Session 1, Taxation Section Breakfast. Moderator: Brian McBride, FSA, MAAA. Presenters: Graham Green Ivan Thomann

Transcription

1 Session 1, Taxation Section Breakfast Moderator: Brian McBride, FSA, MAAA Presenters: Graham Green Ivan Thomann

2 2016 Valuation Actuary Symposium Moderator: Brian McBride Kansas City Life Insurance Company Presenters: Graham R. Green Sutherland Asbill & Brennan LLP Ivan A. Thomann KPMG LLP Section 1: Taxation Section Washington Update August 29, 2016

3 Disclaimer This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. 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 sessions are audiorecorded and may be published in various media, including print, audio and video formats without further notice. The views expressed by the presenters are not necessarily those of Kansas City Life Insurance Company, KPMG LLP, or of Sutherland, Asbill & Brennan LLP. 2

4 Agenda LB&I Reorganization Tax Reform 3

5 LB&I Reorganization 4

6 LB&I Reorganization Moving away from Coordinated Industry Case designation system Broader risk-based approach to audit multinational companies Issue/risk based plan; not based on size of taxpayer Not going to stop continuous examination of the largest taxpayers (but there will be decreases here) CAP program may become a lighter touch or may end entirely No new taxpayers are being accepted into CAP Some taxpayers are being removed from CAP Exam selection process is centralized and focused around highest compliance risks using data analytics Continual update of risk-assessment criteria Multiple feedback mechanisms to provide central selection process with insight into outcomes 5

7 Campaigns Identified by centralized risk assessments A plan focused on the right issues, using the right resources, and using the right combination of treatment streams to achieve the intended outcomes. Variety of approaches over 3-5 years to fully address an audit concern (example: OVDI) Soft letter to allow taxpayers to self-correct, followed by enforcement Pre-identification of the most egregious issues at a particular taxpayer Agents not precluded from identifying more issues on audit Points of entry of different agents at a particular taxpayer are staggered; closure date keyed to last issue to be resolved 6

8 The Four Pillars Flexible, well-trained workforce Selection of better work Tailored treatments Integrated feedback 7

9 IRS Pub New IRS LB&I Examination Process publication released Feb. 26, 2016, effective May 1, 2016 The IRS updated the Internal Revenue Manual (section 4.46) to reflect Pub Further changes are anticipated New rules for informal refund claims Must be presented by taxpayer within 30 days of opening conference Thereafter formal refund claim (e.g., amended return) required Staffing of audit team Case manager Issue manager 8

10 LB&I Organization c LB&I Commissioner Douglas O Donnell Deputy Commissioner (Domestic) Sergio Arellano (Act) Deputy Commissioner (International) Dave Horton (Act) Shared Support Susan Latham Pre-Filing & Technical Guid. Tina Meaux Communications, Technology & Media Assistant Deputy Commissioner (International) Financial Services International Business Compliance Global High Wealth Heavy Manufacturing & Pharmaceutical International Individual Compliance Transfer Pricing Operations Natural Resources & Construction Retailers, Food, Transportation & Healthcare 9 9

11 LB&I Organization 2016 LB&I Commissioner Douglas O Donnell Deputy Commissioner Rosemary Sereti 12 direct reports to Deputy Commissioner No direct reports to Assistant Deputy Commissioner (International) Assistant Deputy Comm. (Compliance Integration) David Horton Assistant Deputy Commissioner (International) Theodore Setzer Director, Program & Business Solutions Susan Latham Division Counsel Thomas Kane Director Data Mgt. William Holmes Director Compliance Planning and Analytics Christopher Larson Director Technology and Program Solutions Kathryn Greene (Acting) Director Resource Solutions Keith Walker Conduct Examinations & Participate in Identifying Campaigns Northeastern (New York City) Barbara Harris Western (Oakland CA) + Global High Wealth Kimberly Edwards Central (Houston TX) Tina Meaux Eastern (Downer s Grove IL) Lavena Williams Passthrough Entities Cheryl Claybough Enterprise Activities (including Financial Institutions and Products, Corporate, Credits & Penalties) Kathy Robbins Cross-Border Activities John Hinding Withholding & International and Individual Compliance Pamela Drenthe Treaty & Transfer Pricing Operations Sharon Porter Study Compliance issues, Suggest Campaigns, Develop Training & Audit Tools & Technical Content, Field Support 10 10

12 Geographic Compliance Areas Western (Oakland CA) Kimberly Edwards Central (Houston TX) Tina Meaux Eastern (Downer s Grove IL) Lavena Williams Northeastern (New York City) Barbara Harris DFO West (AK, HI, WA, OR, ID, MT, WY, CA, NV) Donald Sniezek (Act) DFO South Central (NE, KS, OK, TX, MO, AR, LA) Margie Maxwell (Act) DFO Southeast (Southern IN, Southern OH, KY, TN, NC, SC, GA, AL, MS, FL) John Hinman (Act) DFO North Atlantic (ME, VT, NH, MA, RI, CT, NYC) Catherine Jones DFO Southwest (UT, CO, AZ, NM) Paul Curtis Computer Audit Specialists DFO North Central (ND, SD, MN, IA) Katheryn Houston Engineers DFO Great Lakes Northern IN, Northern OH, IL WI, MI) Stephen Whiteaker DFO Mid-Atlantic (NY, PA, DE, WV, DC, MD, VA) Dennis Figg Global High Wealth Computation Specialists 11

13 Geographic Compliance Areas 12

14 Subject-Matter Areas Director Passthrough Entities Cheryl Claybough Deputy Director Passthrough Entities Clifford Scherwinski Director Enterprise Activities Kathy Robbins Director Financial Institutions & Products Gloria Sullivan Director Cross-Border Activities John Hinding DFO East Orrin Byrd DFO West Jolanta Sander Director Withholding & International and Individual Compliance Pamela Drenthe DFO Foreign Payments Johanna McGeady- Murphy Treaty & Transfer Pricing Compliance Sharon Porter DFO Transfer Pricing Cheryl Teifer Economists Promoter Program Senior Advisor Elizabeth Wagner Financial Products Banks, Insurance, RICs, REITs, REMICs DFO International Individual Compliance Elise Gardner Director APA & Mutual Agreement Hareesh Dhawale Director Treaty Administration Deborah Palacheck Affordable Care Act Director Corporate/Credit Holly Paz Treaty Assistance & Interpretation Exchange of Information Corporate Issues & Credits Joint International Tax Shelter Information Center Penalties 13

15 Noteworthy: LB&I In Flux Greater volume of information reporting Affordable Care Act Offshore accounts FATCA information BEPS Common Reporting Standard and Exchange of Information LB&I Staffing 2009 staff 7, staff 5,400 Loss by attrition, staffing now uneven, many acting managers 14

16 Noteworthy: Pre-filing agreements In addition to closing CAP to new entrants, the IRS is also making Pre-Filing Agreements ( PFAs ) less attractive PFA fee was $50,000 prior to June 3, 2016 PFA Fee Increased to $134,300 for requests from June 3, 2016 to December 31, 2016 PFA Fee Increasing to $218,600 for requests submitted after December 31, 2016 Increase in PFA fees is consistent with IRS moving away from devoting resources to individual taxpayers in favor of campaigns 15

17 Noteworthy: New IDR Process Implemented Jan. 20, 2015 Issue-focused IDR Draft shared with taxpayer Timeframe for response mutually agreed Notification whether response is sufficient Delinquent/incomplete IDR responses trigger a mandatory pre-summons letter and eventually summons Summons enforcement still up to DOJ Implementation characterized as a little bumpy but smoothing out 16

18 Noteworthy: Appeals Judicial Attitude and Culture (AJAC) Interim Guidance issued July 2013, Phase II implemented July 2014 Appeals will not investigate facts not provided to Exam. IDR requesting agreement with the facts New facts presented at Appeals which require analysis or investigation will cause the case to be sent back to Exam. Appeals will not raise new issues not raised by Exam, or re-open issues resolved at Exam. 17

19 Questions/Uncertainties Reduction in number of taxpayers under continuous audit Future of CAP Future campaigns, including captive insurance Taxpayer experience with the interaction of horizontal and vertical elements of reorganized LB&I Interaction with AJAC 18

20 Tax Reform 19

21 Tax Reform Background of Current Tax Reform Effort The Camp Draft (February 28, 2014) Summary of Key Insurance Provisions Summary of Key Non-Insurance Provisions Ways & Means Blueprint (June 24, 2016) Modernization of Derivatives Tax Act (May 2016) 20

22 Background It has been 30 years since Congress last reformed and simplified the IRC. For life insurance companies, the last major reforms occurred 32 years ago. Congress has continued to amend the tax law over that time, adding back the complexity it removed and adding even more. The number of temporary provisions has increased, so that today there are over 50 so-called extenders that need to be re-enacted periodically, adding significant uncertainty to tax planning for corporations. More business is done through non-corporate form, such as partnerships and LLCs, than in 1986, but the tax laws have not kept pace with the changes in business operating form. 21

23 Background The economy has changed dramatically since 1986, with economic globalization expanding, while the U.S. tax laws have remained relatively static. The U.S. federal corporate tax rate is 35%, one of the highest statutory rates in the world. The U.S. still taxes corporations on worldwide income, while much of the world has moved to a territorial tax system. More and more companies are making the decision to undertake inversion transactions, which has attracted significant White House and Congressional attention. 22

24 Background Comprehensive tax reform takes a long time to achieve, although Congress and the White House have been busy in recent years. Highly politicized process, particularly in recent times Has led to unilateral actions by Treasury and IRS to address certain items (see, e.g., Partnership Audit rule changes, anti-inversion rules introduced in recent years, and section 385 regulations) House Ways & Means and Senate Finance Committees have: Held dozens of tax reform hearings; and Released discussions drafts focused on international tax, corporate accounting issues, small business, financial products, and tax administration between 2011 and Former House Ways & Means Chairman Dave Camp released a draft comprehensive tax reform proposal in February 2014, that covered individual, corporate, and international tax reform. Ways & Means Blueprint released June 24,

25 Camp Draft On February 28, 2014, Former House Ways & Means Chairman Dave Camp released a discussion draft of a comprehensive tax reform bill. Rate reduction was a major goal of the draft. Individual tax rate were reduced to two brackets, 10% and 25%, with a 10% high income surcharge. The corporate tax rate was reduced to 25%, but this rate reduction phased in over 5 years. The draft moves towards a territorial tax system with strong base erosion provisions. The draft includes substantial changes to the tax treatment of insurance companies as well as sweeping changes to corporate and individual tax rules. 24

26 Camp Draft Insurance Proposals 25

27 Camp Draft In addition to proposals specifically targeting the insurance industry, a number of proposals that apply to all affected corporations would have a dramatic impact on the insurance industry. These proposals include: Repeal of the corporate AMT and allowance of existing AMT credits Amortization of 50% of advertising expenses (with no exception for insurance companies) Repeal of like-kind exchanges Inclusion of market discount in income currently (which repeals long-standing insurance company treatment) Modifications to the low-income housing tax credit Limitations on deduction of NOLs, including harmonization of life insurance operations loss deduction Modification of hedging rules Requires use of 5-year distribution on most distributions of qualified plans after the death of the owner The bank tax, i.e., a surcharge on certain financial institutions, including some insurance companies 26

28 Ways & Means Blueprint Published June 24, 2016 Different approach as compared to Camp Discussion Draft No statutory language and no project revenue impacts provided Starting point for Republican-led attempts at tax reform, depending on outcome of elections in fall? Simpler, flatter, and fairer Simplify the IRC Eliminate the AMT for individuals and corporations Consolidate standard deduction and personal exemptions into a larger standard deduction Consolidate Child Tax Credit and Personal Exemption for children and dependents into a larger Child and Dependent Tax Credit Flatten rates Consolidate seven existing tax brackets for individuals into three brackets 12% / 25% / 33% Lower rates Lower highest individual income tax rate from 39.6% to 33% Expand standard deduction and personal exemptions to increase the number of non-filers Lower corporate tax rate to 20% 27

29 Ways & Means Blueprint Individual Income Tax Rates 28