Session 120 PD - Company Taxation. Moderator: Donald M. Walker, ASA, MAAA. Presenters: Jean Baxley Sheryl Flum

Transcription

1 Session 120 PD - Company Taxation Moderator: Donald M. Walker, ASA, MAAA Presenters: Jean Baxley Sheryl Flum SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 2017 SOA Annual Meeting Company Taxation Session Don Walker, Moderator Jean Baxley, Deloitte Tax LLP Sheryl Flum, KPMG LLP October 17, 2017

3 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. These materials are copyrighted to the company of the presenter presenting them.

4 Agenda Current IRS Exam Environment and Priorities Status of Tax Reform in 2017 List of Recent/Ongoing Guidance

5 Current IRS Exam Environment and Priorities

6 Overview of a Typical IRS Audit - Exam IRS groups taxpayers based on asset size Large companies fall under the jurisdiction of the IRS Large Business and International Division (LB&I) For some companies subject to LB&I jurisdiction, each years tax returns are subject to audit An on-site IRS examination team is assigned Some companies are in CAP program 5

7 Lifecycle of a Typical IRS Audit - Exam Exam Kickoff meeting: Scope, agreed plan, timeline 6662 Disclosures Information Document Requests (IDRs) Timelines Enforcement Standard IDR - Reserve Questionnaire Numerical analysis and presentation by coverage type, issue year, interest rates, mortality and reserve method Application of statutory cap and net surrender value floor Calculation of federally prescribed reserves Notices of Proposed Adjustments - Forms

8 Lifecycle of a Typical IRS Audit after IRS Exam Revenue Agent s Report (RAR) compilation of 5701s Taxpayer analysis of RAR and determination of issues to protest, if any Protest file written protest with Appeals Office IRS Rebuttal Appeals - All protested issues are discussed with an IRS Appeals Officer in an effort for each issue to be settled on the basis of the strength of the party s position (i.e. based on hazards of litigation). Upon completion of this phase, a Form 870-AD is issued. Litigation - For those protested issues not resolved with the IRS Appellate Division, and reserved on the Form 870-AD, a taxpayer may still pursue them further via Litigation in one of three forums (U.S. Tax court, U.S. Court of Federal Claims or Federal District Court) 7

9 Overview of LB&I s Launch of Campaign Process On January 31, 2017 the LB&I announced detailed information on the first tranche of issues to be addressed using a new method for audits of large corporate taxpayers LB&I continues to position the division to address compliance and resource challenges Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback The launch of campaigns is the culmination of an extensive effort to redefine compliance work and build a supportive infrastructure Movement towards issue-based examinations which allows the division flexibility in determining the best steps to achieve compliance 8

10 Insurance Related Campaign Process Micro-Captive Insurance This campaign addresses transactions described in Transactions of Interest Notice , in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. LB&I has developed a training strategy for this campaign. The treatment stream for this campaign will be issue-based examinations. Deferred Variable Annuity Reserves & Life Insurance Reserves Industry Issue Resolution (IIR) The IIR program will help develop guidance to address uncertainties on issues important to the Life Insurance Industry. The issues include amounts to be taken into account in determining tax reserves for both deferred variable annuities with Guaranteed Minimum Benefits, and Life Insurance contracts. The campaign's objective is to collaborate with industry stakeholders, Chief Counsel and Treasury to develop published guidance that provides certainty to taxpayers regarding these related issues. Information about campaign process: 9

11 Changes to IRS Examination Process Clear expectations for LB&I examiners, taxpayers, and representatives Examiners expected to work transparently in a collaborative manner with taxpayers to understand their business and share ideas Encourages taxpayers to work transparently with examiners to provide an overview of business activities, operational structure, accounting systems and a global tax organizational chart Focus on collaboration in order to develop audit steps, timelines, and provide personnel with assisting in development of issues 10

12 Issue Driven Examination Process Focuses specific resources on targeted and selected issues Encourages collaboration within issue teams where examiner and mangers are equally responsible and accountable for the examination Leverages knowledge transfer Establishes case timelines as determined by complex issues Provides examiners an optional issue-driven risk analysis form ( ) 11

13 Three Phases of Examination Process Planning Phase Introduces roles and responsibilities of team members, including issue managers Principles of Collaboration (appear to) replace Rules of Engagement Execution Phase Determine facts and apply the law and understand tax implications New IDR process (IDR Directive march 2014) New Written Acknowledgement of Facts (AOF) IDR Resolution Phase Revenue agents encouraged to use resolution tools to shorten examination, conserve resources and reduce burden Issue Resolution Stage: Consider Fast Track Settlement for all unagreed issues Exit Strategy Stage: At the conclusion of resolution stage, joint critique of process and suggest improvements 12

14 IRS Priority Guidance Plan The PGP was released on 8/15/2016 The IRS released Notice on 4/21/2017 requesting public comment on what guidance projects to pursue in the plan Items related to life insurance companies and products: Final regulations under section 72 on the exchange of property for an annuity contract (proposed regulations were published on 11/20/2006) Regulations under sections 72 and 7702 defining cash surrender value (proposed regulations were published on 12/15/1992) Guidance on annuity contracts with a long-term care insurance rider under sections 72 and 7702B (relates to provisions added to the Code in the PPA of 2006) Guidance under sections 807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles-based methodologies, including stochastic reserves based on conditional tail expectation (Notice Guidance on 2017 CSO Tables first piece of transition guidance issued related to PBR) Guidance on exchanges under section 1035 of annuities for long-term care insurance contracts (added originally in PGP) Guidance relating to captive insurance companies (guidance has been subsequently issued on 831(b) micro-captives in Notice )

15 Regulatory Freeze On 1/20/2017 the President s Chief of Staff issued a memorandum to all agencies directing the following: Pull back any regulations that had been sent to, but not yet published by, the Office of the Federal Register; Not publish any new regulations unless approved by an Administration political appointee; and; Delay the effective date of any pending regulations for 60 days to provide the Administration time to review and reconsider those regulations

16 Executive Order for-1 On 1/30/2017 the President signed Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs. EO requires federal agencies to eliminate at least two existing regulations for each new regulation they issue Clarified by an OMB memorandum to be applicable only to regulations that were defined as significant under EO EO defines significant regulatory action to include regulations that have an annual economic effect of $100 million or more or adversely effect in a material way the economy, a sector of the economy, productivity, completion or jobs

17 Executive Order Identifying and Reducing Tax Regulatory Burdens On 4/21/2017, the President signed EO 13789, Identifying and Reducing Tax Regulatory Burdens. EO institutes an immediate review of all significant tax regulations since the beginning of 2016 and requires Treasury to provide an interim report on its findings within 60 days which will identify regulations that impose an undue burden on taxpayers and add undue complexity to the tax laws or exceed the statutory authority of the IRS Clarified by an OMB memorandum to be applicable only to regulations that were defined as significant under EO EO defines significant regulatory action to include regulations that have an annual economic effect of $100 million or more or adversely effect in a material way the economy, a sector of the economy, productivity, completion or jobs EO requests that Treasury submit within 150 days a report recommending specific actions to lessen the burden of the regulations identified in the interim report Interim Report (June 22, 2017) and Notice identified 8 regulations as burdensome, including the regulations under section 385. Second Report dated October 2, 2017 makes recommendations regarding next steps

18 Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (Oct. 2, 2017) Proposed Regulations to Be Withdrawn in their Entirety Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG ) Proposed Regulations under Section 103 on Definition of Political Subdivision (REG ) Treasury and the IRS may propose more targeted guidance in the future after further study of the relevant legal issues. Regulations to Consider Revoking in Part Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778) Regulations under Section 707 and Section 752 on Treatment of Partnership Liabilities (T.D. 9788) Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790) Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporation (T.D. 9803) Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770) Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794)

19 Status of Tax Reform in 2017

20 Tax reform The state of play For the first time since 2006, the Republican Party (GOP) controls the House, Senate, and White House simultaneously Speaker of the House Paul Ryan was a driving force behind the development of the House GOP Blueprint on Tax Reform released in June 2016 Donald Trump s campaign tax plan borrowed heavily from the Blueprint s concepts On April 26, 2017, the Trump Administration released its principles for tax reform which, although very high level, largely echo the Trump campaign plan

21 Tax reform The state of play (continued) The so-called Big Six tax reform negotiators have been meeting on a regular basis. The Big Six are: Speaker of the House Paul Ryan (R-WI) Ways and Means Chairman Kevin Brady (R-TX) Senate Majority Leader Mitch McConnell (R-KY) Senate Finance Chairman Orrin Hatch (R-UT) Secretary of Treasury Steven Mnuchin Director of National Economic Council Gary Cohn On July 27, 2017 the Big Six released a joint statement outlining agreed upon tax reform principles. On September 27, 2017 a Unified Framework For Fixing Our Broken Tax Code was released by the Trump administration, House Ways and Means and Senate Finance

22 The evolution of GOP tax reform Current Law Camp 2014 House GOP 2016 Blueprint Pres. Trump 2016/2017 Sept Framework Corporate taxation 35% top rate 25% top rate, phased in 20% top rate 15% top rate 20% top rate Passthrough business income Taxed at owner s rates Taxed at owner s rates (some income subject to surtax) 25%, TBD rules to ensure reasonable compensation 15% 25%, TBD rules to ensure reasonable compensation Capital Expensing MACRS/ADS with bonus depreciation Phased-in repeal of MACRS 100% immediate expensing (permanent) Electable regime ( 16); no change ( 17) 100% immediate expensing (5+ years) Business interest payments Generally deductible Modify 163(j) rules and implement new thin cap rules No current deduction for net interest expense Electable regime ( 16); no change ( 17) Partially limited Corporate AMT 20% on alternative minimum taxable income Repeal with refundability of credits Repeal Repeal Repeal

23 The evolution of GOP tax reform Current Law Camp 2014 House GOP 2016 Blueprint Pres. Trump 2016/2017 Sept Framework International taxation Foreign-held earnings Base erosion measures Worldwide with deferral US tax deferred until repatriated; FTC offset Subpart F rules for passive income Territorial with 95% dividend exemption Deemed repatriation at 8.75%/3.5%; proportional FTC offset Minimum worldwide tax at 15.5%/12.5% Territorial with 100% dividend exemption Deemed repatriation at 8.75%/3.5% 20% destinationbased cash flow tax (BAT) Worldwide with repeal of deferral ( 16); Territorial ( 17) Deemed repatriation at 10% Repeal deferral ( 16); unspecified ( 17) Territorial with 100% dividend exemption Deemed repatriation at bifurcated rate TBD Minimum worldwide tax at TBD rate Business tax incentives Myriad Repeal many Repeal except R&D credit and LIFO Repeal many, unspecified Repeal or limit many; retain R&D and LITHC

24 The evolution of GOP tax reform Individual taxation Individual tax incentives Estate tax AMT Investment Income Current Law 7 brackets, top rate of 39.6% Myriad 40% after exemption of $5.5M/$11M 26%/28% on alternative minimum taxable income 0/15%/20%, depending on tax bracket Camp brackets, top rate of 25% + 10% surtax on MAGI Limit some, consolidate others, double SD, eliminate PE Retain House GOP 2016 Blueprint 3 brackets, top rate of 33% Repeal SALT and most others, double SD, eliminate PE Repeal Pres. Trump 2016/ brackets, top rate of 33% ( 16); 35% ( 17) Repeal most, double SD Repeal, but tax cap gains of $10M+ at death ( 16); repeal ( 17) Sept Framework 3 brackets, top rate of 35% (possible 4 th at higher rate) Repeal SALT and others; double SD, eliminate PE Repeal Repeal Repeal Repeal Repeal Tax at ordinary income rates, 40% above-line deduction Tax at ordinary rates, 50% exclusion No change in rates; repeal net investment income tax No change

25 Tax Reform - September 2017 Framework Building on the July 2017 statement by the Big Six, Trump administration, House Ways and Means and Senate Finance provided further details in their tax framework intended to update the US tax code in the most significant way since International tax reform: Move to territorial tax from a world-wide system Transition to territorial system would entail a one-time tax on offshore profits Base erosion rules to prevent shifting profits offshore with a minimum tax

26 Tax Reform - September 2017 Framework Business tax reform: Reduction in the corporate tax rate to 20%, down from current 35% Immediate capital expensing for at least 5 years Rate for pass-through businesses capped at 25% Limit net interest deductibility Repeal of corporate AMT Other business credits, deductions and exclusions would be repealed or restricted Tax rules affecting specific industries

27 Tax Reform - September 2017 Framework Individual tax reform Three tax brackets for individuals: 12 percent, 25 percent and 35 percent, down from the existing seven rates, which top out at 39.6 percent Congressional tax-writing committees will be given flexibility to add a fourth rate for the highest earners Repeal the alternative minimum tax and estate tax Most itemized deductions for individuals would be eliminated except mortgage interest and charitable giving deductions Including elimination of State and local tax deduction

28 Possible Insurance Industry Pay-fors from Rep. Camp s 2014 Tax Proposal Life insurance $44 billion Increase interest rate for reserve calculation $24.5 billion Increase capitalization rates for certain policy acquisition expenses (DAC) $11.7 billion Changes in proration rules for company s dividends received deduction $4.5 billion Repeal of Section 807(f) 10-year amortization period for life insurance reserves changes $2.5 billion Change in operations loss deductions (carried back 2 years and forward up to 20 tax years) $.3 billion Repeal of the small life insurance company deduction $.3 billion Property and Casualty $22 billion Increase discounting rates for unpaid losses $17.9 billion New proration formula for tax-exempt interest $2.9 billion Modifications related to interest expense incurred for tax-example obligations under section 265 $1.6 billion International Insurance $9 billion Disallow deduction for P&C reinsurance premiums paid to a related company that is not subject to US tax $8.7 billion Change in insurance exception to PFIC status of foreign corporations $.4 billion

29 Possible process for action on tax reform Signature The House Ways and Means releases tax reform draft Ways and Means Chairman releases Chairman s mark and/or modified mark Ways and Means marks up tax reform bill, including amendments Full House of Representatives passes bill approved by Ways and Means (further amendments unlikely) House bill sent to Senate The Senate Senate Finance releases mark (could be similar to or different from House bill) Senate Finance Chairman releases modified mark Senate Finance marks up its own tax reform bill, including amendments Full Senate considers bill approved by Senate Finance (further amendments possible) If bill achieves 60 votes, then to conference with the House Alternatively, budget reconciliation vehicle to achieve Senate approval Senate considers policy changes to conform with budget reconciliation rules Conference House and Senate call for conference to reconcile differences between the two versions of the bill House and Senate Republicans and Democrats appoint conferees to negotiate conference report If conferees resolve their differences, the negotiated Conference Report sent back to House and Senate for final vote and passage No amendments to Conference Report permitted Senate may achieve 60 votes or 51 (via Reconciliation) for passage If approved, the bill is sent to President Conference report sent to President for signature, veto, or nonaction Treasury and Internal Revenue Service begin process of implementing the new law

30 Tax Reform and the budget simplified illustration Can tax reform become law? Can Big Six agree on a tax reform deal? Does the bill add to the deficit beyond budget window? ($1.5T) No Yes Violates reconciliation rules Can the bill get 218 votes in the House? Can bill get 60 votes in Senate? OR Use reconciliation rules for tax reform Yes Yes Can the bill get yes 51 votes in the Senate? Yes Can Congress pass FY18 Budget? Will the President sign the bill?

31 List of Recent/Ongoing Guidance

32 IRS Guidance Reserves Industry Issue Resolution Program, AG 43, Life PBR FAA F (section 807(f) change in basis) PLRs and (807(d)(4) revocations) CCA (life insurance reserve ratio test/purchase rate guarantees) Dividends-received deduction ( DRD ) CCA (separate account invests in partnership) FAA F (short-term capital gains) Other Guidance Notice (diversification) CCA (ceding commissions) Section 385 regulations (debt/equity classification) CCA (uncollectible deductibles) CCA (section 846 loss reserve discounting) 31

33 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 32

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