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Groups Examine Life Insurance Issues in Proposed GILTI Regs

NOV. 20, 2018

Groups Examine Life Insurance Issues in Proposed GILTI Regs

DATED NOV. 20, 2018
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November 20, 2018

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

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

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

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

Re: Comments Regarding Proposed Regulations under section 951A1

Dear Messrs. Mnuchin, Kautter, Harter, and Ms. Rollinson:

On behalf of the American Council of Life Insurers (”ACLI”)2 and the American Insurance Association3, we are writing with recommendations for implementation of section 951A of the Internal Revenue Code of 1986, as amended (the “Code”).4 Our recommendations offer reasons for why the Proposed Regulations implementing the “Global Intangible Low-Taxed Income Included in Gross Income of US Shareholders” (“GILTI”), as defined in section 951A should be modified to address issues unique to the life insurance industry. Specifically, ACLI requests Treasury and IRS to confirm that (i) in determining the tested income or loss of a controlled foreign corporation (“CFC”), the rules of sections 953 and 954(i) would apply, including the rules of reserve computation under section 954(i); (ii) that the determination of the tested income or loss of a CFC be made after the consideration of an election made under section 952(c)(1)(B)(vii)(I); and (iii) that interest income and expense derived from active conduct of insurance business not be uniquely treated for purposes of reducing the qualified business asset investment (“QBAI”) when determining the net deemed tangible income return (“net DTIR”).5

We thank you for soliciting feedback and providing the opportunity for dialogue and welcome the opportunity to discuss these items in further detail. We believe the following recommendations will assist you to issue guidance effectively and efficiently to implement new section 951A for the life insurance industry.

Background

Section 951A requires a US shareholder of a CFC to include in its gross income its GILTI for the taxable year. 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. Under section 951A(c)(2), tested income and tested loss are determined by beginning with a CFC's 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).

Use of section 954(i) reserve computations for purposes of GILTI

The Preamble to the Proposed Regulations states:

The 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).6

Treas. Reg. section 1.952-2(b)(2)7 provides that the taxable income for any taxable year of a CFC 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 a life insurance company to which Subchapter L applies is to be generally determined by treating such corporation as a domestic corporation taxable under Subchapter L and by applying the principles of Treas. Reg. sections 1.953-4 and 1.953-5 for determining taxable income. Treas. Reg. sections 1.953-4 and 1.953-5 generally follow subchapter L principles, with modifications. However, those regulations were promulgated in 1964, which predates current sections 953(a), 953(b)(3) and 954(i).

Section 953(a) states that for purposes of section 952(a)(1) the term ”insurance income” means any income which is (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 953(b)(3) provides that in determining insurance income under section 953(a), “reserves for any insurance or annuity contract shall be determined in the same manner as under section 954(i).” Therefore, ACLI requests Treasury and IRS to confirm that in determining the tested income or loss of a CFC, the rules of section 953 and 954(i) would apply, including the rules for the computation of reserves as provided under section 954(i).

The Preamble to the Proposed Regulations explains that determinations of gross income and allowable deductions for GILTI should be made in a manner similar to the determination of subpart F income. A reason for this decision is the efficiency and consistency of using the same information for the determinations of GILTI and subpart F income. While we believe that the proper interpretation of the GILTI rules is to use reserves as calculated pursuant to section 954(i), it is also important to understand that calculating reserves pursuant to more than one method could take companies a long time to develop actuarial systems and calculations and would be extremely expensive and inefficient.8

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

An election may be made under section 952(c)(1)(B)(vii)(I) to effectively have all insurance income of a CFC to be treated as subpart F income. This election is commonly referred to as a “full inclusion” election.

The Preamble to the Proposed Regulations provides that “[a]nother item excluded from gross tested income is gross income taken into account in determining a corporation's subpart F income. 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 proposed that the gross tested income and allowable deductions properly allocable to gross tested income of a controlled foreign corporation for a CFC inclusion year are determined without regard to the application of section 952(c). See proposed §1.951A-2(c)(4).”

A literal interpretation of this proposed rule, requiring that tested income and loss be determined without regard to section 952(c) would cause the determination of tested income and loss to include income that is subpart F income as a result of the “full inclusion” election, that would otherwise be excluded from the determination of tested income and loss. The Preamble to the Proposed Regulations makes it clear that the intent of proposed §1.951A-2(c)(4) is that gross tested income and loss should be determined without regard to the limitations in section 952(c). The “full inclusion” election made under section 952(c)(1)(B)(vii)(I) is not a limitation to the determination of subpart F income but rather causes an addition or inclusion of subpart F income. This may be viewed as similar to the recapture of subpart F income under section 952(c)(2), that causes an addition to subpart F income, and that is applied despite proposed §1.951A-2(c)(4).

Because the “full inclusion” election is not a limitation to subpart F income under section 952(c), instead it increases it, the Proposed Regulations should provide that the determination of gross tested income or loss is made after giving effect to the “full inclusion” election. Otherwise, even though insurance income of a CFC would be taxed as subpart F income by reason of the election under section 952(c)(1)(B)(vii)(I), it would result in double taxation by treating the same income as both GILTI and Subpart F on an annual basis. Accordingly, ACLI requests that any amount included as subpart F income by reason of an election under section 952(c)(1)(B)(vii)(I) would not treated as GILTI income.

Determining Net DTIR

The GILTI computation excludes a notional return of a US shareholder on certain tangible business assets of its CFCs. Once net CFC tested income has been determined, such amount is then reduced by the US shareholder's net DTIR to arrive at its GILTI inclusion amount for the taxable year. Net DTIR is the excess of DTIR (i.e., 10% of the US shareholder's pro rata share of each CFC's aggregate QBAI) over certain interest expenses. QBAI is each CFC's aggregate quarterly average adjusted basis in 'specified tangible property' (i.e., tangible depreciable property used in the production of tested income).

In determining a US shareholder's net DTIR, broadly, the notional 10% return on the CFCs' QBAI is reduced by a specified interest expense. The term specified interest expense” was added and defined in the Proposed Regulations as the excess of tested interest expense over tested interest income. The Proposed Regulations adopt a netting approach (rather than a direct tracing approach) in determining a US shareholder's pro rata share of specified interest expense.

Proposed §1.951A-4 provides that the computation of tested interest expense and tested interest income excludes qualified interest expense and qualified interest income, respectively. Qualified interest expense is the amount of interest expense incurred by a qualified CFC engaged in the active conduct of a banking, financing, or insurance business under sections 954(h) and 954(i), respectively. Similar to the exclusion of qualified interest expense from tested interest expense, tested interest income does not include interest income of a qualified CFC that is excluded from subpart F income by reason of sections 954(h) or 954(i) (i.e., qualified income). The Preamble to the Proposed Regulations offers this explanation for the approach adopted by the Proposed Regulations: “Treasury Department and the IRS have determined that a U.S. shareholder's specified interest expense, and therefore its net DTIR and its GILTI inclusion amount, should not depend on whether the U.S. shareholder has one or more CFCs engaged in the active conduct of a financing or insurance business, as long as the interest expense of the CFC is incurred exclusively to fund such business with unrelated persons and thus not incurred, for instance, to fund the acquisition of specified tangible property.”

While the insurance industry has expressed its view that AFE income should not be treated as GILTI, we recognize that (as currently drafted) AFE income derived in the active conduct of an insurance business is treated as GILTI. As section 951A does not treat income derived from the active conduct of an insurance business any differently than any other income excluded from subpart F for GILTI purposes, it is ACLI's position that interest income and expense derived from active conduct of an insurance business should not be treated differently for purposes of reducing QBAI when determining the net DTIR.

* * *

We thank you for considering our comments to the Proposed Regulations and welcome the opportunity to discuss our recommendations.

Sincerely,

Regina Rose
Senior Vice President, Taxes & Retirement Security
American Council of Life Insurers
Washington, DC

Mandana Parsazad
Vice President, Taxes & Retirement Security
American Council of Life Insurers
Washington, DC

David Pearce Jr.
Vice President and Director of Tax Policy
American Insurance Association

CC:
Douglas Poms
International Tax Counsel
Department of Treasury

Angela J. Walitt
Attorney-Advisor
Department of Treasury

Brett York
Attorney-Advisor
Department of Treasury

Melinda Harvey
Attorney-advisor
Internal Revenue Service

Michael A. Kaercher
Attorney-advisor
Internal Revenue Service

FOOTNOTES

1REG-104390-18. On September 13, Treasury and the IRS released the Proposed Regulations, the first guidance relating to GILTI (the “Proposed Regulations”). The preamble that accompanied the Proposed Regulations will be referred to hereinafter as the “Preamble to the Proposed Regulations.”

2The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association with approximately 290-member companies operating in the United States and abroad. ACLI advocates in state, federal, and international forums for public policy that supports the industry marketplace and the policyholders that rely on life insurers' products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, and reinsurance, representing 95 percent of industry assets, 93 percent of life insurance premiums, and 98 percent of annuity considerations in the United States. Learn more at www.acli.com.

3The American Insurance Association (AIA) is the leading property-casualty (non-life) insurance trade organization in the United States, representing more than 330 companies, which collectively write more than $134 billion in premiums each year. AIA member companies, which include the most globally-active insurers, have operations in more than 70 countries, serve customers in more than 170 countries and territories, and offer all types of property-casualty insurance products.

4The Code was last amended by “an Act to Provide for Reconciliation pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” P.L. 115-97 (more commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”).

5While the insurance industry has expressed its view that income that falls within the active finance exception (of either section 953(e) or 954(i), “AFE income”) should not be treated as GILTI, we recognize that as currently drafted AFE income derived in the active conduct of insurance business is treated as GILTI and treated no differently than virtually any other non-subpart F income. As section 951A does not treat income derived from the active conduct of an insurance business any differently for GILTI, it is ACLI's position that interest income and expense derived from active conduct of insurance business should not be treated differently for QBAI.

6See, supra note 1.

7See also Treas. Reg. section 1.952-2(a)(2)(i) and (ii).

8We have separately discussed that the life insurance industry's understanding following the enactment of changes to subchapter L as part of TCJA, and more specifically, to section 807, is that local country foreign statement reserves should be used to determine the reserves of a CFC under section 954(i). In addition to this being our understanding of the Code after amendments made by TCJA, using such reserves provides for efficiency and simplicity, so that another method for determining the reserves of a CFC is not necessary. The life insurance industry looks forward to discussing this understanding with you.

END FOOTNOTES

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