Life Insurers Seek Equal Relief From BEAT

February 4, 2020

Internal Revenue Service
CC:PA:LPD:PR (REG-112607-19))
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

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

Dear Sir or Madam:

On December 6, 2019, proposed regulations (REG-112607-19)) were published in the Federal Register under section 59A of the Internal Revenue Code (IRC) providing guidance, in part, on a possible election by taxpayers to waive deductions in the computation of the taxpayers' “base erosion and anti-abuse tax” (BEAT). On behalf of its member companies, the American Council of Life Insurers (ACLI)¹ is pleased to submit the following comments on a portion of the waiver rule that is of special interest to the life insurance industry.

Summary of IRC Section 59A Rules and Proposed Regulations

IRC section 59A imposes on certain taxpayers (including, for this purpose, many life insurance companies) for each taxable year an additional tax equal to the taxpayers' relevant “base erosion minimum tax” amount for the year. That amount is based on a number of factors, including the taxpayers' “base erosion tax benefit with respect to any base erosion payment.”² Taxpayers for whom their base erosion tax benefits constitute 3% or more³ of aggregate deductions plus certain other base erosion tax benefits generally are subject to the BEAT.

IRC section 59A(d) provides several categories of base erosion payments, including allowable deductions generally and “reinsurance payments taken into account under [IRC] sections 803(a)(1)(B) or 832(b)(4)(A).” In addition, the definition of a base erosion tax benefit in IRC section 59A(c)(2)(A)(iii) expressly refers to “any reduction under [IRC] section 803(a)(1)(B) in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity insurance.” As a consequence of these provisions, reinsurance premiums paid to a foreign related party generally are BEAT payments under IRC section 59A that must be taken into account in computing a taxpayer's BEAT exposure.

Because the premise of the BEAT is that an additional tax should be imposed on certain taxpayers to the extent they make deductible payments to related foreign parties, the recently released proposed regulations potentially permit a taxpayer to avoid the BEAT by waiving deductions, thereby reducing the amount of base erosion tax benefits that are taken into account in computing the fraction that determines whether a taxpayer is subject to the BEAT. See Prop. Treas. Reg. § 1.59A-3(c)(6). The election, which allows taxpayers with amounts in excess of the 3% threshold to waive deductions and thereby drop below the 3% “cliff,” is fully consistent with the purpose of the BEAT and is a reasonable and equitable solution to cases in which taxpayers may be subject to a significant BEAT even though their “outbound” deductions may only slightly exceed the 3% threshold. However, as discussed below, it is not clear under the current version of the waiver rule whether it applies to an important category of base erosion payments — namely, premiums paid in indemnity reinsurance transactions that technically are reductions in premium income rather than deductions. The ACLI requests that the proposed regulations be revised to clearly permit, solely for the purposes of Prop. Treas. Reg. § 1.59A-3(c)(6), life insurance companies to make the waiver election with respect to those reinsurance premiums paid, giving them the same opportunity as other taxpayers to avoid the BEAT.

Discussion

As noted above, the proposed regulations permit a taxpayer (subject to certain limits) to waive allowable deductions and thereby reduce the amount of its base erosion tax benefit. However, the language of the proposed regulation may not permit life insurance companies to make a corresponding waiver election with respect to premiums paid in indemnity reinsurance transactions. That is because the proposed regulations refer only to “all deductions that could be properly claimed.”⁴ Although a reduction of premium income by the amount of indemnity reinsurance premiums paid is economically similar to a deduction, the statutory language in the insurance provisions does not refer to that reduction as a “deduction.” In particular, IRC section 805 does not list outgoing indemnity reinsurance premiums as deductions; instead, IRC section 803(a)(1) provides that “life insurance gross income” means (in part) the “gross amount of premiums and other consideration on insurance and annuity contracts, less... premiums and other consideration arising out of indemnity insurance.” The ACLI is not aware of any policy reason to treat reinsurance premiums paid in indemnity reinsurance transactions differently from other deductions allowed to life insurance companies with respect to application of the BEAT. Indeed, the specific reason that Congress required reinsurance payments taken into account under IRC section 803(a)(1)(B) to be treated as base erosion payments was that it viewed those payments as comparable to deductions. And, in fact, the reduction in income under IRC section 803(a)(1)(B) is similar economically to a deduction by reducing taxable income, irrespective of whether there is premium income that is more or less than the amount of indemnity reinsurance premiums paid. For example, if a life insurance company has $150 of premium income and $100 of reinsurance premiums paid in indemnity reinsurance transactions, but no other deductions, it has $50 of taxable income, just as it would have if it had $150 of premium income and $100 of claims paid (but no indemnity reinsurance premium payments paid). This similarity to a deduction is shown even more clearly in a case where a life insurance company has $100 of premium income, $75 of investment income, and $150 of indemnity reinsurance premiums paid. In that case, the company has $25 of taxable income because the “excess negative premium income” is deductible by the company against the investment income, clearly demonstrating the similarity to a deduction of the reinsurance premiums paid.⁵

Moreover, because reinsurance payments paid in assumption reinsurance transactions specifically are described as deductions under IRC section 805(a)(6), and therefore presumably would be subject to waiver under the existing language of the proposed regulations, failing to clarify that a waiver would be permitted with respect to indemnity reinsurance premiums would create an unreasonable distinction between reinsurance premiums paid in two different types of reinsurance transactions, even though there would be no basis for that distinction.

Given the strong policy reasons for treating indemnity reinsurance premium payment offsets to premium income in a manner similar to deductions under the IRC, we urge you to exercise the broad grant of authority provided to you under IRC 59A(i) to clarify that solely for the purposes of Prop. Treas. Reg.§ 1.59A-3(c)(6), life insurance companies have the ability to make waiver elections under the BEAT rules with respect to those payments. Not only are life insurance companies entitled to certainty on that issue, but there is no reason to adopt a regulatory framework that may well lead to litigation of this issue.⁶

The ACLI would be pleased to answer any questions you may have about this submission.

Very truly yours,

Regina Y. Rose

Mandana Parsazad

American Council of Life Insurers
Washington, DC