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Insurance Company Suggests Guidance for Base Erosion Payments

SEP. 5, 2018

Insurance Company Suggests Guidance for Base Erosion Payments

DATED SEP. 5, 2018
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September 5, 2018

LG Harter, Deputy Assistant Secretary (International Tax Affairs)
Doug Poms, International Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Mr. Harter and Mr. Poms:

We are writing in response to Chubb's submission of August 17, 2018 (copy attached) regarding implementation of 26 U.S. Code Section 59A. While we agree with the view that losses incurred by a U.S. insurance company on reinsurance assumed into the U.S. should not be considered base erosion payments, Chubb's proposed regulatory language is too broad and goes well beyond Congressional intent.

More specifically, Chubb proposes that “base erosion payments do not include any amounts that constitute reductions in gross receipts in arriving at gross income under Section 61, and, in the case of an insurance company, Sections 803 or 832(b)(1).” The “any amounts that constitute reductions in gross receipts in arriving at gross income” language is overly broad and sweeps in categories of payments that do, in fact, constitute base erosion payments. Although Chubb's proposed language would treat earned premiums paid for reinsurance under Section 832(b)(4)(A) and Section 803(a)(1)(B) as base erosion payments, as expressly provided in Section 59A(d)(3), it would exclude from base erosion payments all expenses incurred in earning underwriting income and investment income and arguably unearned premiums for reinsurance. Such an approach would leave it to the Internal Revenue Service to challenge payments that it believes are, in fact, base eroding, on a case-by-case basis. Rather than debate each category and type of payments, the more appropriate response is to provide a narrow clarification for the intended purpose of excluding losses incurred by a U.S. insurance company on reinsurance assumed into the U.S.

To achieve the stated objective, Treasury has been granted explicit authority under Section 59A(i) to prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section. Under this authority, Treasury can clarify a narrow exception to reflect that base erosion payments under Section 59A(d) do not include amounts paid or accrued to a foreign person which is a related party for claims, benefits, or losses incurred with respect to reinsurance.

Congress debated and thus intentionally and deliberately included reinsurance payments in the final bill signed into law. Providing relief in a manner described by Chubb's proposal would undermine Congressional intent — specifically, to provide a level playing field between U.S. and foreign reinsurers — by permitting the continuation of the egregious base erosion behaviors Congress sought to limit.

Should you have questions, feel free to contact us.

Sincerely,

Scott Rynda
Senior Vice President, Corporate Tax
Travelers
Saint Paul, MN

cc:
Brett York
Brian Jenn
Kevin Nichols
Daniel Winnick
David Brazell

From: Bond, Jodi H <Jodi.Bond@Chubb.com>
Sent: Friday, August 17, 2018 11:45 AM
To: Harter, Chip <LafayetteChip.Harter@treasury.gov>
Cc: Boyle, Timothy C <Timothy.Boyle@Chubb.com>; WPayne@mayerbrown.com
Subject: BEAT Follow-up

Chip,

Thank you again for the swift engagement conversation on Monday. Aa promised, below should address the follow up requested. In this, am introducing our new head of Tax, Tim Boyle, who has been in discussions with the domestic insurance tax counsels, and Warren Payne, so we all are in touch in the case you or your team need them to come in for a meeting, or jump onto a call for specific clarifications. You and I can be in touch regarding the senior leadership discussions that may take place in the coming weeks, and how to ensure those are effective. With deep appreciation, Jodi

Jodi — as discussed, I am attaching a quick summary of the clarification we (and many in our industry) are seeking on inbound reinsurance, followed by proposed regulatory language and why we believe Treasury has the authority to promulgate such regulations. Let me know if you have any questions. Regards, Tim

Executive Summary

We urge Treasury to adopt regulations which make clear that “losses incurred” by a US insurance company cannot be “base erosion payments.” Such regulations would carry out the intent of Congress not to subject reductions in gross income to the BEAT and preclude the logical contradiction of treating as base eroding both outbound reinsurance transactions (explicitly covered by Section 59A(d)(3)) and inbound reinsurance transactions.

Proposed Regulatory Language

a) Base Erosion Payments —

1) For purposes of section 59A(d)(1), base erosion payments do not include any amounts that constitute reductions in gross receipts in arriving at gross income under Section 61 and in the case of an insurance company sections 803 or 832(b)(1).

a. In the case of an non-life insurance company, reductions in arriving at gross income under 832(b)(1) include amounts provided in section 832(b)(2) through (8) and section 832(c)(4), except for amounts for reinsurance paid under section 832(b)(4)(A).

(i) Amounts described in section 832(b)(5) shall be treated as reductions in gross income for purposes of this section even if those amounts are also described in section 832(c)(4).

b. In the case of a life insurance company, reductions in arriving at gross income under section 803 include amounts provided in section 803(a), except for amounts for reinsurance paid under section 803(a)(1)(B).

Authority to Promulgate Regulations

Section 59A(i) grants the Treasury explicit authority to “prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions” of the BEAT legislation. We urge Treasury to use this grant of authority to adopt regulations which clarify that payments by US domestic reinsurers to related foreign insureds are not “base erosion payments.”

Even if Section 59A(i) did not cover this point, Section 7805(a) directs that “the Secretary shall prescribe all needful rules and regulations for the enforcement of this title.” The Supreme Court stated its most recent review of Treasury's Authority under Section 7805(a), describing that section as an “express congressional authorization to engage in the process of rulemaking.” Mayo Foundation for Medical Education & Research v. U.S., 562 U.S. 44 (2011), at 57 (2011), quoting U.S. v. Mead Corp., 533 U.S. 218 (1971), at 229. We suggest that a regulation that eliminates the illogical result that both outbound and inbound reinsurance are “base erosion payments” is a “needful” regulation. Because the regulation is “needful,” Treasury is directed by Section 7805(a) to prescribe it.

Timothy C. Boyle
Senior Vice President
Head of Global Tax
Chubb
510 Walnut Street WB12A, Philadelphia, PA 19106, USA
O. 215-640-1622 M 267-251-1300
E timothy.boyle@chubb.com

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