Insurer Seeks Equitable Treatment Under Ownership Attribution Regs

November 12, 2019

Internal Revenue Service
CC:PA:LPD:PR (REG-104223-18)
Courier's Desk
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Re: REG-104223-18 (Proposed Regulations on Section 958 Ownership Attribution)

Prudential Financial, Inc. (“Prudential”) appreciates the opportunity to comment on the Notice of Proposed Rulemaking (REG-104223-18) (the “Proposed Regulations”), published in the Federal Register on October 2, 2019, relating to the modification of section 958(b) of the Internal Revenue Code¹ by the Tax Cuts and Jobs Act. These comments specifically address the requirements under chapter 61 which generally provide that U.S. payors (as defined in Treas. Reg. 1.6049-5(c)(5), which generally includes controlled foreign corporations (“CFCs”)) must report to the Internal Revenue Service (“IRS”) certain payments or transactions with respect to United States persons that are not exempt recipients.

We commend the Department of the Treasury (“Treasury”) and the IRS for taking steps in the Proposed Regulations to mitigate some of the unintended consequence of the repeal of section 958(b)(4), including exempting from certain reporting obligations under chapter 61 foreign corporations that became CFCs solely as a result of the repeal of section 958(b)(4).However, we believe that, in order to avoid burdensome and problematic reporting requirements and produce a level playing field for insurance company CFCs, final regulations should exempt all CFCs — not just those CFCs which result from the repeal of section 958(b)(4) — from the reporting obligations under chapter 61 imposed on U.S. payors.

A. Reasons an Exemption from Chapter 61 Reporting for CFCs is Needed

As noted above, the Proposed Regulations included an exemption from certain reporting obligations under chapter 61 for foreign corporations that became CFCs solely as a result of the repeal of section 958(b)(4). Letters to Treasury and the IRS requesting guidance on the repeal of section 958(b)(4)² expressed several different reasons why such an exemption would be appropriate. For example, the reporting requirements imposed on CFCs are significantly more burdensome than the requirements imposed on foreign companies which are not CFCs; non-U.S. payors who are not CFCs are required under chapter 61 to report only with respect to reportable amounts of U.S. source income³ (which is likely to be a very limited universe of payments), while CFCs must report all U.S. and non-U.S. source reportable payments to the IRS. This increased reporting burden on CFCs necessitates the maintenance of expensive systems to identify and track payments subject to this reporting.

Additionally, reporting under chapter 61 may conflict with local laws and regulations regarding client privacy rights and the confidentiality of information. While the Foreign Account Tax Compliance Act (“FATCA”) regime addresses reporting by means of intergovernmental agreements with the IRS intended to “address . . . legal impediments to compliance, simplify practical implementation, and reduce FF1 costs,”⁴ the reporting requirements of chapter 61 do not similarly incorporate mechanisms to assuage those legal concerns, nor do those requirements encourage simplification or cost reduction.

Furthermore, in addition to imposing reporting on CFCs which conflict with the objectives of FATCA, the reporting requirements under chapter 61 (which require reporting to both the IRS and contract holders) for insurance company CFCs are largely duplicative of the reporting requirements under FATCA, and provide little compliance value to either the IRS or contract holders that receive the reports. Under chapter 61, insurance companies that are CFCs are generally required to report on IRS form 1099-MISC when $600 or more is paid with respect to a life insurance or annuity contract, regardless of whether or not the distribution is subject to tax.⁵ Under FATCA, insurance company CFCs are required to provide a FATCA report on IRS Form $966 with respect to all annuity contracts and life insurance contracts with cash values of $50,000 or more annually, irrespective of whether there has been a payment with respect to a life insurance or annuity contract.⁶ The FATCA report would also include any gross distributions made by the CFC (again, regardless of whether the distribution is subject to tax).It seems unnecessary to require reporting under both chapter 61 and the FATCA regime when there are only minor differences between the two in what is memorialized and communicated to the IRS and FATCA reporting is more comprehensive. Further, since Form 1099 reporting is required regardless of whether the distribution with respect to a life insurance or annuity contract is subject to tax, a Form 1099 does not provide a contract holder information that is helpful in computing taxable income, and the IRS likewise cannot use the form 1099 to “match” income reported on the recipient's tax return. So, there is no independent value to either taxpayers or the IRS in the additional reporting required under chapter 61. Prudential supports the solution proposed by the American Council of Life Insurers, wherein FATCA reporting will be the sole reporting for CFCs that are engaged in the life insurance business, and CFCs can provide policyholders with the information that was included in the FATCA report in lieu of the reporting requirements under chapter 61.⁷

B. Exemption Should Apply to All CFCs

The rationales for the exemption discussed above — that reporting requirements under chapter 61 are burdensome, violate local privacy and confidentiality rules, and are duplicative of and conflict with the objectives of reporting under FATCA — apply equally to all CFCs, not just CFCs resulting from the repeal of section 95$(b)(4). Companies that would be CFCs even absent the repeal of the prohibition on downward attribution in section 958(b)(4) in many instances lack the expertise and capabilities to comply with the reporting requirements of chapter 61. It is incorrect to presume that just because a U.S. parent company has systems to comply with U.S. reporting rules, it can easily transfer those systems or its knowledge to assist CFCs with this reporting. The policy administrative systems used by U.S. insurance companies and each CFC are not integrated. Therefore, entirely new systems must be developed for CFCs. Employees of the U.S. parent company would also have limited ability to assist a CFC with its reporting obligations due to privacy and confidentiality rules that apply to CFCs. If one assumes that a U.S. parent company will be able to facilitate the implementation of such compliance protocols, they are overlooking the operational complexities of imposing U.S. tax obligations on companies accustomed to operating under local rules. Additionally, foreign-parented CFCs have the same access to consultants who are aware of the rules and operational complexities as do U.S.-parented CFC insurance companies. Moreover, many companies become CFCs after an acquisition, and do not even have the limited benefit of having pre-existing relationships with affiliates who are U.S. companies subject to expanded reporting under chapter 61. In light of these concerns and the overlap between what is reported under chapter 61 and FATCA, to the extent any CFC is exempt from chapter 61 reporting it is reasonable to exempt all CFCs from chapter 61 reporting, and not just foreign-parented CFCs resulting from the repeal of section 95.8(b)(4).

In addition, failing to exempt all CFCs from chapter 61 reporting puts foreign insurance companies which have a U.S. parent at a competitive disadvantage relative to their foreign-parented peers. Not only do such CFCs have to expend resources and time in order to set up and maintain the compliance systems necessary to accomplish the reporting required under chapter 61, but those companies may also lose potential clients who are wary of any additional information being reported to the IRS.We have had CFCs inform us that non-U.S. and locally-owned competitors have used the fact that U.S.-controlled CFCs have different U.S. tax reporting rules as a marketing tool; such competitors attempt to dissuade clients from buying insurance policies from our affiliates with intimidating stories about the rights the IRS has to access client information from CFCs and cautionary disclosures that U.S.-controlled CFCs are subject to additional U.S. tax reporting rules that do not apply to non-U.S. and locally-owned insurance companies. It would be unfortunate if final regulations are promulgated that would perpetuate a potential competitive disadvantage for U.S.-controlled CFCs by continuing to subject U.S.-controlled CFCs to different U.S. tax reporting rules with respect to client information. In contrast, FATCA reporting applies equally to all foreign insurance companies, regardless of the residence of their parent corporations. Accordingly, we believe the best way to level the playing field for U.S.-parented CFCs is to exempt all CFCs from Chapter 61 reporting.

C. Treasury and the IRS have Authority to Provide an Exemption for All CFCs

Treasury and the IRS are provided broad authority to promulgate regulations under chapter 61.⁸ The preamble to the Proposed Regulations states that Treasury and the IRS exercised their regulatory authority under section 6049(a) in exempting from certain reporting obligations under chapter 61 foreign corporations that became CFCs solely as a result of the repeal of section 958(b)(4). Similar regulatory authority can be relied on to exempt all CFCs from reporting under chapter 61.

The recommended exemption would eliminate duplicative reporting provided to the IRS, and accordingly should result in cost and resource savings to the IRS from a tax administration standpoint. The exemption would also be consistent with the directive issued by the President in Executive Order 13789 on April 21, 2017 (82 FR 19317) to reduce tax regulatory burdens.

We believe the above recommended exemption would also not give rise to a potential for abuse given the significant overlap with the reporting requirements under FATCA, which CFCs will continue to be required to meet. If Treasury and the IRS believe the proposal suggested in this letter nevertheless has the potential for abuse, we would welcome an opportunity to discuss those concerns and how they might be addressed.

Prudential appreciates your consideration of these comments and would welcome the opportunity to discuss them with you at your convenience. Please contact us at (973) 802-3616 or paul.aronoff@prudential.com and (973) 802-4437 or eric.lopata@prudential.com if you have any questions.

Paul Aronoff
Vice President and Corporate Counsel

Eric M. Lopata
Vice President and Corporate Counsel

Prudential Financial, Inc.
Newark NJ

cc:
Hon. David I. Kautter, Assistant Secretary of the Treasury (Tax Policy), U.S. Department of the Treasury
Hon. Charles P. Rettig, Commissioner, Internal Revenue Service
Lafayette G. “Chip” Harter III, Deputy Assistant Secretary (International Tax Affairs), U.S. Department of the Treasury
Michael I. Desmond, Chief Counsel, Internal Revenue Service
William M. Paul, Deputy Chief Counsel (Technical), Internal Revenue Service
John Sweeney, Office of Associate (Chief Counsel), Branch 8, International Branch Chief, Internal Revenue Service
Douglas L. Poms, International Tax Counsel, U.S. Department of the Treasury
Brett York, Associate International Tax Counsel, U.S. Department of the Treasury
Angela Walitt, Attorney-Advisor, U.S. Department of the Treasury