  • Custodial fees of invested reserve assets,

  • General and administrative costs including accounting, reserving and other costs of the business, and

  • Regulatory costs.

Second, we believe the proposed regulations ignore a significant business trend globally; specifically, the impact of outsourcing in the insurance and reinsurance industry. Many industries have evolved to an “outsourcing” model to effect operational efficiencies and to remain competitive in the global marketplace. The use of an outsourced service provider versus employing persons directly helps keep employment costs lower for small and mid-sized businesses because the employees of service providers can perform the same business functions for a number of entities.

In the reinsurance space, resource sharing is often necessary because the technical skills required for underwriting, catastrophe modeling, enterprise risk management, claims handling, insurance accounting, investment management and actuarial services are highly sought after and competition is intense for relevantly qualified staff globally.

We believe this is a global trend which affects both domestic and non-U.S. businesses. Based on one source, we noted that the global market for outsourced services increased from $45.6B in 2000 to $85.6B in 2018.7

In a recent report published by the National Association of Insurance Commissioner (“NAIC”), the NAIC reported that 49% of U.S. insurers outsourced to an unaffiliated investment manager as of the end of 2017. The NAIC reported that the percentage increased to 64% when looking at small insurers (whose total cash and investable assets are less than $250M).

By ignoring a significant global trend, the proposed regulations in their current form will unfairly penalize an industry whose balance sheets are focused on the assumption of true insurance and reinsurance risks and clearly conduct an “active insurance businesses”.

Additionally, we would like point out that little clarity exists with respect to whether an individual performing services for a QIC is considered an officer or employee or an independent contractor. We note that we are not aware of any definition of the term “employee” or “independent contractor” in the Internal Revenue Code or regulations. Generally, when applying a domestic analysis for purpose of U.S. based employment taxes, workers must be classified using the “common law test.” Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial Control: Are the business aspects of the worker's job controlled by the payer (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?

3. Relationship of the Parties: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.

Following the common law standard, the Treasury Regulations provide that an employer-employee relationship exists if the business has the right to direct and control the worker who performs the services. In other words, the worker is subject to the will and control of the business as to how the work will be done (not just the type of work that will be done).

In contrast, if the worker is subject to the control or direction of another only as to the results to be accomplished, rather than the means or details by which those results are accomplished, the individual would be an independent contractor. It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so. The designation or description of the relationship by the parties is immaterial.

Applying a common law test could create an excessive burden on the U.S. shareholder or non-U.S. reinsurance company.

Finally, we believe an appropriate definition of “active conduct” should look to what a QIC actually does, what costs are incurred relative to the business the QIC conducts, the nature of revenue it derives relative to the business the QIC conducts, and how its assets are deployed relative to the business the QIC conducts and not limit the analysis to the employment costs of individuals who may or may not be directly employed by the company. We believe a better analysis is contained in the regulations under Treas. Reg. §1.367(a)-2(d)(5) as this seems to effectively confront the concerns expressed by the Service originally in Notice 2003-34:

Treas. Reg. §1.367(a)-2(d)(5) Use in the trade or business. Whether property is used or held for use by the foreign corporation in a trade or business is determined based on all the facts and circumstances. In general, property is used or held for use in the foreign corporation's trade or business if it is:

(i) Held for the principal purpose of promoting the present conduct of the trade or business;

(ii)Acquired and held in the ordinary course of the trade or business; or

(iii) Otherwise held in a direct relationship to the trade or business. Property is considered held in a direct relationship to a trade or business if it is held to meet the present needs of that trade or business and not its anticipated future needs. Thus, property will not be considered to be held in a direct relationship to a trade or business if it is held for the purpose of providing for future diversification into a new trade or business, future expansion of trade or business activities, future plant replacement, or future business contingencies.

We believe the proposed regulations introduce a dated concept which is inconsistent with how active businesses are conducted in today's global economy.

Thank you in advance for considering our comments. If you have questions about any aspect this comment letter, please contact Scott D. Slater at +1 (441) 299-7178 or scott.slater@pwc.com.

Sincerely,

Scott D. Slater
Partner
PricewaterhouseCoopers Tax Services Limited
Hamilton, HM EX, Bermuda

FOOTNOTES

1INS. INFO. INST., A Firm Foundation, How Insurance Supports the Economy, https://www.iii.org/sites/default/files/docs/pdf/a_firm_foundation_2019.pdf, 1, (2019).

2FED. INS. OFF., U.S. DEP'T OF THE TREAS., The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States, https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/FIO%20-%20Reinsurance%20Report.pdf, 26, (December 2014 updated February 11, 2015).

3Hector Costello, Global Reinsurance Market and Insurance Industry Size, Share, Premium, Overview, Brokers, Services, Company Profile, Trends, Status and Outlook to 2025, REUTERS https://www.reuters.com/brandfeatures/venture-capital/article?id=64707, (November 28, 2018).

4The U.S. Reinsurance Market Dominated by Foreign Companies, ATLAS MAG. (April 2019) https://www.atlas-mag.net/en/article/the-us-reinsurance-market-dominated-by-foreign-companies, (citing Reinsurance Association of America, Offshore Reinsurance in the U.S. Market, 2017 Data).

5FED. INS. OFF., U.S. DEP'T OF THE TREAS., 1.

6Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24, 2015.

7E. Mazareanu, Global Market Size of Outsourced Services from 2000 to 2018 (in billion U.S. dollars), STATISTA, (Jul. 22, 2019) https://www.statista.com/statistics/189788/global-outsourcing-market-size.

END FOOTNOTES

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