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Global Insurers Seek Changes to Proposed GILTI Regs

NOV. 16, 2018

Global Insurers Seek Changes to Proposed GILTI Regs

DATED NOV. 16, 2018
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November 16, 2018

Internal Revenue Service
Attn: CC:PA:LPD:PR (REG-104390-18)
Courier's Desk
1111 Constitution Avenue, N.W.
Washington, DC 20224

Mr. Steven T. Mnuchin
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. L.G. "Chip" Harter
Deputy Assistant Secretary (International Tax)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Ms. Marjorie Rollinson
Associate Chief Counsel, International
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Mr. Jeffrey G. Mitchell
Associate Chief Counsel, International
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Dear Sir or Madam:

We appreciate the opportunity to comment and respectfully submit this letter on behalf of HCC Insurance Holdings, Inc.; Prudential Financial, Inc.; Reinsurance Group of America, Incorporated; and American International Group, Inc., each a common parent of an affiliated group of corporations filing a consolidated US corporate income tax return.

On September 13, 2018, the US Department of the Treasury (the Treasury) and the Internal Revenue Service (the IRS) issued proposed regulations (the Proposed Regulations) under section 951A of the Code.1 In the preamble to the Proposed Regulations (the Preamble), the Treasury and IRS requested comments on the application of the proposed rules including additional modifications to determining tested income or tested loss for purposes of calculating "global intangible low-taxed income" (GILTI).

We are requesting that Proposed Regulation §1.951A-2(c)(4) be modified to clarify that GILTI is determined after giving effect to an election made under section 952(c)(1)(B)(vii)(I). In our view, determining GILTI after the application of section 952(c)(1)(B)(vii)(I) is consistent with the Congressional intent to exclude Subpart F income in determining a controlled foreign corporation's (CFC's) tested income or loss under section 951A.

Executive Summary

Section 951A generally serves as an overlay to the existing Subpart F regime of the Code2 with the clear Congressional intent that GILTI is to be determined without regard to a CFC's gross income that is treated as Subpart F income. The Preamble expressly acknowledges this limitation on GILTI. Nevertheless, the literal language of Prop. Reg. §1.951A-2(c)(4) belies this intent and may result in certain Subpart F income being subject to double taxation in the United States.

A US shareholder of a foreign insurance company that elects section 952(c)(1)(B)(vii)(I) must treat all of the foreign company's insurance income as Subpart F income.3 Section 951A(c)(2)(A)(II) provides, in relevant part, that tested income means a CFC's gross income determined without regard to any gross income taken into account in determining the Subpart F income of such corporation. Prop. Reg. §1.951A-2(c)(4)(i), however, provides that a CFC's gross tested income is determined without regard to the application of section 952(c) in its entirety. Thus, as explained below, this proposed regulatory language is inconsistent with section 951A's exclusion of Subpart F income generally and undermines Congressional intent behind section 952(c)(1)(B)(vii)(I).

Accordingly, we respectfully request the Proposed Regulations be modified to clarify that a CFC's tested income or loss should be determined without regard to a CFC's Subpart F income after giving effect to any election in effect with respect to that corporation under section 952(c)(1)(B)(vii)(I).

Section 951A Generally

On December 22, 2017, President Donald Trump signed into law a budget reconciliation act commonly known as the Tax Cuts and Jobs Act (TCJA).4 Rather than substantially re-writing the Code, the TCJA is designed to be implemented generally as an overlay to existing tax law. Accordingly, to the extent possible the Treasury and IRS should aim to harmonize the integration of the new provisions with the existing tax law without abridging or distorting Congressional intent.

New section 951A is effective starting with the first tax year of a CFC beginning after December 31, 2017.5 The general intent behind section 951A is to serve as a backstop to the Subpart F provisions of the Code by providing that a 10% US shareholder6 is taxed currently on its allocable share of its controlled foreign corporations' (CFCs)7 earnings for a tax year to the extent such earnings exceed a 10% return on the shareholder's allocable share of tangible assets held by CFCs. In particular, under section 951A, a US shareholder's GILTI is determined by first calculating the aggregate "net CFC tested income," which is the excess (if any) of the aggregate of the US shareholder's pro rata share of the "tested income" of each of its CFCs over the aggregate of such US shareholder's pro rata share of the "tested loss" of each of its CFCs. "Tested income and tested loss are determined by beginning with a CFCs gross income, excluding certain items (gross income after exclusions, 'gross tested income'), and then subtracting properly allocable deductions determined using rules similar to the rules of section 954(b)(5)."8 A CFC's gross tested income does not include any items of high-taxed foreign base company income, Subpart F income, related-party dividends, certain foreign oil and gas extraction income, and income of the CFC taxable in the United States as effectively connected income.9

GILTI should be determined after the
application of section 952(c)(1)(B)(vii)(I)

The Preamble to the Proposed Regulations states that "[t]he Treasury Department and the IRS have determined that due to the similarities between gross tested income and subpart F income (for example, gross tested income and subpart F income are both determined at the CFC level and taxed to a U.S. shareholder on a current basis), and the overlap between CFCs impacted by GILTI and subpart F (since a CFC can have both tested income and subpart F income), the determinations of gross income and allowable deductions for GILTI should be made in a manner similar to the determination of subpart F income. Accordingly, the proposed regulations require that the gross income and allowable deduction determinations for purposes of determining tested income and losses are made under the rules of §1.952-2. See proposed §1.951A-2(c)(2)."

Treas. Reg. §1.952-2(b)(2)10 provides that "[t]he taxable income for any taxable year of a controlled foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as an insurance company to which Subchapter L of chapter 1 of the Code applies" is generally "determined by treating such corporation as a domestic corporation taxable under Subchapter L of chapter 1 of the Code and by applying the principles of §§1.953-4 and 1.953-5 for determining taxable income." While Treas. Reg. §§1.953-4 and 1.953-5 generally follow subchapter L principles, with modifications, neither of those regulations has been updated since they were promulgated in 1964, which predates current section 953(a).11

Current section 953(a) excludes from the definition of "insurance income" income that is treated as exempt insurance income.12 A US shareholder of a foreign insurance company may elect under section 952(c)(1)(B)(vii)(I) to determine its section 953(a) insurance income without regard to this home-country exception, and, once the election is made, the election may not be revoked without the consent of the Secretary. Thus, while such an election is in effect, all insurance income of the electing US shareholder's CFC will be treated as Subpart F income.13

The Preamble expressly acknowledges that Subpart F income is excluded from gross tested income and further states that "[comments have requested guidance on the interaction between the earnings and profits limitation to subpart F income under section 952(c), including the recapture rule in section 952(c)(2), and the determination of gross tested income for purposes of section 951A. The Treasury Department and the IRS have determined that any income described in section 952(a) is 'taken into account in determining subpart F income' regardless of whether the section 952(c) limitation applies, and therefore should not be included in gross tested income. Conversely, the recapture of subpart F income under section 952(c)(2), even if by reason of earnings and profits attributable to gross tested income, does not result in excluding any amount from gross tested income. Therefore, the proposed regulations provide that tested income and tested loss are determined without regard to the application of section 952(c). See proposed §1.951A-2(c)(4)."

The Preamble clearly indicates that Prop. Reg. §1.951A-2(c)(4) is intended to determine GILTI without regard to any of the limitations on taking into account Subpart F income under section 952(c). However, where a US shareholder elects under section 952(c)(1)(B)(vii)(I) to treat all of its insurance income as Subpart F income, the US shareholder effectively causes an increase or addition to the CFC's Subpart F income.

By reason of Prop. Reg. §1.951A-2(c)(4) requiring the determination of a CFC's gross tested income or loss without regard to section 952(c) in its entirety, an inconsistency arises that may result in a section 952(c)(1)(B)(vii)(I) electing US shareholder having to include such income both as Subpart F income and as GILTI. This occurs because a literal interpretation of the Proposed Regulations would require disregarding the US shareholder's election under section 952(c)(1)(B)(vii)(I) for purposes of determining GILTI. If the section 952(c)(1)(B)(vii)(I) election is ignored for these purposes, the amount of the CFC's increased Subpart F income would not reduce the CFC's gross tested income; thereby, potentially subjecting the same item of income to US tax twice in the hands of the same US shareholder.

Prop. Reg. § 1.951A-2(c)(4)'s explicit mandate to disregard all of section 952(c), rather than just its limitations on Subpart F income, contravenes general US tax policy (by subjecting the same income to US tax twice in the hands of the same taxpayer), but also distorts the clear Congressional intent to allow US shareholders of insurance companies to elect to treat all of the CFC's insurance income as Subpart F income.

For the reasons described above, we request that Prop. Reg. §1.951A-2(c)(4) be modified to clarify that GILTI is determined after giving effect to an election under section 952(c)(1)(B)(vii)(I). If the Treasury and the IRS make the requested modification, the Subpart F income resulting from a section 952(c)(1)(B)(vii)(I) election made by an eligible taxpayer will be excluded from the computation of GILTI under Section 951A(c)(2)(A)(II); thereby, harmonizing the relevant Subpart F and GILTI provisions without abridging either or causing the unintended distortion that may result in an electing US shareholder's share of a CFC's insurance income being taxed as both Subpart F income and GILTI.

We appreciate the opportunity to provide comments on the Proposed Regulations. If you would like to discuss this letter further, please contact Chris Ocasal at chris.ocasal@ey.com or (202) 327-6868.

Respectfully submitted,

Chris Ocasal
Principal, Ernst & Young, LLP
Washington, DC

Cc:
Mr. Douglas Poms
International Tax Counsel
Department of Treasury

Ms. Angela J. Walitt
Attorney-Advisor
Department of Treasury

Mr. Brett York
Attorney-Advisor
Department of Treasury

Ms. Melinda Harvey
Attorney-advisor
Internal Revenue Service

Mr. Michael A. Kaercher
Attorney-advisor
Internal Revenue Service

FOOTNOTES

1 Unless otherwise noted, all Code and section references are to the United States Internal Revenue Code of 1986, as amended, and all "Treas. Reg." references are to the Treasury Regulations promulgated thereunder

2  See §§951-965 for Subpart F provisions.

3  See §§ 952(a)(1) and 953. Section 953(a)(1) provides that "insurance income" means any income which — (A) is attributable to the issuing (or reinsuring) of an insurance or annuity contract, and (B) would (subject to the modifications provided by subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company." Section 952(c)(l)(B)(vii)(l) refers to section 953(a)(1)(A), which prior to law changes generally defined insurance income simply as income that arose "in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, a country other than the country under the laws of which the controlled foreign corporation is created or organized." An insurance income exception rule is currently in section 953(a)(1)(B) and cross references section 953(e).

4 P.L. 115-97.

5  See TCJA §§14201(a) and (d).

6 A "US Shareholder" is a US person directly, indirectly, or constructively owning 10% or more of the voting power or value of stock of a CFC. Prior to the TCJA, status as a US Shareholder was determined solely with reference to voting power. See TCJA §14214 (adding the value prong of the test, effective for taxable years beginning after December 31, 2017).

7 A CFC is any foreign corporation in which US Shareholders own more than 50% of the stock by vote or value. §§951(b) and 957(a).

8 Preamble. See also §951A(c)(2).

10  See also Treas. Reg. §1.952-2(a)(2)(i) and (ii).

11 Section 953(a) defines the term "insurance income" for purposes of section 952(a)(1).

13  See supra footnote 3.

END FOOTNOTES

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