Health Service Group Comments on Application of Proposed FATCA Regs to Insurers

Cigna Corporation is pleased to submit comments on Proposed Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities ("Proposed Regulations,") issued by the Internal Revenue Service ("IRS" or "Service") and the Department of the Treasury ("Treasury") on February 8, 2012. The Proposed Regulations address issues raised under chapter 4 of Subtitle A (sections 1471 through 1474) of the Internal Revenue Code ("chapter 4" or "FATCA"), which was added with the enactment of the Hiring Incentives to Restore Employment Act of 2010 on March 18, 2010. These provisions were originally introduced as part of the Foreign Account Tax Compliance Act of 2009, commonly referred to as FATCA.

Cigna is a global health service organization dedicated to helping people around the world improve their health, well being and sense of security. We provide a broad range of integrated health care and related plans and services, and proven health and well-being programs that are targeted to the unique needs of our customers, clients and partners. Our 30,000 employees maintain 66 million customer relationships in 29 countries around the world.

We request your consideration of the following comments:

The Proposed Regulations contribute some much needed clarity to the issue of what type of foreign insurance companies will be classified as FFIs under FATCA. Under the Proposed Regulations, a financial institution includes an insurance company that issues or is obligated to make payments with respect to a "financial account". Included in the definition of financial account are cash value insurance contracts and annuity contracts, while term life insurance contracts are specifically excluded from the definition. Prop. Reg. § 1.1471-5(b)(1)(iv); Prop. Reg. § 1.1471-5(b)(2)(ii). Cash value insurance contracts are defined as insurance contracts having a cash value greater than zero, with cash value defined as the greater of (a) the amount the policyholder may borrow on the contract or (b) the amount the policyholder is entitled to receive upon a surrender or termination of the contract. Prop. Reg. § 1.1471-5(b)(3)(v). Insurance contracts that pay personal injury or sickness benefits are specifically excluded from the definition of cash value, as are contacts providing indemnification for an economic loss incurred upon the occurrence of an event (e.g. property and casualty insurance). Prop. Reg. § 1.1471-5(b)(3)(v)(C)(1).

Thus, the determination of whether a foreign insurance company is an FFI under the Proposed Regulations will be based upon the portfolio of products the company sells. Foreign insurers that exclusively sell products that have no cash value component will not qualify as financial institutions under the Proposed Regulations and therefore will have no obligation under chapter 4 to register with the Service as an FFI. In contrast, companies that issue annuities and other cash value insurance products will be classified as FFIs. Indeed, a foreign insurance company need only issue a single cash value life insurance or annuity contract to qualify as an FFI under the Proposed Regulations. Prop. Reg. § 1.1471-5(e)( l)(iv). Thus, regardless of how many health, disability or properly and casualty contracts it issues, a foreign insurance company that sells but one cash value insurance contract faces the prospect of having to register with the Service as an FFI and implementing the FATCA reporting and withholding rules.

This result stands in sharp contrast to the more moderate approach for determining whether other organizations qualify as financial institutions. For instance, entities that qualify as a financial institution under section 1471(d)(5)(B) by holding assets for the account of others only so qualify if that activity is a "substantial portion of its business". IRC § 1471(d)(5)(B). For these purposes, holding such assets is a substantial portion of an entity's business if 20% of its gross receipts are derived from that activity. Prop. Reg. § 1.1471-5(e)(3). Similarly, an entity engaged primarily in the business of investing, reinvesting or trading in securities and other financial assets only falls under the section 1471(d)(5)(C) category of financial institution if 50% of the entity's gross income is attributable to such activity. Prop. Reg. § 1.1471-5(e)(4). Even banks and other financial institutions must take deposits "in the ordinary course of a banking or similar business" to be classified as a financial institution under section 1471(d)(5)(A). These organizations may not be classified as FFIs despite having a meaningful amount of their income attributable to financial accounts, while foreign insurance companies, entities that are not even mentioned in chapter 4, can become an FFI with as little as one such account.

The omission of language limiting the scope of FATCA with respect to foreign insurance companies in the life and annuity business is inconsistent with the balance between compliance and cost that is evidenced in the statutory language of chapter 4. FATCA targets tax avoidance and noncompliance by U.S. taxpayers using foreign accounts by requiring entities maintaining those accounts to register with the IRS and agree to impose US tax withholding on specified account holders. However, to ease the cost of compliance on both foreign entities and the IRS, the statute contains the previously described de minimis language under section 1471(d)(5). Thus, in the name of efficiency, entities falling under this de minimis language are excepted from FATCA requirements, regardless of whether they have US account holders. Yet, the Proposed Regulations ignore the administrative costs to foreign life insurance companies by pulling them within the reach of FATCA when they have as little as one cash value life insurance or annuity contract.

As other insurers and industry trade groups have noted in their comments on the Proposed Regulations and previous IRS guidance, cash value life insurance and annuity contracts pose minimal risk of tax avoidance. Such products are marketed to provide financial protection for old age and unforeseen events (e.g., death, disability) and it often takes a long period of time for significant levels of cash value to build. On any sizable life or annuity contracts, there will be a good deal of underwriting and analysis before an insurer agrees to accept the risk, and insurers generally require policyholders to pay surrender charges to access the cash value through a termination of the policy. Local regulations and laws generally limit the ability of insurers to market these products to US individuals and other nonresidents. Since life and annuity products are so difficult to utilize for the type of tax avoidance FATCA was designed to curtail, we believe that the Proposed Regulations overreach in defining FFIs to include foreign insurers that write a small number of cash value life insurance or annuity contracts.

For these reasons, we recommend that the Proposed Regulations' definition of financial institution be altered to include only those insurance companies that are primarily engaged in the business of selling or issuing cash value life insurance or annuity products. For these purposes, we further recommend that an insurer be considered to be primarily engaged in the business of selling or issuing cash value life or annuity contracts if 50% or more of its gross premiums are attributable to such contracts. Adding these provisions would extend the definition of financial institutions to insurance companies in a manner consistent with how section 1471(d)(5) defines the term for other financial organizations. They would also reduce insurance company FATCA compliance costs to a level that is more commensurate with the risk of tax evasion posed by cash value life insurance and annuity contracts that they sell. More importantly, it would meaningfully address the inequity created by subjecting foreign insurance companies to the withholding and reporting responsibilities of an FFI upon the sale of a single cash value life insurance or annuity contract.

For registered deemed-compliant FFIs and especially certified deemed-compliant FFIs, the chapter 4 compliance requirements are significantly less onerous than that faced by fully participating FFIs. As its name implies, a registered deemed-compliant FFI is required to register with the IRS, obtain IRS confirmation of its registration, and renew its registration with the IRS every three years. Its chief compliance or equivalent officer must certify that all requirements of deemed-compliant status have been met, and the entity must agree to notify the IRS if changes in circumstances would leave it ineligible to maintain deemed-compliant status. In contrast, a certified deemed-compliant FFI need not register with the IRS. Rather, it need only provide withholding agents with documentation certifying that it satisfies the requirements of the certified deemed-compliant subcategory. As currently drafted, the Proposed Regulations do not allow for foreign insurance companies to qualify as deemed-compliant FFIs. In the preamble to the Proposed Regulations, IRS and Treasury seem to acknowledge this oversight in stating that consideration is being given to establishing a category of deemed-compliant FFIs for companies issuing insurance and annuity contracts. Such a category would have requirements that are analogous to the requirements for deemed-compliant local FFIs, a class of registered deemed-compliant FFI under the Proposed Regulations. The preamble also includes a general request for comments on whether there should be additional categories of deemed-compliant FFIs.

While we welcome Treasury and IRS's interest in establishing a classification of deemed compliant FFIs applicable to foreign insurance companies, we believe that merely expanding the local FFI category of registered deemed-compliant FFI to insurance companies would have limited beneficial impact. Under the Proposed Regulations, each member of a local FFI's so-called expanded affiliated group must be organized or incorporated in the same country in order for the FFI to qualify as a local FFI. Prop. Reg. § 1.1471-5(f)(1)(i)(A)(8). Unless the IRS and Treasury are willing to eliminate this "same country" requirement, extending the definition of local FFI to include foreign insurance companies would be of little benefit to Cigna and other U.S. and multinational insurers with non-US insurance affiliates.

With respect to extending the registered deemed-compliant sub-category of FFIs to foreign insurance companies, we find ourselves generally in agreement with criteria articulated by the Canadian Life and Health Insurance Association ("CLHIA") in their comments dated April 5, 2012. As we understand these recommendations, a foreign insurance company would qualify as a registered deemed-compliant FFI if it met the following conditions:

• The foreign insurer is licensed and regulated by the foreign jurisdiction in which it is organized;

• The regulating jurisdiction is FATF-compliant within the meaning of Prop. Reg. § 1.1471-1(b)(22);

• The foreign insurer has no fixed place of business outside the regulating jurisdiction, treating a branch as a separate entity for these purposes;

• The foreign insurer does not solicit for policyholders outside its regulating jurisdiction;

• 95% of the foreign insurer's accounts are held by residents of the regulating jurisdiction; and

• The foreign insurer has policies in place to prevent US persons who are not residents of the regulating jurisdiction from purchasing insurance or opening accounts.

Additionally, we also recommend that the certified deemed-compliant FFI sub-category be expanded to include foreign insurance companies that maintain low value cash value accounts. While we recognize that the Proposed Regulations already contain a certified deemed-compliant FFI classification for FFIs with low value accounts, section 1.1471-5(f)(2)(iv)(A) of the Proposed Regulations precludes extension of this classification to foreign insurance companies. As foreign insurers are locally regulated and their products present little risk of tax avoidance, it is not clear what the rationale is for excluding such entities from this sub-category.

Specifically, we propose that foreign insurance companies that maintain only low value cash value life insurance and annuity contracts qualify as certified deemed-compliant FFIs. For these purposes, low value cash value life insurance and annuity contracts would be those contracts with a cash value (as defined under Prop. Reg. § 1.1471-5(b)(3)(v)(B)) of $250,000 or less. Given the legal and regulatory barriers faced by most foreign insurers in marketing cash value life and annuity products to US individuals and other nonresidents, we believe this higher threshold (relative to the $50,000 limitation for low value accounts prescribed in section 1.1471-5(f)(2)(iv)(B)of the Proposed Regulations) strikes the proper balance between FATCA's policy objectives and the administrative costs of compliance. Finally, since the size and composition of insurance company balance sheets are subject to local regulation, we believe that there is no need for a provision similar to the $50 million limitation on balance sheet assets set forth in section 1.1471-5(f)(2)(iv)(C) for low value accounts.

CONCLUSION

While we appreciate the efforts of Treasury and the IRS in addressing insurance industry issues in the Proposed Regulations, we believe that the FATCA rules are still overly burdensome and costly given the relatively low risk of tax avoidance presented by foreign insurance companies. Accordingly, as detailed above, we recommend that the Proposed Regulations be changed to limit the definition of financial institution to cover only those insurance companies primarily engaged in the business of selling cash value life insurance and annuity contracts. Additionally, we propose that a separate classification of certified deemed-compliant FFIs be created to cover foreign insurers selling only low value cash value life insurance and annuity policies. Finally, we recommend establishing a classification of registered deemed-compliant FFIs consistent with the criteria suggested by the CLHIA in their April 5^th correspondence.

We appreciate the opportunity to provide comments on the Proposed Regulations and would be happy to discuss them further if that would be helpful. Please contact the undersigned at (860) 226-8963 if you have any questions.