Reinsurers Assert Entitlement to Waiver Election in New BEAT Regs

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:

Proposed regulations (REG-112607-19)) were recently published in the Federal Register under section 59A of the Internal Revenue Code providing guidance on a possible election by taxpayers to waive deductions in the computation of the taxpayers' “base erosion and anti-abuse tax” (the “BEAT”). The American Coalition of Global Reinsurers (the “ACGR”) — made up of the US subsidiaries of Canada Life Re, Hannover Re and Munich Re — is submitting the following comments on the waiver rule that apply specifically to the insurance industry.

Background

Under section 59A, an additional tax is imposed on certain taxpayers (including many life or property and casualty insurance companies that reinsure business with foreign affiliates) for each taxable year. That tax is equal to the taxpayers' relevant “base erosion minimum tax amount” (“BEMTA”) for the year. The BEMTA is based on a number of factors, including the taxpayers' “base erosion tax benefit with respect to any base erosion payment.”¹ Taxpayers for whom their base erosion tax benefits constitute 3% or more of aggregate deductions plus certain other base erosion tax benefits generally are subject to the BEAT.

Section 59A(d) lists several categories of base erosion payments, including “reinsurance payments taken into account under sections 803(a)(1)(B) or 832(b)(4)(A).” Moreover, the definition of a base erosion tax benefit in section 59A(c)(2)(A)(iii) expressly refers to (i) “any reduction under 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” and (ii) “any deduction under section 832(b)(4)(A) from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid on reinsurance.” Under these provisions, reinsurance premiums paid by a domestic insurance company to a foreign related party generally are payments under section 59A that must be taken into account in computing the insurance company's BEMTA.

The BEAT is based on the concept that an additional tax should be imposed on certain taxpayers to the extent they make deductible payments to related foreign parties. In some cases, a taxpayer may be subject to a significant BEAT even though its deductions (and therefore its base erosion tax benefits) only slightly exceed the 3% “cliff.” The recently released proposed regulations allow taxpayers to avoid this result by permitting them to waive deductions, thereby reducing the amount of base erosion tax benefits that are taken into account in determining whether the taxpayer is subject to the BEAT. See Prop. Treas. Reg. § 1.59A-3(c)(6).

The proposed election is fully consistent with the purpose of the BEAT, as it avoids situations in which a domestic taxpayer obtains a U.S. deduction for a payment made to a non-U.S. affiliate, and the election is an equitable solution to cases in which taxpayers may be subject to a significant BEAT even though their deductions for payments to foreign affiliates 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 two important categories of base erosion payments — namely, (i) premiums paid by a life insurance company in an indemnity reinsurance transaction under section 803(a)(1)(B) and (ii) premiums paid by a property and casualty insurance company in any type of reinsurance transaction under section 832(b)(4)(A), as those payments are described in the relevant provisions as reductions in premium income, rather than as deductions. Accordingly, while the ACGR is encouraged by the availability of the waiver election generally, we believe strongly that the final regulations should clearly provide that reinsurance premiums paid also are amounts that are allowed to be waived.

Discussion

Although the proposed regulations generally permit a taxpayer to waive allowable deductions and thereby reduce the amount of its base erosion tax benefit, the current language of the proposed regulations may not permit insurance companies to make a corresponding waiver election with respect to premiums paid in certain reinsurance transactions. That is because the proposed regulations refer only to “all deductions that could be properly claimed.”² Although reductions of premium income by the amount of reinsurance premiums paid have the same effect as deductions, the statutory language in the relevant insurance provisions does not specifically refer to those reductions as “deductions.” In this regard, section 805 does not list outgoing indemnity reinsurance premiums as deductions allowable to life insurance companies; instead, section 803(a)(1) provides that “life insurance gross income” includes the “gross amount of premiums and other consideration on insurance and annuity contracts, less . . . premiums and other consideration arising out of indemnity insurance.” Comparable statutory language applies to property and casualty insurance companies — that is section 832(c) does not list outgoing reinsurance payments as deductions; instead, section 832(b) provides that property and casualty insurance companies' gross income includes “gross premiums written on insurance during the taxable year [less] premiums paid for reinsurance.”³

There is no policy reason to treat reinsurance premiums paid in reinsurance transactions differently from other deductions allowed to insurance companies. Indeed, Congress required reinsurance payments taken into account under sections 803(a)(1)(B) and 832(b)(4)(A) to be treated as base erosion payments specifically because it viewed those payments as equivalent to deductions. Moreover, reductions in income under sections 803(a)(1)(B) and 832(b)(4)(A) operate precisely as deductions by reducing taxable income, regardless of whether the relevant insurance company has premium income or not. In fact, the Internal Revenue Service has recognized in rulings that, if an insurance company has “negative” premium income (that is, reinsurance premiums paid in excess of premium income), the negative amount is deductible against other income of the company, like any other deduction. See, e.g., PLR 8817008 (Nov. 5, 1987). The Internal Revenue Service took the same position under prior law. See, e.g., PLRs 8124031 (Mar. 17, 1981) and 8124032 (Mar. 17, 1981).

Further, we note that, in the case of assumption reinsurance transactions entered into by life insurance companies, the Internal Revenue Code specifically describes the premium payments paid in those transactions as deductions under section 805(a)(6). As a result, even under the current language of the proposed regulations, those premium payments would be subject to the proposed waiver rule. There clearly is no reason that premium payments paid in one type of reinsurance transaction would be eligible for a waiver, while those paid in another type would not.

Given the strong policy reasons for treating reinsurance premium payment offsets to premium income as deductions for purposes of the BEAT, we urge you to exercise the broad grant of authority provided to you under section 59A to clarify that insurance companies have the ability to make waiver elections under the BEAT rules with respect to those payments.⁴ Not only are insurance companies entitled to certainty on that issue, but there is no reason to adopt a regulatory framework that could well lead to litigation of this issue.

Contact Information

ACGR would be pleased to answer any questions you may have about this submission. Please contact Mike Mulcahy (mike.mulcahy@canadalifere.com or 215.542.4318).

Sincerely,

Michael Mulcahy, FSA, MAAA
American Coalition of Global Reinsurers
Head of U.S. Life Reinsurance
Canada Life Re