Insurance Group Asks for Expansion of Waiver Provision in Proposed BEAT Regs

February 3, 2020

Internal Revenue Service
Office of the Chief Counsel
CC: PA: LPD: PR (REG-108214-15) Room 5203
1111 Constitution Avenue, NW
Washington, D.C. 20224-0001

RE: Proposed Regulations on Election to Waive Allowable Deductions (REG-112607-19)

The Reinsurance Association of America (RAA), headquartered in Washington, D.C., is the leading trade association of property and casualty reinsurers doing business in the United States. The RAA is committed to promoting a regulatory environment that ensures the industry remains globally competitive and financially robust. RAA membership is diverse, including reinsurance underwriters and intermediaries licensed in the U.S. and those that conduct business on a cross border basis.

OVERVIEW

In order to limit the tax's application to large companies, the base erosion tax (hereafter, the BEAT) statute provides a 3% base erosion percentage test for application of the tax, as well as a requirement of average annual gross receipts of $500 million over three years.¹ The IRS and Treasury released proposed regulations that permit a taxpayer to elect to waive deductions in order to reduce the amount of base erosion tax benefits below the 3% threshold. RAA commends Treasury/IRS for providing reasonable relief from the harsh effect of the 3% cliff.

However, the waiver fails to include an important category of base erosion tax benefits — nonlife reinsurance premiums — which are, technically, a reduction of income rather than a deduction. RAA asks that nonlife insurance companies be provided the same opportunity to make the election that other industries have been given. While reinsurance premiums are a reduction of gross income for purposes of the BEAT, Code §59A(c)(2)(A)(iii) treats such payments as a deduction in determining base erosion tax benefits. The final regulation should clearly allow nonlife reinsurance premiums ceded to be waived, just as other deductions can be waived.

DISCUSSION

Code §59A(d) provides four categories of base erosion payments, including allowable deductions generally and “reinsurance payments taken into account under sections 803(a)(1)(B) or 832(b)(4)(A).” The definition of base erosion tax benefit in Code Sec 59A(c)(2)(A)(iii) expressly refers to “any deduction under section 832(b)(4)(A) from the amount of gross premiums written” (emphasis added). Nonlife (or property/casualty) reinsurance premiums paid to a foreign related party are clearly BEAT payments and are included in computing the base erosion percentage.

However, the statutory language has raised a question whether nonlife reinsurance premiums are eligible for the waiver. The waiver is available to “all deductions that could be properly claimed.” Code §832(b)(4)(A) treats reinsurance premiums as a “reduction” of income, rather than a deduction. Code §832(b)(4)(A) directs that “premiums earned” — a component of taxable income — shall be computed by deducting the amount of “premiums paid for reinsurance” from the “amount of gross premiums written on insurance contracts during the taxable year.” Although Code §59A(c)(2)(A)(iii) defines a “base erosion tax benefit as a “deduction under section 832(b)(4)(A),” this reference still leaves taxpayers less than certain that they may make the election, given the statutory language. In short, there is too much at stake to risk a misinterpretation. Taxpayers also want to avoid litigation of this issue. Clarification should be provided in the final regulation that the waiver is available for nonlife reinsurance premiums as well as other deductions. Proposed language for the amended regulation is attached.

Equitable Treatment

RAA is not aware of any policy reason to treat nonlife reinsurance premiums differently from other deductions for purposes of the waiver. Ceded reinsurance premiums reduce gross income, which, in turn, reduces taxable income, just like deductions. The amount is clearly determinable at the time the reinsurance premium is incurred, and the amount and liability for payment of premiums are stated in the reinsurance contract. The extensive anti-abuse provisions included in the proposed regulation would apply to reinsurance premiums just as they would apply to deductions, so there is no likelihood of “gaming” the election.

Regulatory Authority

In addition to the general grant of regulatory authority in Code §7805(a), Section 59A contains an express grant of regulatory authority.² The Supreme Court recognized in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984) that "[t]he power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress." 467 U.S. 837, at 843 (internal quotation marks omitted). Comments on the initial proposed regulation noted that it was not clear that excess deductions could be waived and sought clarification. The statute provided only a measurement of the amount of base erosion tax benefits, without considering whether excess amounts might lead to unfair results. Treasury has provided relief (in the form of the waiver of deductions) consistent with the purpose of taxing only large taxpayers and has prevented the rigid imposition of a regulatory cliff that could lead to harsh results. The waiver has filled a gap in the statute in a manner consistent with the general purpose of restricting the BEAT to large taxpayers that make substantial BEAT payments. Adding nonlife reinsurance premiums is merely a technical correction necessary to provide clarity, given variations in the statutory language. It clearly falls within the express grant of regulatory authority to the Treasury Secretary. Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., supra. United States v. Mead Corp., 533 U.S. 218, (2001). Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44 (2011).

CONCLUSION

RAA welcomes the election to waive deductions, which enables taxpayers to avoid application of the BEAT where excess deductions as defined in section 59A would otherwise subject BEAT payments to the tax. It is clear that Treasury has adequate authority to address an issue not addressed within the statute when the relief provided is consistent with legislative intent, i.e., to tax large taxpayers making substantial payments to related foreign parties.

To provide certainty, the ability to waive excess deductions should be expressly extended to nonlife reinsurance premiums. There is no policy reason to allow other industries to waive deductions but deny the waiver to nonlife reinsurance premiums when §59A treats them in a like manner.

RAA would be pleased to answer any questions you may have about this proposal. Please contact Joseph Sieverling (sieverling@reinsurance.org or 202-783-8312) or Brenda Viehe-Naess (bvns@att.net or 202-841-3902).

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Amendment to Prop. Reg. §1.59A-3(c)(5)

§1.59A-3 Base erosion payments and base erosion tax benefits

(c) * * *

(5) Allowed deduction. Solely for purposes of paragraph (c)(1) of this section, all deductions (including premiums paid for reinsurance pursuant to section 59A(c)(2)(A)(iii)) that could be properly claimed by a taxpayer for the taxable year (determined after giving effect to the taxpayer's permissible method of accounting and to any election, such as the election under section 173 to capitalize circulation expenditures or the election under section 168(g)(7) to use the alternative depreciation system of depreciation) are treated as allowed deductions under chapter 1 of subtitle A of the Internal Revenue Code.