Tax Reform Implementation. American Bar Association Section of Taxation May 11, 2018

Transcription

1 Tax Reform Implementation American Bar Association Section of Taxation May 11, 2018

2 Presenters Pete Bautz, American Council of Life Insurers Howard Stecker, EY Brenda Viehe Naess, Washington Advocates Group Moderator: Lori Robbins, KPMG 2

3 Agenda General Issues for Insurance Companies Life Insurance Tax Issues P&C Insurance Tax Issues International Insurance Tax Issues 3

4 General Issues for Insurance Companies Financial Reporting Tax Reporting Regulatory Capital Repeal of Corporate AMT Life/Nonlife Consolidated Returns Section 163(j) Limits on Businesses Interest Expense Deduction PFIC Definition 4

5 Financial Reporting 2017 issues due to 12/22/17 enactment date Continuing (2018 and forward) issues due to unresolved technical tax matters 5

6 Tax Reporting Income tax and information reporting forms need to be updated Company and third party software must be timely updated to properly report Internal company information gathering and tracking processes may need to be re examined 6

7 Regulatory Capital Both numerator (total capital) and denominator (required capital) of RBC ratio formula contain some after tax measures that were impacted by tax reform Some changes automatic, others require NAIC action 7

8 Repeal of Corporate AMT Application of the 1985 Budget Control Act sequestration to 2018 and subsequent corporate AMT credit refunds 8

9 Life/Nonlife Consolidated Returns Effect on existing regulations of: Repeal of life company operations loss carryback Enactment of indefinite NOL carryforward (subject to income limitations) 9

10 Section 163(j) limits on businesses interest expense deduction Definition of business interest for purposes of determining deduction Computation of deduction on consolidated group basis? 10

11 PFIC Definition Amends exception for qualifying insurance company defined as (i) foreign company would be subject to subchapter L if a domestic company and (ii) applicable insurance liabilities constitute more than 25% of its assets Alternative test 11

12 Life Insurance Tax Issues Reserves Proration DAC Section 807(f) Change in Basis Life Company Operations Loss/NOL Repeal of Section 806 (Small Co. Deduction) Life Settlement Reporting under Section 6050Y 12

13 Reserves Amount of life insurance reserves for any contract is the greater of either the net surrender value of the contract or 92.81% of the reserve determined under the tax reserve method applicable to the contract Tax reserve method generally is the method prescribed by the NAIC and applicable to the contract at the valuation date (not, as under old law, the date the contract was issued) CRVM for life insurance, CARVM for annuities Provided modified but similar rules for life insurance reserves relating to variable contracts Transition rule requires that the difference in the amount of in force reserves computed under the new method versus the old method as of year end 2017 must be taken into account ratably over eight years, beginning with 2018 tax year 13

14 Proration Modified life company proration rules for purposes of determining a company s DRD (general and separate account) and tax exempt interest by setting the company share at 70% and policyholder share at 30% Reduction of general corporate DRD from 70% to 50% means life companies now receive a 35% DRD (50% x 70%) 14

15 DAC Increased DAC tax capitalization rates for annuities (1.75% 2.09%), group insurance (2.05% 2.45%) and other specified insurance contracts (7.7% 9.2%) and generally extended the amortization period from 10 to 15 years Incorrect cross cites for capitalization rate changes Impact on pre 2018 DAC capitalization balances (both 60 and 120 month capitalization) 15

16 Section 807(f) Change in Basis Repealed prior law 10 year spread and defines a reserve change in basis as a change in method of accounting initiated by the taxpayer and made with the consent of the IRS Commissioner Accounting method changes generally are reported in the year of changes (for a net negative adjustment) or four years (for net positive changes) Impact on pre 2018 basis changes (including 2017 basis changes) Treatment of 2018 and subsequent changes in method of computing life insurance reserves 16

17 Life Company Operations Loss (NOL) Repealed life insurance company special operations loss carry back (three years under old law) and carry forward (15 years under old law) Subjects life companies to new net NOL rules applicable to corporations generally (no carryback, indefinite carryforward subject to income limitations) OLD defined in former section 810 as excess of life insurance deductions over life insurance gross income Is description for life insurer losses post 2018 needed or should they now be defined as NOLs? 17

18 Repeal of Section 806 (Small Co. Deduction) Includes repeal of section 806(b) (defining noninsurance business) 18

19 Life Settlement Reporting Section 6050Y Reporting obligations for life insurance contract buyer and insurance company where reportable policy sale Definition of reportable policy sale and effect of interpretation of indirect sales on exceptions to transfer for value rule 19

20 Non Life Tax Issues Loss Reserve Discounting Proration Section 847 Special Estimated Tax Payments Non Life Net Operating Losses 20

21 Loss Reserve Discounting Change in interest rate from specified rate of AFIR to corporate bond yield curve under section 430(h)(2)(D)(i) Uncertainty on what segment of time from the yield curve should be used to compute the rate prior law dictated mid term period 3 year to 9 year Extension of loss payment pattern for long tailed lines of business to maximum of 25 years Transition adjustment (no fresh start) January 1, 2018 beginning reserves revalued using new rules difference between reserves as of 12/31/17 on old and new methodology is spread over eight year period beginning in

22 Proration Changed existing 15% rate to 25%; rate is now tied to change in corporate tax rate in the future so that it produces an effective tax rate of 5.25% (21% * 25%) Change is effective for 2018 and forward 22

23 Section 847 Special Estimated Tax Payments Repealed for tax years beginning after

24 Non Life Net Operating Losses Retained prior law treatment of 2 year carryback and 20 year carryforward Non life NOLs not subject to 80% limitation applied to other NOLs 24

25 International Insurance Tax Issues Transition Tax on deferred foreign E&P Base Erosion Anti Abuse Tax (BEAT) Global Intangible Low Taxed Income (GILTI) Foreign Derived Intangible Income (FDII) 25

26 Transition Tax on Deferred E&P In moving to territorial system, Congress imposed tax on post 1986 deferred earnings and profits of foreign corporations (except PFICs). Rate: 15.5% on illiquid assets and 8% on cash, US Shareholder may elect to spread payment over 8 years Substantial guidance provided already Notice Transition guidance on the repatriation of foreign earnings under section 951(a)(1) as a result of newly enacted section 965. Notice Guidance on earnings calculation under section 951(a)(1) resulting from the section 965 transition tax. Notice Announces planned regulations for the transition tax enacted under section 965, including estimated tax penalty relief. 26

27 Base Erosion Anti Abuse Tax (BEAT) Net of claims payments and ceding commission? For purposes of computing 3% base erosion percentage and base erosion payment, are claims payments and ceding commissions treated as deductible payments or as reductions of gross premiums under Subchapter L? Are domestic companies required to pay BEAT on claims payments and ceding commissions on reinsurance treaties w/ foreign subs and foreign third parties? These payments do not erode the US tax base and may be included in US payee s tax base through GILTI or Subpart F For life reinsurance, is MODCO net of claims payments and ceding commissions? Are Funds Withheld contracts net? 27

28 BEAT Issues Timing? If reinsurance contract is written in 2017, but premiums are actually transferred in 2018, is the premium taxable under BEAT? Also an issue for 2019 and 2026 transition to higher rates. If US insurance company establishes and deducts loss reserves in 2017, but pays the underlying claims in 2018, is the base erosion payment the 2017 establishment of the reserve or the 2018 claims payment? Does reference to a deductible payment paid or accrued alter insurance company accounting? Are all insurance company payments on accrual basis? 28

29 BEAT Issues Is BEAT tax computed at consolidated level or single company level? Base Erosion Percentage is clearly calculated on aggregate basis. Does that rationale extend to tax computation as well? Calculation of BEAT in consolidated return Is computation made at single company and then BEAT payments are added back? Treatment of 953(d) company in consolidated return? How is the denominator measured for purposes of the 3% threshold? Are derivatives gross or net? Nonqualified derivatives? Basket of derivatives? 29

30 BEAT Issues Services Cost Method Exception (SCM Exception) Exception for payment for services eligible for use of services cost method under Code 482 (without regard to the business judgment rule), so long as there is no markup (see Treas. Reg (b)) Can payments be divided between cost component of marked up payments and mark up? If 2 payments are made, is the cost component eligible for exclusion? Senate floor colloquy between Sen. Portman and Chairman Hatch supports exclusion of cost component of marked up payments, at least where taxpayer has separate accounts for each component Conference Report seems to suggest exclusion is not available if mark up is applied to payment 30

31 GILTI (Global Intangible Low Taxed Income) 10% US Shareholder of CFC is subject to current taxation on part of CFC s net income exceeding 10% return on foreign tangible assets Mechanical computation of tangible assets means insurance company s income is likely to be included Does not apply to Subpart F income, but Active Finance Exception excludes most foreign insurance companies from Subpart F Rate: 10.5% until 12/31/2025, and then rises to 13.25% (vs 21% for ordinary income) Corporate SHs eligible for 50% deduction against GILTI amount (37.5% after 2025) 31

32 GILTI GILTI amount: US SH s net CFC tested income over its net deemed tangible income return. Tested income: gross income (wo/ ECI, high taxed amounts, related party dividends) minus deductions allocable to that income CFCs tested income and loss netted at US SH level Net deemed taxable income return: 10% of aggregate of US SH QBAI (Qualified Business Asset Investment = depreciable tangible property used in trade or business) over interest expense Partial FTC = 80% of inclusion percentage ; no carryforward of deemed paid credits; Separate basket for GILTI deemed paid credits; no carryback or carryforward of excess GILTI credits. 32

33 GILTI Issues Typically, Section 953(e) and Active Finance Exception (AFE) exclude insurance companies from Subpart F (if the company writes a majority of same country business), so many insurance companies with global operations are subject to GILTI Many of these subs are in high tax countries, so that GILTI s 80% limit on FTC means that multi national insurance companies are subject to GILTI and the FTCs are limited No carryforward for GILTI credits Did Congress intend for high tax exception to apply only to Subpart F income? Could Treasury extend it to GILTI? Election out of AFE, but broken cross references create uncertainty 33

34 FDII (Foreign Derived Intangible Income) FDII provides lower tax rate for goods and services sold to foreign unrelated parties. US corporation receives a 37.5% deduction on its FDII Exception for Subpart F income and financial services income insurance premiums, insurance services, e.g., actuarial, underwriting, etc. removes most insurance CFC income from FDII 34

35 Thank you 35