Developments Affecting Captives and Non-traditional Risk Transfer Arrangements

Transcription

1 Developments Affecting Captives and Non-traditional Risk Transfer Arrangements Art Koritzinsky, Marsh & McLennan Companies Frederick Krull, Ernst & Young LLP P. Bruce Wright, Dewey & LeBoeuf LLP Jean Baxley, Latham & Watkins LLP, Moderator

2 Overview of Developments Legislation Dodd-Frank Act/NRRA - implications for reinsurance and surplus lines Regulations The series rules and associated issues Audit Activity Cascading Federal Excise Tax (FET) Litigation Concentration cases 2

3 Legislation: The Dodd Frank Act Overview of NRRA Regarding Surplus Lines Non-admitted and Reinsurance Reform Act (Title V, Subtitle B) Institutes single State regulation of surplus lines insurance by the Home State of the insured Definition of Home State Exception for workers compensation coverage Requires States to conform surplus lines eligibility to criteria of NAIC Non-admitted Insurance Model Act Eases surplus lines broker requirements Generally eliminates State due diligence requirements where purchaser is an exempt commercial purchaser Establishes a premium tax rule for surplus lines taxes 3

4 NRRA Premium Tax on Surplus Lines Allows only the Home State to collect premium tax on surplus lines insurance Encourages the States to develop and interstate compact to establish allocation and remittance procedures for State premium taxes NAIC introduced Surplus Lines Insurance Multistate Compliance Compact ( SLIMPACT ) 4

5 Potential Effects of NRRA and Mitigation Strategies For Captives Review Captive Business Plan Confirm business purpose is still relevant Focus on direct placements; the tax does not impact reinsurance transactions Impact of NRRA on SPT and DP Premium Tax Obligations Only the Home State can collect tax Relevant Supreme Court case law is now obsolete Home State can now tax 100% of premium Determine the Economic Impact SPT and DP taxes can range from 0-6% of premium Review economic value of captive program Calculate potential of SPT and DP tax 5

6 Potential Effects of NRRA and Mitigation Strategies For Captives Domicile Review May be able to convert placement from Non-admitted to authorized 30 states currently have captive legislation Consider re-domestication or creation of a branch captive, if state captive legislation allows for it Review and Restructure Insurance Placements Home state is defined for each placement Headquarters and principal place of business, or State with the largest percentage of premium 6

7 Regulations: The Series Rules and Associated Issues Overview of proposed regulations Treas. Reg (a)(5), (e), (f); and Definition of Series Definition of Series Statute Determination of Jurisdiction and Ownership Information Reporting 7

8 The Series Rules and Associated Issues Definition of series A segregated group of assets and liabilities that is established pursuant to a Series Statute by Agreement of a Series Organization Includes: Series LLC; Series Partnership; Series Trust; Protected Cell Company; Segregated Cell Company; Segregated Portfolio Company; or Segregated Account Company Does not include a Life Company s Segregated Asset Account 8

9 The Series Rules and Associated Issues A Series statute is a law of a State or foreign jurisdiction that explicitly provides for the organization or establishment of a Series of a juridical person. The statute must explicitly permit: Member to have rights, powers or duties of the Series; A Series to have separate rights, powers or duties with respect to specified property; and Segregation of Asset and Liabilities Liabilities are walled off from other Series 9

10 The Series Rules and Associated Issues Determining jurisdiction and ownership Jurisdiction is determined by place of organization Ownership is determined by benefits and burdens of ownership Information reporting Annual filing requirements for Series Required form and information still under assessment 10

11 Implications of Series Regulations for Insurance Companies Historic Viewpoint Each Series that qualifies as an insurance company is treated as a separate corporation Domestic Series that do not qualify as an insurance company may be classified as DRE, partnership or corporation Regulations do not apply to foreign Series except for Series in the insurance business 11

12 Open Issues Flipping in and out of insurance status How is insurance status determined? different positions taken Foreign series that do not qualify as insurance Section 953(d) elections Subchapter C issues 12

13 Audit Activity: Federal Excise Tax (FET) Overview of the IRC 4371 Federal Excise Tax (FET) The IRS s position regarding the cascading FET Considerations regarding compliance Controversies 13

14 FET Overview IRC 4371-imposes a tax on transactions between (a) a U.S. insured or insurer, and, (b) a foreign insurer or reinsurer with respect to U.S. risks at a rate of 4% on insurance relating to property causality 1% on life insurance, sickness and accident and annuity contracts 1% on reinsurance U.S. person includes a foreign corporation, partnership or individual who is engaged in a trade or business (ETB) with regard to U.S. risks. IRC 4372(d). 14

15 Liability for, and exceptions to, the FET Tax is imposed on basis of a return by any person who makes, signs, issues or sells the policy, IRC 4374, thus implicating insured, broker and reinsurer. The FET is not applicable to: Effectively connected items. IRC 4373 Non-insurance Elections under IRC 953(c)(3)(c) or IRC 953(d) Treaties UK format (conduit) Standard format No FET exception format Closing agreement, Rev. Proc , C.B

16 The IRS s position regarding the cascading FET Overview of IRS position IRS guidance TAM (Dec. 18, 1995) Rev. Rul , I.R.B. 633 Announcement , I.R.B

17 Cascading FET under Rev. Rul Ruling addresses four scenarios: U.S. corporation insures with non U.S. insurer (no treaty), reinsured with non U.S. reinsurer (no treaty) - 4% + 1% U.S. insurer insures with non U.S. reinsurer (no treaty), reinsured with non U.S. reinsurer (no treaty) - 1% + 1% U.S. corporation insures with non U.S. insurer (qualified FET treaty), reinsured with non U.S. reinsurer (no treaty) - 4% +1% U.S. corporation insures with UK insurer, reinsured (no conduit) with non U.S. reinsurer (no treaty) - 0% + 1% 17

18 Compliance with Cascading FET Calculations of tax based on U.S. risk Actual premiums Formula based on source Post January 31, 2008 Voluntary compliers Non compliers Residents of protected jurisdictions Residents in non-protected jurisdictions 18

19 FET Controversies Audit Activity Prevalence and types of audits Timing and progress of controversies Litigation Issues Jurisdiction if no nexus Treaty provisions Practical Issues Economic burden of tax Payment of the tax Filing of the return (Form 720) 19

20 Litigation: Concentration Cases U.S. Tax Court Rent-a-Center, Inc. & affiliated subs. (Dkt. Nos , ) (11/14/11) Securitas Holdings, Inc. & subs. (Dkt. No ) (12/12/11) Batan Ins. Co. SPC, Ltd. (Dkt. No ) (2/6/12) Darco Insurance Company, Inc. (Dkt. No ) (2/13/12); Dielco Crane Service (Dkt. No ) Vincent Enterprises, Inc. & subs. (Dkt. No ) (continued) Pilgrim s Pride (Dkt. No ) (Dispositive motions due 12/15/11) YRC Worldwide & subs. (Dkt. No ) (Jt. Status due 9/15/11) S&J Supply Co., Inc. (Dkt. No ) Court of Federal Claims Proliance Surgeons (Dkt. No T) (fact discovery deadline 11/14/11; Jt. Status due 7/20/12) U.S. District Court (N.D. Texas) Salty Brine, Inc. (Dkt. No. 5:10-CV C); consolidated cases including K&T Farm, Ltd., Wasson Solid Waste Disposal System, Ltd., Five Star Consolidated Co., Ltd., Thomas & Kidd Oil Production, Ltd., Delta Oil & Gas, Ltd., Del-Tex Hydrocarbons, Ltd. (filed 6/30/10; discovery completed and pretrial motions due 9/28/12) 20

21 Concentration Cases: One Size Does Not Fit All Taxpayers are from across the U.S. and from various industries Small and large tax amounts at issue Captives are domiciled in various jurisdictions, both U.S. and non-u.s. Some cases are 100% brother-sister Direct insurance and reinsurance Various coverages (workers compensation, auto, general liability, professional liability) Guarantees/indemnification from parent/ insured 21

22 Concentration Cases: Issues and Arguments Insurance risk Risk shifting Distribution of risk Are premiums an ordinary, necessary business expense? Is the captive an insurance company? Elections under IRC 953(d), IRC 831(b) 22

23 Concentration Cases: Observations Cases do not present a generic scenario, so a bright line test from courts is unlikely IRS challenges will continue Facts viewed by IRS as abusive Family limited partnerships Use of overseas entities in low or non-tax jurisdictions Overlapping ownership or close association IRS will issue additional guidance Impact of decided cases Is Rev. Rul , C.B. 1348, obsolete? Rulings define safe harbors 23

24 COMMENTS & QUESTIONS? 24

25 Disclaimer Although this presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. This presentation is not created nor designed to address the unique facts or circumstances that may arise in any specific instance. You should not, nor are you authorized to, rely on this content as a source of legal advice. This material does not create any attorney-client relationship between you and the professional firms of Dewey & LeBoeuf LLP, Ernst & Young LLP, Latham & Watkins LLP, and Marsh & McLennan Companies. Copyright 2011 Latham & Watkins LLP. All Rights Reserved. 25