New IRS Draft Regs Might Bite Multinational Life Insurers

Part of the IRS headquarters building (Photo: Allison Bell/TA)

The Internal Revenue Services seems to be hinting that the new Base-Erosion Anti-Abuse Tax (BEAT) could hit some multinational life insurers hard — but might be something life insurers can work around, if they study the BEAT rules carefully.

The IRS has sketched out what appears to be a maze-like BEAT framework in a new set of draft BEAT regulations released today.

Members of Congress put the BEAT provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) in an effort to rein in big, multinational companies that try to reduce income tax bills by pushing revenue from one country to another.

The regulations are supposed to apply to multinational companies with more than $500 million per year in annual revenue that get a high percentage of their tax deductions from transactions that, to the BEAT drafters, looked like transactions designed mainly to reduce the companies' taxable income, by moving money from corporate affiliate to another.

Corporate accountants tend to see those transactions as clever, efficient strategies for increasing profits by holding tax costs down.

Critics say the transactions may "erode a country's tax base," or reduce the amount of corporate income the country can tax.

Budget analysts at the Joint Committee on Taxation estimated in November 2017 that the BEAT provision might raise $3.9 billion in tax revenue in 2018, and $123.5 billion over the 10-year period from 2018 through 2027.

The budget analysts did not show much of the revenue they thought would come from life insurers and other insurers.

Analysts at KPMG noted in December 2017, in a review of TCJA insurance provisions, that House and Senate negotiators added insurance and reinsurance provisions to the law when they were hammering out the "conference report" version of the bill, or the version that reconciles differences between the House version of legislation and the Senate version.

The KPMG analysts predicted that a provision referring to "related-party cross border reinsurance" would have a significant impact on large segments of the insurance market.

In the new draft regulations, IRS officials note that the "base erosion payment" calculations will include "premiums or other considerations paid or accrued for reinsurance."

The calculations could also include "a payment resulting in a reduction of the gross receipts of the taxpayer that is with respect to certain surrogate foreign corporations or related foreign persons," according to the preamble, or introduction, to the regulations.

In the language of the draft regulations themselves, the IRS states that a "base erosion tax benefit," or tax break that reduces the income that the IRS can tax, may refer to "any reduction … in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity insurance, or any deduction … from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid for reinsurance."

A company may end up actually having to pay a "base erosion minimum tax amount," or BEMTA, if it uses base erosion payments to cut its U.S. taxable income sharply.

Here's how the IRS describes the calculation of the BEMTA amount in the preamble:

Generally, the taxpayer's BEMTA equals the excess of (1) the applicable tax rate for the taxable year ("BEAT rate") multiplied by the taxpayer's modified taxable income for the taxable year over (2) the taxpayer's adjustedregular tax liability for that year.