Tax Update for Insurance Companies IASA Central States Conference

Transcription

1 Tax Update for Insurance Companies IASA Central States Conference

2 Tax Reform Readiness Table of Contents Topic Slide Number Outlook of Tax Reform 3 Overview of Tax Reform Proposals 8 Tax Reform Readiness 14 Immediate Tax Reform Planning Considerations 17 Contact Information 20 2

3 Outlook of Tax Reform Proposals 3

4 Tax Outlook Is Uncertain Impossible to predict possibility of tax reform in 2017 Many legislative priorities in addition to tax reform Unclear if any tax legislation would be retroactive to January 1, 2017 Substance of any tax reform is uncertain Details of current proposals need to be more fully developed Could require bipartisan support 4

5 Election Results Republican Donald J. Trump elected to serve as 45 th President of the United States Republican majority in House of Representatives 241 Republican 194 Democrat Republican majority in Senate 52 Republican 46 Democrat 2 Independent 5

6 Important Aspects of Legislative Procedure All tax legislation must originate in the House 60 votes in Senate are necessary to prevent filibuster Budget reconciliation bills have procedural protections that facilitate passage 6

7 Federal Budget Process Congressional Budget & Impoundment Control Act of 1974 Framework for congressional budget process Starts with President s budget request Congressional budget resolution Authorization & appropriation 7

8 Overview of Tax Reform Proposals 8

9 Domestic Income Tax Reform Overview Evaluation of Proposed Tax Rates and Ongoing Proposals Base Headline Rate Corporate Tax Rate Reform 35% Current Tax Rate 25% Camp II Proposal 20% House GOP Proposal 15% President Trump Proposal Repeal Corporate AMT Full Expensing of Capital Investments Retain R&D Credit Retain LIFO Taxpayer Unfavorable/Favorable Proposals Interest Expense Limitation Repeal Most Business Expenses (President Trump) Repeal IRC 199 9

10 Domestic Reform Proposals Provision Current Law President Trump House GOP Blueprint Camp II Top Corporate Rate 35% 15% 20% 25% Research Credit Generally allows either a 20% credit for qualifying research expenses in excess of a base amount, or a 14% alternative simplified credit Retain research credit, but repeal most other business tax expenditures Retain credit; Ways and Means Committee will evaluate options to make it more effective and efficient Research credit (alternative simplified credit) would be permanent IRC 199 Deduction and Other Business Deductions Up to 9% deduction under IRC 199 for certain income attributable to domestic production activities Repeal most business tax expenditures except for the research credit Repeal IRC 199 Repeal of IRC 199 phased out over two years (6% in year one, 3% in year two); repeal of percentage depletion Capital Cost Recovery Taxpayers generally recover costs under the Modified Accelerated Cost Recovery System (MACRS) Firms engaged in US manufacturing may elect to deduct the full cost of their capital investments in year one; option revocable within first 36 months* Full expensing in year one of all assets, tangible and intangible, other than land Depreciation would be computed using straight-line method with longer recovery periods (similar to ADS) Net Operating Loss (NOL)** Available for 2-year carryback and 20-year carryforward No Change Specified* NOLs carried forward indefinitely, annual future deduction is limited to 90% of net taxable income. NOL carrybacks will no longer be permitted NOL would only be permitted to offset 90% of the corporation s taxable income in the carryback or carryforward year Interest Expense Generally deductible Businesses that elect full expensing in year one will lose their ability to deduct net interest expense Interest expense deductible against interest income, but no current deduction for net interest expense; net interest expense may be carried forward indefinitely Modifies IRC 163(j) with new thin cap rules; limit for adjusted taxable income reduced from 50% to 40% * Previously in Trump s proposal, but not included in the most recent guiding principles ** Please note that HR 2181 Insurance Company Tax Modernization and Parity Act of 2017 will amend the IRC of 1986 and would repeal limitations related to consolidated returns and non life insurance companies. 10

11 P&C Insurance-Specific Provisions CAMP Proposal Property & Casualty Modifications to Proration rules for P&C companies Modifications include replacing the fixed 15% reduction in the reserve deduction for P&C companies with a special formula. Tax exempt income of the company multiplied by a percentage equal to ratio of the tax exempt assets of the company to all the assets of the company Discounting Rules for P&C insurance companies a. Require P&C insurance companies to use higher interest rate for IRC 846 purposes. i. Use corporate bond yield curve to discount unpaid losses ii. 5 year limitation for special rule extending loss payment patterns for certain lines of business Prevention b. Repeal IRC of 846(e) arbitrage electionof todeductible use companyinterest specific historical expense loss and payment tax-exempt patterns. interest income Modifications to rules under IRC 265. i. C corporations, including insurance companies, would be required to calculate the amount of interest disallowed under IRC 265 based on single method ii. Disallows interest deduction based on the percentage of the taxpayer s assets comprised of tax exempt obligations iii. Repeal special rule for qualified small issuer tax exempt obligations Reinsurance-Specific Provisions Neal Reinsurance Bill Deferral of tax deductions for reinsurance premiums paid to foreign based affiliates of domestic insurers until the actual insured event occurs. In addition, ceding commissions received and recovered reinsurance will be excluded from income in situations where the premium deduction has been disallowed. 11

12 Health Insurance-Specific Provisions Trump Administration Tax Proposal Repeal Patient Protection and Affordable Care Act ( PPACA ) and the business taxes enacted as part of that legislation. Transition into a territorial system of taxation House GOP Proposal Eliminates net interest expense for businesses Eliminate Corporate AMT - Treatment of AMT credits accumulated not specified Repeal PPACA and all related business taxes enacted as part of that legislation, including: The 2.3% excise tax on covered medical devices, which was suspended for 2016 and 2017 (after originally becoming effective in 2013) and is now scheduled to take effect again in 2018, and The so-called Cadillac tax on high-cost employer-provided health plans, which, after being delayed for two years, is currently set to take effect in CAMP Proposal Special Treatment of BCBS: Repeal special rules for Blue Cross Blue Shield and certain other health organizations. i.e., the 25 percent deduction, the exception from the application of the 20 percent unearned premium haircut, and treatment as stock insurance companies Repeal of exemption from tax for certain insurance companies and co-op health insurance issuers Repeal of credit for employee health insurance expenses of small employers 12

13 Global Insurance Company Considerations Inbound Do foreign parented insurance companies lose some of their competitive advantage over US parented entities? Outbound How will US parented entities react to potentially beneficial tax reform? If a territorial tax regime is enacted, would one of the provisions defer the deduction of outbound premium similar to the Neal Bill? If a cash-flow border adjustable tax is adopted, how does it apply to outbound reinsurance contracts? Could the impact of US tax reform on entities domiciled in low tax jurisdictions drive certain re-domestication to the US? Will we see an uptick in M&A activity in the industry as the value of certain offshore entities is impacted? How will the changes to taxation of foreign insurers doing business in the US (FDAP, ECI, FET, withholding taxes, etc.) impact operating models, structuring, and intercompany cash flows? Will the benefit of risk distribution to the overall insurance marketplace be diminished if outbound reinsurance is not taxadvantaged? Will diversifying risk cost more and drive insurance prices higher? Insurance Industry Landscape Will the benefit of a lower US tax rate and the shift to a territorial system offset the loss of certain tax credits, deductions, and the cost of a one-time deemed repatriation of accumulated earnings? How will insurers plan for a one time deemed repatriation? Will companies take advantage of existing repatriation opportunities (e.g. repatriating PTI, triggering basis collector structures)? What will happen to existing foreign tax credit carryforwards? Will declining US corporate tax rates cause outbound insurers to evaluate global reinsurance arrangements? How will cash-flow the border-adjustable tax impact operating models, structuring, and intercompany cash flows? How will US owned, offshore captive insurers be impacted? 13

14 Reform Readiness 14

15 Tax Reform Readiness Navigating the Uncertainty With the possibility of tax reform on the horizon, companies will need to accurately analyze and assess the potential impact of the anticipated tax proposals. Uncertainty around tax reform may lead to inaction, however, there is... Therefore, US companies may wish to consider... Establish a plan for communicating on a regular basis with key stakeholders in this process Identify those tax expenditures that provide important tax benefits to the company Prioritize those provisions that are most important to the company and implement accordingly Measure the impact of provisions that broaden the tax base and provide territorial exemptions * President Trump, House GOP and Camp proposals As tax reform proposals undoubtedly evolve throughout 2017, it will be important to have an agile approach to analyzing the tax effects of new proposals on business operations. 15

16 ASC 740 / SSAP 101 Considerations Evaluate the impact on: Deferred taxes unfavorable impact for net DTA position, favorable impact for net DTL position Inventory of temporary differences e.g., DTA for interest could be eliminated DTAs for specific tax attributes foreign tax credits (i.e., future availability), AMT credits SSAP 101 Considerations: Potential for reduced surplus due to DTA haircut Paragraph 11.a. admissibility if NOL carryback rules change Risk Based Capital (RBC) calculation Transition rules? Valuation allowance implications Change in net deferred tax position Future projections of income Future effective tax rate (ETR) Other considerations: State tax conformity Disclosures Unfavorable impact for proration of TEI, Section 833(b), Section 199, interest or other business expenses Favorable impact for ACA fee, exempt foreign sales, dividends received and non-passive Subpart F income 16

17 Immediate Tax Reform Planning Considerations Convert to Fiscal Year end to Avoid Transition Year 17

18 Rate Reduction Planning Permanent Cash Savings Tax Reform Proposals Include a Reduction in Corporate Rates Between 10 20% Accounting Method Planning Implemented Prior to Rate Reform May Result in Permanent Rate Reduction for Taxpayers Current Gross DTA Cash Tax Reduction if Deduct in 2017 at 35% Rate Cash Tax Reduction if Deduct in 2018 at 25% Rate Permanent Benefit of Accelerating Deduction into 2017 $100,000,000 $35,000,000 $25,000,000 $10,000,000 Generally, a taxpayer changing its method of accounting for an item of income or expense only shifts the recognition of such items between deferred and current tax expense. The change would typically produce cash tax savings but rarely creates a permanent tax benefit. In taxable years bordering a change in federal corporate tax rates, however, taxpayers can capitalize on a permanent tax savings opportunity by decreasing current tax expense as much as possible in years where a decrease in rates is anticipated. Tax Reform has provided Companies with an opportunity to use accounting method changes which may result in cash tax savings as well as permanent rate savings. Fixed Assets Repair analysis Dispositions / Casualty loss Indirect cost analysis for selfconstructed property Bonus depreciation I.R.C. 174 costs Ready and available/lag Asset reclasses Deductions & Credits Prepaid expenditures Accruals and reserves review Rebate methods Recurring Item Exception Inventory and UNICAP analysis Federal Tax Planning Considerations Revenue Recognition Unbilled revenue on professional services Deferred revenue Disputed revenue Defer advanced payments Captive Insurance & VEBA Consider captive insurance co: o Workers comp o Environmental o FAS 106 o Other Risk Consider prefunding VEBA: o Severance o Training o Vacation Permanent Attribute Planning I.R.C. 199 enhancement Lobbying reviews Meals and entertainment Tax basis reviews (federal and state) Federal Credits and Excise Taxes 18

19 Insurance Specific Expense Acceleration and Revenue Deferral Premiums: Income inclusion review under Treas. Reg that could include Advanced, Multiyear, Fluctuating Risk and Retrospectively Rated contracts Premiums: Unearned premium of life insurance products issued by Property and Casualty companies taxed under section 807 Premiums: Deficiency Reserves review for convertible features in the contract Premiums: Deferred and uncollected life premiums review Premiums: Deferred Acquisition Cost Review Investments: Impairments Dispositions / Worthlessness and loss position review Investments: Separate Account Company Share Percentage, Dividend efficiency review Insurance / Health Reserves: Review of inefficiencies, methodologies, principles based reserving, redundant, disputed claims and previous adjustments Health Insurer: Administrative Services Contract revenue recognition review and IBNR review Health Insurer: Health Insurer Fee review of underlying policies feeding into SHCE for exclusions Health Insurer: Intangible deduction for provider networks, subscriber groups and software Health Insurer: Pharmacy Rebate revenue accrual review to determine if fixed and determinable International: Foreign Currency reviews under Sections 985, 987 and 988 International: Subpart F / E&P / FTC / Section 954(i) reviews Mutual: Policyholder dividend program review 19

20 Contact Information Convert to Fiscal Year end to Avoid Transition Year 20

21 Contact Information Thomas F. Wheeland Partner, BKD St. Louis Brandy L. Shy Director, BKD St. Louis