Insurer Suggests Changes to Clarify BEAT Regs

February 19, 2019

CC:PA:LPD:PR (REG-104259-18)
Room 5203, Internal Revenue Service
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Dear Sir or Madam:

Globally, the Allianz group has over 140,000 employees and offers a wide range of insurance and fund products to 88 million customers in more than 70 countries. In the US insurance market, Allianz operates companies that offer a wide variety of products, including life insurance and annuities, credit insurance, travel insurance, and property and casualty insurance for large global clients.

On December 13, 2018, the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations (hereinafter, "the Proposed Regulations), implementing that Base Erosion and Antiabuse Tax ("BEAT') under section 59A of the Internal Revenue Code. The Proposed Regulations clarified a number of important issues for taxpayers. However, we believe that modifications to certain rules would provide further clarity. Specifically, we respectfully request that the following modifications to the Proposed Regulations.

Clarify Definition of Aggregate Group by Expressly Excluding RICs and REITs

Under section 59A, the BEAT may only be imposed on an applicable taxpayer, which is defined as a corporation, other than (1) a regulated investment company ("RIC), (2) a real estate investment trust ("BEI-1'), or (3) an S corporation, that satisfies the gross receipts test and the base erosion percentage test. For purposes of these tests, members of a group of corporations related by stock ownership are aggregated. Section 59A(e)(3) refers to aggregation on the basis of persons treated as a single taxpayer under section 52(a). Unlike an S corporation, a RIC or REIT could be included in such an aggregate group under the section 52(a) definition. However, because a RIC or REIT cannot be an applicable taxpayer under the statute, it is presumed that the Treasury Department and IRS does not intend for them to be included in the aggregate group for purposes of the gross receipts and base erosion tests, either. As such, we recommend the following change to section 1.59-1(b)(1) in the final rules:

(b) Definitions. For purposes of this section and §§ 1.59A-2 through 1.59A-10, the following terms have the meanings described in this paragraph (b).

(1) Aggregate group. The term aggregate group means the group of corporations determined by —

(i) Identifying a controlled group of corporations as defined in section 1563(a), except that the phrase "more than 50 percent" is substituted for "at least 80 percent" each place it appears in section 1563(a)(1) and the determination is made without regard to sections 1563(a)(4) and (e)(3)(C), and

(ii) Once the controlled group of corporations is determined, excluding:

(A) any corporation that is regulated investment company, a real estate investment trust, or an S corporation, and

(B) foreign corporations except with regard to income that is, or is treated as, effectively connected with the conduct of a trade or business in the United States under an applicable provision of the Internal Revenue Code or regulations published under 26 CFR chapter I. Notwithstanding the foregoing, if a foreign corporation determines its net taxable income under an applicable income tax treaty of the United States, it is excluded from the controlled group of corporations except with regard to income taken into account in determining its net taxable income.

Scope of Lower Base Erosion Percentage for Banks and Registered Securities Dealers

By statute, a lower base erosion percentage applies to an affiliated group, as defined in section 1504(a)(1), that includes a bank or registered securities dealer. The Proposed Regulations extend this lower base erosion percentage threshold to entire aggregate groups that include a bank or registered securities dealer. We believe such an expansion of the scope of the lower base erosion percentage is not supported by the language of section 59A. The legislative history of section 59A implies that the lower threshold for banks and registered securities dealers was imposed because such entities make qualified derivatives payments ("QDPs") to foreign related parties and QDPs are excluded from the definition of base erosion payment under section 59A(c)(4)(6)(ii). The Proposed Regulations make it clear that the base erosion minimum tax is determined on a separate taxpayer basis and that a consolidated group is treated as a single taxpayer for purposes of section 59A. Because the statute specifically references section 1504(a)(1) when referencing groups that include banks and registered securities dealers, and only corporations that meet the requirements of section 1504(a)(1) are allowed to file consolidated tax returns, the proper application of the provisions of section 59A(b)(3) should be limited to affiliated groups as defined by section 1504(a)(1). Additionally, it would be inequitable to impose the lower base erosion percentage threshold on taxpayers that do not benefit from the QDP exception. As such, the following changes are recommended to final section 1.59A-2(e)(2) to apply the scope of the lower base erosion percentage threshold to only those taxpayers defined in the statute:

(2) Base erosion percentage test for banks and registered securities dealers —

(i) In general. A taxpayer that is a member of an affiliated group (as defined in section 1504(a)(1)) that includes a bank (as defined in § 1.59A-1(b)(4)) or a registered securities dealer (as defined in section § 1.59A-1(b)(15)) satisfies the base erosion percentage test if its base erosion percentage is two percent or higher.

(ii) Aggregatc groups. An aggregate group of which a taxpayer is a member and that includes a bank or a registered securities dealer that is a member of an affiliated group (as defined in section 1501(a)(1)) will be subject to the base erosion percentage threshold described in paragraph (c)(2)(i) of this section.

(iii) De minimis exception for banking and registered securities dealer activities. An aggregateaffiliated group that includes a bank or a registered securities dealer that is a member of an affiliated group (as defined in section 1504(a)(1)) is not treated as including a bank or registered securities dealer for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, in that taxable year, the total gross receipts of the aggregateaffiliated group attributable to the bank or the registered securities dealer represent less than two percent of the total gross receipts of the aggregateaffiliated group, as determined under paragraph (d) of this section. When there is no aggregate group, a consolidated group that includes a bank or a registered securities dealer is not treated as including a bank or registered securities dealer for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, in that taxable year, the total gross receipts of the consolidated group attributable to the bank or the registered securities dealer represent less than two percent of the total gross receipts of the consolidated group, as determined under paragraph (d) of this section.

Except Contemporaneous Retrocessions from the Definition of Base Erosion Payments

A base erosion payment is defined in Code section 59A(d) to include any premium or other consideration paid or accrued to a foreign related party for reinsurance premiums taken into account under sections 803(a)(1)(B) or 832(b)(4)(A). For a variety of non-tax business reasons, domestic insurance companies may cede reinsurance to a foreign related party that is then immediately retroceded to an unrelated third party, called a retrocessionaire. The risks insured in this manner are typically risks from large corporate multinational clients with complex global operations.¹

Multinational risk exposures are naturally complex and insurance coverage for multinational corporations is structured to service the specific needs of the large corporate client. International insurance programs can accommodate the specific legal requirements for policies in each jurisdiction where the multinational client operates to essentially offer a combination of local policies embedded in a global umbrella of coverage, which is a type of coverage that simply cannot be offered by companies that only operate in one jurisdiction. A very important piece of this type of coverage is the ability of the client-facing insurer to spread such risks to multiple unrelated retrocessionaires via reinsurance. As the policies for such risks are being developed with the client, the customer-facing insurer is at the same time lining up a panel of unrelated reinsurers in order to spread the risk amongst various unrelated insurance groups, which ultimately keeps premium costs down for the clients as well as stabilizes the overall insurance system by spreading risk out.

While the local office of the insurer negotiates with the client in the jurisdiction where the client is located, the home office of each insurance group negotiates with the unrelated reinsurers. While there are separate contractual obligations between the customer-facing insurer, the insurer and its home office, and the home office and the unrelated reinsurers, there are clear economic ties between these transactions. With these complex cases, direct cessions from the customer-facing insurer to the unrelated retrocessionaire without an affiliated intermediary to first aggregate the global risk of the multinational client are problematic. Without the aggregation by the intermediary, there is increased execution risk on the reinsurance placements and increased cost of obtaining reinsurance coverage, as well as material operational inefficiencies in the administration of these policies. Additionally, for certain multinational clients, capacity is either simply not available in the US reinsurance market or only available at a non-economical level. In general, if risks are not first aggregated by a related intermediary, premiums will be higher because instead of pricing the exposure in the context of a larger risk portfolio, reinsurers must quote stand-alone prices for the US part of the portfolio only without the diversification benefits of the non-US portfolio. This has the effect of increasing the premium for the ultimate customer, which may be a US-headquartered multinational corporation.

Reinsurance arrangements such as the ones described above serve no base erosion purpose. Reinsurance premium payments made for such coverage are not amounts that domestic insurance companies make in order to reduce their US corporate income tax liabilities. Instead, such arrangements are entered into to provide insurance coverage to large corporate clients that otherwise would not be able to obtain coverage for their global operations. The reinsurance arrangements would not be entered into without the underlying policy being needed by the client and the client would not be able to obtain such coverage in an economic manner without the reinsurance arrangements in place.

Section 1.59A-9(b) of the Proposed Regulations provides that if a taxpayer pays or accrues an amount to one or more intermediaries and if the intermediary makes corresponding payments to or for the benefit of the foreign related party, the role of the intermediary is disregarded as a conduit. This provision ultimately supports the view that looking through transactions to analyze the ultimate economic substance of the transaction. In the case of international insurance programs and similar transactions described above, it is appropriate to look through the transaction to determine whether the payment from the US insurer to the foreign related party is ultimately being paid to the economic benefit of the foreign related party or whether the economic benefit ultimately resides with an unrelated party. In cases where a portion of risk, and hence the premium, is retained by the foreign related party, it is appropriate to treat that portion of the premium as a base erosion payment. However, in cases where a portion of premium simply flows through to a third party, such premium payments should not be treated as base erosion payments.

As noted in the Preamble to the Proposed Regulations, the Treasury Department and the IRS determined that "establishing whether a payment is a base erosion payment based solely on the status of the recipient as a foreign person is inconsistent with the statute's intent of eliminating base erosion" when it carved out an exception for payments made to US branches of foreign related parties. Similar logic should apply to payments that are made to foreign related parties that are simply serving as intermediaries between the US company and an unrelated third party. Such transactions are undertaken to either provide insurance coverage where no other coverage is available or to provide insurance coverage at lower rates for the ultimate customer and not to erode the US tax base. In the case of international insurance programs described above, it is also possible for a US insurance company to pay reinsurance premiums to a foreign related intermediary that in turn retrocedes it to a US reinsurer. In such cases, there is absolutely no erosion of the US tax base, and as such it would be inappropriate to impose the BEAT on the payment from the US insurer to the foreign related intermediary.

Because reinsurance transactions similar to the ones described above are undertaken for valid business reasons and not for tax avoidance purposes and because they do not serve a base eroding purpose, we respectfully request that payments made to foreign related intermediaries as a part of such arrangements be specifically excluded from the definition of base erosion payments. We suggest the following modifications to the Proposed Regulations be adopted in the final regulations:

(b) Base erosion payments — (1) In general. Except as provided in paragraph (b)(3) of this section, a base erosion payment means —

* * *

(iii) Any 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).

* * *

(3) Exceptions to base erosion payment. Paragraph (b)(1) of this section does not apply to the types of payments or accruals described in paragraphs (b)(3)(i) through (vii-)(viii) of this section.

* * *

(viii) Contemporaneous retrocession. A payment described in paragraph (b)(1)(iii) shall not be treated as a base erosion payment to the extent that the taxpayer establishes that the related reinsurer immediately retroceded such premium or other consideration to a person which is not a related party.

We appreciate the opportunity to comment on the Proposed Regulations under section 59A. Please do not hesitate to contact me at (763) 765-6315 if you would like to discuss our comments further.

Sincerely,

William W. Kenny
Chief Financial Officer, Treasurer, & Tax Director
Allianz of America, Inc.
Minneapolis, MN

Copy to:
Lafayette "Chip" G. Harter III
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220