Insurers Request Change to Foreign Tax Credit Regs

June 15, 2022

Jose Murillo
Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury

Peter Blessing
Associate Chief Counsel (International), Internal Revenue Service

Re: Revisions to the Non-Duplication Requirement of Reg. §1.903-1(c)(1)(ii)

Dear Messrs. Murillo and Blessing:

On behalf of Aflac Incorporated, American International Group, Inc., MetLife, Inc., Prudential Financial, Inc., and Reinsurance Group of America, Incorporated, some of the world's largest providers of insurance, reinsurance, annuities, investment management, retirement planning and other products and services, we respectfully request that Treasury revise the non-duplication requirement of Reg. §1.903-1(c)(1)(ii) (the Non-Duplication Requirement) in a scenario in which a foreign country imposes multiple generally-imposed net income taxes. Such a change would provide certainty with respect to the creditability of certain foreign taxes imposed by some of the largest U.S. trading partners.

Background

To illustrate the issue at hand, consider an example in which Country X imposes a corporate income tax (Tax A). Tax A is a generally-imposed net income tax within the meaning of Reg. §1.903-1(c)(1)(i). Additionally, Country X imposes a second tax (Tax B), which is a separate and independent generally-imposed net income tax. Under Reg. §1.901-2, both Tax A and Tax B meet the definition of a foreign income tax. With respect to insurance companies, Country X imposes a gross basis tax on premiums (Tax C) that is in lieu of Tax B. Tax C (the tested foreign tax under Reg. §1.903-1(c)(1)) and Tax B (a generally-imposed net income tax) satisfy the requirements of Reg. §§1.903-1(c)(1)(i), (iii) and (iv).

For taxpayers subject to both Tax A and Tax B, no rule prevents taxpayers from treating both taxes as foreign income taxes under Reg. §1.901-2; therefore, both taxes would be creditable for a taxpayer (subject to any other applicable limitations). However, Tax C appears to fail the Non-Duplication Requirement because it substitutes for only Tax B (and not for both Tax A and Tax B). Specifically, the Non-Duplication Requirement provides the following:

Neither the generally-imposed net income tax nor any other separate levy that is a net income tax is also imposed, in addition to the tested foreign tax, by the same foreign country on any persons with respect to any portion of the income to which the amounts (such as sales or units of production) that form the base of the tested foreign tax relate (the “excluded income”). [Emphasis added.]

We believe the result as applied to Tax C is inconsistent with a plain reading of the statute and leads to an inequitable and illogical result. The statute states that a section 903 tax “shall include a tax paid in lieu of a tax on income, war profits or excess profits”.¹ The statutory language does not require that the potential section 903 tax be paid “in lieu of the tax” or “in lieu of all taxes”.² We acknowledge and agree that the case law and regulations are clear that the phrase “in lieu of” means the potential section 903 tax cannot be applied simultaneously with the generally-imposed net income tax for which it is substituting. However, as the example above illustrates, a foreign country can impose multiple distinct generally-imposed net income taxes. In such a scenario, nothing in the statute requires that the potential section 903 tax substitute for all generally-imposed net income taxes, as opposed to just one generally-imposed net income tax.

Current rules are clear that both Tax A and Tax B can qualify as foreign income taxes if they otherwise meet the definition of Reg. §1.901-2, even if imposed on the same taxpayer. There does not appear to be any policy justification for why Tax A and Tax C should not also meet the definition of a foreign income tax when a taxpayer is subject to both. (Tax C is simply a substitute for Tax B and ought to be interchangeable.)

We note that Tax C should be creditable under prior regulations. Prior Reg. §1.903-1 (in effect prior to the issuance of T.D. 9959) stated the following:

A foreign tax satisfies the substitution requirement if the tax in fact operates as a tax imposed in substitution for, and not in addition to, an income tax or series of income taxes otherwise generally imposed. [Emphasis added.]

It appears that the language above was intended to address situations in which the foreign country had a schedular income tax system where multiple income taxes collectively formed a single generally-imposed net income tax. For instance, Example 2 of Prop. Reg. §1.903-1(e) (1979) involved a foreign country with a schedular income tax system under which separate income taxes were imposed on realized net income from investments, business activities and personal services. The example concluded that the schedular income taxes were considered a general income tax.³ Similarly, in PLR 8152047 (Sept. 29, 1981), the IRS concluded that the general corporate income tax of a foreign country that was imposed on different types of income consisted of a series of separate charges. The 1979 proposed regulations and PLR 8152047 interpreted the substitution requirement to require that the potential section 903 tax substitute for either “an income tax otherwise generally imposed” or a “series of income taxes otherwise generally imposed.” In other words, the prior regulations appeared to contemplate a scenario in which a foreign country imposed only one generally-imposed net income tax (either through a single income tax or a series of income taxes that collectively formed one generally-imposed net income tax).

Under such interpretation, Tax C would be creditable because it was in substitution for Tax B (a separate and independent generally-imposed net income tax). Notably, this result would be consistent with the holding of Compania Embotelladora Coca-Cola, S.A., v. U.S., the only case of which we are aware that addressed this issue. There, the court held that the potential section 903 tax was an in-lieu-of tax within the meaning of section 903 because it was in substitution for the generally-imposed income tax, even though the taxpayer remained subject to another net income tax.⁴

The preamble to T.D. 9959 does not explain the reasoning behind the new language (“nor any other separate levy that is a net income tax”) in the Non-Duplication Requirement. It is possible that the new language was intended to be a continuation of the “series of income taxes” concept in prior regulations, or is directed at a separate levy that is not a generally-imposed net income tax but is imposed in connection with a generally-imposed net income tax.

Requested Change

In light of the above, we respectfully request that Treasury provide that a potential section 903 tax need only satisfy the Non-Duplication Requirement with respect to “a” generally-imposed net income tax (or a generally-imposed net income tax plus a narrower and related net income tax that is not itself a generally-imposed net income tax) if a foreign country imposes multiple generally-imposed net income taxes. Specifically, we propose the following amendment:

(ii) Non-duplication. — (A) In general. Except as provided in paragraph (c)(1)(ii)(B) of this section, neither the generally-imposed net income tax (which may include a series of income taxes that together are generally imposed), nor any other separate levy that is a net income tax imposed in connection with the generally-imposed net income tax, is also imposed, in addition to the tested foreign tax, by the same foreign country on any persons with respect to any portion of the income to which the amounts (such as sales or units of production) that form the base of the tested foreign tax relate (the “excluded income”). Therefore, except as provided in paragraph (c)(1)(ii)(B) of this section, a tested foreign tax does not meet the requirement of this paragraph (c)(1)(ii) if a generally-imposed net income tax imposed by the same foreign country applies to the excluded income of any persons that are subject to the tested foreign tax, even if not all persons subject to the tested foreign tax are subject to the generally-imposed net income tax.

(B) Multiple generally-imposed net income taxes. If the same foreign country imposes multiple separate generally-imposed net income taxes, paragraph (c)(1)(ii)(A) of this section is applied with respect to the generally-imposed net income tax for which the tested foreign tax is substituting, without regard to any other generally-imposed net income tax.

We believe that such a change is consistent with the statute and prior interpretations of the statute. Additionally, the change avoids the inequitable and illogical results that occur if Tax A and Tax B are both creditable, but Tax A and Tax C (which substitutes for Tax B) are not both creditable. Finally, we believe this issue requires immediate attention in light of the significant impact it has on foreign income taxes imposed by certain major U.S. trading partners; we also anticipate that without our proposed change, many other taxes that may currently be creditable under Reg. §1.903-1 could be rendered non-creditable simply due to countries adopting new generally-imposed net income taxes (such as a war profits or excess profits tax) in addition to existing generally-imposed net income taxes.

Due to the importance of this issue to our industry, we respectfully request an opportunity to meet with Treasury and the IRS to discuss this matter further. If you would like to discuss this letter, please contact Chris Ocasal at chris.ocasal@ey.com or (202) 327-6868. Thank you for your consideration of this matter.

Respectfully,

Aflac Incorporated

American International Group, Inc.

MetLife, Inc.

Prudential Financial, Inc.

Reinsurance Group of America, Incorporated

Cc:
Lindsay Kitzinger
Acting International Tax Counsel, U.S. Department of the Treasury

Angela Walitt
Attorney Advisor, U.S. Department of the Treasury

Isaac Wood
Attorney Advisor, U.S. Department of the Treasury

Daniel McCall
Deputy Associate Chief Counsel, Associate Chief Counsel (International), IRS

Michael Gilman
Branch Chief, Branch 3, Associate Chief Counsel (International), IRS

Tianlin Shi
Assistant Branch Chief, Branch 3, Associate Chief Counsel (International), IRS

Teisha Ruggiero
Attorney, Branch 3, Associate Chief Counsel (International), IRS

Dan Trsic
Director of Tax, Aflac Incorporated

Angela Bekker
Head of Global Tax, American International Group, Inc.

Joseph Vaccaro
SVP & Tax Director, MetLife, Inc.

Paul Aronoff
VP International Tax, Prudential Financial, Inc.

Bridget Linde
SVP, Global Tax, Reinsurance Group of America, Incorporated