Captive Insurers Oppose Anti-Netting Rules in BEAT Regs

February 19, 2019

Ms. Sheila Ramaswamy
Ms. Karen Walny
CC:PA:LPD:PR (REG–104259–18)
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re:Notice of Proposed Rulemaking, Base-Erosion and Anti-Abuse Tax 83 Fed. Reg. 65956 (Dec. 21, 2018) — Comments of the Vermont Captive Insurance Association

Dear Mss. Ramaswamy and Walny:

The Vermont Captive Insurance Association (“VCIA”) provides the following comments to the Treasury Department and the IRS (together, the “IRS”) regarding the referenced proposed regulations, which implement the base erosion and anti-abuse tax of the 2017 tax law (“BEAT”). VCIA is the largest trade association for captive insurance in the world. Established in 1985, it has nearly 450 member companies that compromise Fortune 50 companies to small non-profit housing authorities. VCIA is concerned about the proposed anti-netting rules related to deductions from gross income for reinsurance premiums paid by a taxpayer to a foreign affiliate.

Background

The Tax Cuts and Jobs Act of 2017, which added Section 59A to the Internal Revenue Code (the “Code”),¹ established a new alternative minimum tax designed to prevent most large multinational corporations operating in the United States from making payments to a foreign related party (affiliate) for the purpose of shifting profits overseas. Otherwise, Congress believed, the tax base of many U.S. corporations would be eroded, reducing their corporate taxable income.

In the reinsurance context, Proposed Treas. Reg. 1.59A-3(b)(1)(iii) defines “base erosion payments” to include “[a]ny premium or other consideration paid or accrued by the taxpayer to a foreign related party of the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A).” In the case of a life insurance company, section 803(a)(1)(B) permits a deduction from gross income for return premiums as well as premiums and other consideration arising out of indemnity reinsurance. With respect to an insurance company other than a life insurance company (for our purposes, a property & casualty insurance company), section 832(b)(4)(A) permits a deduction from gross income for return premiums and premiums paid for reinsurance.

Proposed Treas. Reg. 1.59A-3(c)(1)(iii) defines a “base erosion tax benefit” to include “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.”

VCIA's Concerns with the Proposed Anti-Netting Provisions

The nature of reinsurance agreements is such that affiliates often make or receive payments on a net basis; consequently, to effect the base erosion anti-abuse measures, Proposed Treas. Reg. 1.59A-3(b)(2)(ii) requires the amount of certain base erosion payments to be determined on a gross (not net) basis.

Before going into specific areas of the proposal related to netting, it is important to note that, historically, the U.S. has not been considered a worldwide insurance hub; but through tax reform, it could become one. It is in that spirit that we provide the following responses to three of the netting issues on which the IRS has requested comment.

1. The proposed regulations disallow netting of reinsurance premium payments against claims payments from a foreign related party or against reserve adjustments. Netting also is disallowed for other commercial agreements with reciprocal payments. In determining the net amount to be paid between the parties, should the regulations distinguish between (1) reinsurance contracts entered into by an applicable taxpayer and a foreign related party that provide for settlement of amounts owed on a net basis and (2) other commercial contracts entered into by an applicable taxpayer and a foreign related party that also provide for netting?

The portion of an insurance company's losses that may be recovered from a reinsurance company (a reinsurance recoverable) should be allowed to be netted. The absence of a specific netting rule means that BEAT might be imposed without regard to the actual profits shifted offshore. Consequently, reinsurance transactions would be taxed on a gross basis without the economics of the transaction being considered. In an environment of rising insurance costs, this would place undue hardship on the U.S. insurance industry in how its prices its products for U.S. citizens. Instead, the focus of the netting protocol should be on gross profits as opposed to gross receipts. Moreover, premium amounts are based on many factors, claims being one of them. Insurance companies establish reserves for the claims and are allowed a deduction against them. The reinsurance purchased is also a factor and offsets the reserves established. In that sense, reserves and reinsurance are similar to the cost of goods sold for other commercial entities, which is generally excluded for purposes of BEAT. As such, insurance companies should receive treatment similar to that afforded other industries.

2. What is the appropriate treatment under section 832(b)(3) of claims payments made by a domestic property & casualty insurance company that reinsures foreign risk?

If a domestic reinsurance company makes a claims payment to a foreign related ceding company pursuant to a reinsurance contract, such amounts may be subject to BEAT. However, payments that are treated as reductions to gross income under 832(b)(3) may not be subject to BEAT.

We agree that claims payments to property & casualty insurance companies should not be subject to BEAT under section 832(b)(3). Imposing BEAT on outbound claims payments would run contrary to the purpose of BEAT and would negatively impact the profitability and growth of U.S. insurance companies on a global stage. Indeed, claims payments on insurable losses are not typically intended to be recognized by the recipient as revenue in the normal course of business and, therefore, should not be subject to BEAT.

3. Should a life insurance company that reinsures foreign risk be treated in the same manner as a non-life insurance company that reinsures foreign risk?

Both types of insurance companies should be treated the same when it comes to reinsuring foreign risk. Claims payments paid by a domestic life insurance company that reinsures the foreign risk of an affiliated foreign company should be excluded from BEAT. Section 803(a)(2) can be interpreted as providing a direct correlation between life insurance gross income and decreases in reserves. Such an interpretation could also provide a similar correlation between gross income of non-life insurance companies and deductions for losses incurred and expenses incurred (section 832(b)(3)). Furthermore, the claim payment of a life insurance company is similar to that of a non-life insurance company. For these reasons, it is illogical to have different treatment. Again, imposing the BEAT on outbound claim payments would be contrary to the purpose of BEAT and would negatively impact the profitability and growth of U.S. insurance companies on a global stage.

VCIA appreciates the opportunity to comment on the proposed rule.

Sincerely,

Richard Smith
President
Vermont Captive Insurance Association 
Burlington, VT