SSAP No. 101: Issues to consider

Transcription

1 SSAP No. 101: Issues to consider Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.

2 Agenda 1) General observations 2) Valuation allowance considerations 3) DTA admissibility part 1 4) DTA admissibility part 2 5) DTA admissibility part 3 6) Tax loss contingencies 7) Other considerations 8) Best practices 6

3 Section one GENERAL OBSERVATIONS

4 General observations SSAP 101 Golden Rule ASSUME NOTHING 8

5 General observations 1) Labor intensive Increased recordkeeping and detail Analytical review Template development 2) Distinction between life and non-life companies important 3) Creates added complexity in surplus and dividend planning 9

6 Section two VALUATION ALLOWANCE CONSIDERATIONS

7 Valuation allowance considerations Valuation allowance (VA) More-likely-than-not (MLTN) that some portion or all of DTA will not be realized > MLTN is a likelihood of more than 50 percent > Based on weight of all available evidence Separate company, reporting entity basis 11

8 Valuation allowance considerations VA utilized strictly to calculate the adjusted gross DTA > Consider VA before DTA admissibility test Gross deferred tax asset - Valuation allowance = Adjusted gross deferred tax asset VA results in a reduction of the gross DTA > Not a statutory valuation allowance reserve within the financial statements > Change in VA reflected in statutory rate reconciliation 12

9 Section three DTA ADMISSIBILITY PART 1 (PARAGRAPH 11.A.)

10 Life versus non-life Important to distinguish between life and non-life companies Different carryback periods: Life companies Non-life companies 3 year ordinary carryback 2 year ordinary carryback 3 year capital carryback 3 year capital carryback How is life versus non-life determined? > Annual statement versus tax return 14

11 Hypothetical NOLs Nonlife Reporting Entity 12/31/14 Reporting Year Ordinary loss carryback Taxes paid Taxes paid Estimated taxes paid One-year reversals (hypothetical loss) Two-year reversals (hypothetical loss) Three-year reversals (hypothetical loss) Capital loss carryback Legend = 2015 capital loss carrybacks = 2015 ordinary loss carrybacks = 2016 capital loss carrybacks = 2016 ordinary loss carrybacks = 2017 capital loss carrybacks 16

12 Tax character Tax character is important A nonlife entity has $100 ordinary DTA that will reverse in 2015 > What can be admitted under 11.a? Carryback years Ordinary taxes recoverable Capital taxes recoverable 2014 $30 $ $35 $10 Total $65 $35 > $65 ordinary taxes and $35 capital taxes can be recovered > Remember: Ordinary DTAs can be admitted based on capital taxes recoverable Capital DTAs cannot be admitted based on ordinary taxes recoverable 17

13 Reversal patterns Review reversal patterns annually Keep gross (not tax effected) Review impact of tax planning strategies Remember nonadmitted assets 18

14 Determination of reversal patterns Loss reserve discounting > Look at loss payment patterns Unearned premium reserve > Check annual statement to see if any UPR earned after 1 year Credits > General business (i.e. affordable housing), foreign tax, alternative minimum tax (AMT) > Determine when credits will be utilized > Consider ordering rules Supporting documentation and data 19

15 Considerations Avoid netting DTAs and DTLs > Ex: Sec 807(f) adjustments AMT considerations > Taxes recoverable in carryback years can be limited if loss carrybacks trigger AMT Tax loss contingency considerations > Impact of releases of tax loss contingencies > RAR adjustments Merger and acquisition considerations > Pre- versus post-acquisition tax provision matters > Recovery of prior taxes paid in accordance with IRS rules & regs 20

16 Taxes recoverable Tax return basis, not taxes recorded on financial statements DTA admissibility under 11.a. > Footnote 2, SSAP 101 > Taxes paid is maximum amount that can be admitted under 11.a. > May not exceed the amount that the entity could reasonably expect to have refunded by its parent. Consolidated return issues > Hypothetical NOL calculations 21

17 Tax sharing agreement Tax sharing agreement (TSA) > Benefits of loss versus separate entity > Systematic, rational and consistent approach required > 12.c. taxes recoverable may not exceed amount the reporting entity could reasonably expect to have refunded by parent > Q&A 8.2 taxes paid by reporting entity represent maximum admissible DTAs; amount can be reduced pursuant to TSA > Must settle taxes timely > TSA can hurt or be neutral for admissibility calculation 22

18 Tax sharing agreement Example 1 > LifeCo is a member of HoldCo s consolidated group > LifeCo reported taxable income of $1 mil in each of last 3 years > Under TSA, LifeCo paid its parent $350,000 for each of last 3 years > LifeCo reports a $3 mil loss for the current year > Holdco and subs reported consolidated losses in each of last 3 years and would not be able to obtain tax refunds by filing carryback claims to any of those years (Forms 1139) > TSA provides that tax refunds are allocated to the entities that had losses which resulted in the claim > LifeCo would not be able to admit DTAs under 11.a. based on the taxes it paid to HoldCo in prior 3 years 23

19 Tax sharing agreement Example 2 > LifeCo is a member of HoldCo s consolidated group > LifeCo reported taxable loss of $1 mil in each of last 3 years > LifeCo reports a $3 mil loss for the current year > HoldCo can use LifeCo s current NOL to offset income of other subsidiaries. > Under TSA, LifeCo gets paid by parent if the consolidated group can utilize LifeCo s losses > LifeCo has a current year benefit / receivable for its $3 mil loss > No impact on DTAs / Admissibility from TSA 24

20 Section four DTA ADMISSIBILITY PART 2 (PARAGRAPH 11.B.)

21 RBC/Surplus limitations Three-part comparison Lesser of: > Remaining gross DTA that is reversing within prescribed period > Amount expected to be realized > Stated percentage of adjusted capital and surplus Know which Realization Threshold Limitation applies > Contingent upon ExDTA RBC ACL ratio > 0 yrs / 0% or 1 yr / 10% or 3 yrs / 15% > Full 3-yr / 15% requires ratio of more than 300% > Adjusted capital and surplus determined as of current period > Know ExDTA ACL RBC percentage 27

22 Expected to be realized Expected to be realized (with and without calculations) > Inherently subjective > Consolidated groups that don t forecast on a separate entity basis > Reversal patterns consistent with 11.a. Projections > Consistency with other projections (i.e. board, ratings agencies, regulators) > Explanation of differences tax planning strategies > History of strong forecasting? 28

23 Capital and surplus Current year capital and surplus difficulties Draft capital and surplus calculation Changes between threshold limitations Audit adjustments not accounted for in annual statements 29

24 Section five DTA ADMISSIBILITY PART 3 (PARAGRAPH 11.C.)

25 Considerations Practical considerations related to scheduling Relationship between valuation allowance and 11.c. Character considerations Consistency from year to year 31

26 Indefinite lived intangible Example: Mis-matched DTA / DTL > LifeCo has DTA for tax intangible related to state licenses that reverses over next 15 years > LifeCo can admit DTA for intangible that reverses over the next 3 years under 11.a. > LifeCo s only DTL is for book basis of these state licenses. However, this DTL is not expected to reverse in the foreseeable future. Can LifeCo admit the DTA for tax-basis intangible that reverses beyond 3 years under 11.c.? If LifeCo has large NOLs and determines a valuation allowance is necessary, does the valuation allowance bring the net DTA balance to $0? What would impact be if LifeCo s policy were to net as 1 DTA/DTL? 32

27 Section six TAX LOSS CONTINGENCIES

28 Tax loss contingencies SSAP 101 Paragraph 3.a. > Establishes more-likely-than-not and reasonably estimated criterion > State income tax loss contingencies accounted for under an unmodified, or probable and reasonably estimated criterion Tax loss contingencies > Presumed that the reporting entity will be examined by the relevant taxing authority that has full knowledge of all relevant information > If the estimated tax loss contingency is greater than 50% of the tax benefit originally recognized, the tax loss contingency recorded equal to 100% of the original benefit recognized 34

29 Tax loss contingencies Gross-up considerations > Tax loss contingencies related to temporary differences > Triggering event Notice of proposed adjustment Information document request > Possible surplus impact 35

30 Section seven OTHER CONSIDERATIONS

31 Surplus considerations Review surplus for: > Items that affect tax return > Prior period adjustments Deferred components adjusted through surplus: > Change in net deferred tax asset > Change in nonadmitted asset > Change in unrealized gain/(loss) > Prior period adjustments > Foreign exchange gain/(loss) 37

32 AMT considerations Current calculation > When coming out of NOLs, remember AMT NOL limited to 90% of AMTI > Creates AMT credit carryforward Admissibility calculation > Effect of AMT on carryback potential > Reversals of AMT credit carryforwards > Utilization of AMT credit in with and without calculation May be more than current / deferred flip > DTA may not be admissible 38

33 Effective tax rate reconciliation Performed on total basis, not just current Current taxes include both ordinary and capital taxes Includes > Change in gross DTA related to statement of operations > Change in nonadmitted assets included in deferred inventory Final check to make sure tax provision works 39

34 Current tax receivable Verify components of ending balance > Not just a rollforward of prior year end balance Analyze all components for admissibility > Check current receivable for admissibility > Not just deferred tax asset Example > Under TSA, entity projected tax benefit in 2013 at provision > Set up current tax receivable from parent > 2013 tax return filed 9/15/2014 > At 12/31/2014, receivable from parent still outstanding > Should the receivable be nonadmitted? 40

35 Section eight BEST PRACTICES

36 Best practices Before year end 1) Don t rely solely on mechanical formulas 2) Build in cross-checks/proofs within template 3) Confirm expectations regarding exdta ACL RBC percentages before quarter close 4) Confirm expectations regarding capital and surplus before quarter close 43

37 Best practices During provision 1) Use rate reconciliation to verify total tax - Not useful in assessing accuracy of current expense 2) Compare reversal patterns from year to year 3) Review draft financial statements before calculation is final 4) Perform high-level analysis of tax footnote 44

38 Best practices Planning 1) Be aware of changes expected in taxable income - Separate company and consolidated group 2) Be aware of amended returns, RARs, etc. that could change prior year taxes paid under paragraph 11.a. - Consider gross-up for temporary tax loss contingencies 45

39 Best practices Planning 3) Understand impact that affiliates entering or leaving group will have on taxes recoverable 4) Analyze potential changes in admissibility in future quarters - Determine if significant increases or decreases are anticipated in capital and surplus, and RBC percentages 46

40 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan, or arrangement to any other party. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought Baker Tilly Virchow Krause, LLP 48