On December 22, 2017, the President signed into law H.R. 1, known generally as the Tax Cuts and Jobs Act (the “TCJA”), which makes widespread changes to the Internal Revenue Code. The TCJA includes a number of provisions that impact the taxation of the insurance and reinsurance sector, particularly in the context of cross-border affiliate insurance and reinsurance.
The TCJA adds new Section 59A to the Code, designed to prevent the erosion of the United States tax base by U.S. taxpayers through the use of deductible payments (“base erosion payments”) made to related non-U.S. taxpayers. Some portion of insurance and reinsurance premiums paid to related non-U.S. persons may trigger the application of these new provisions, thus potentially making the implementation of a program utilizing such insurance/reinsurance more expensive for U.S. taxpayers.1
New Section 59A imposes a form of alternative minimum tax on U.S. and non-U.S. corporations that reduce their U.S. income tax liability by making such base erosion payments. This new provision is applicable generally to U.S. taxpayer corporations with average annual gross receipts for their most recent three-year taxable period equal to at least $500 million, whose base erosion payments for the then-current year equal or exceed a specified percentage (generally 3%) of the amount of their total deductions for such year. Subject taxpayers are required to pay a minimum tax equal to 10%2 of their modified taxable income calculated without the benefit of any deduction (including potentially net operating loss deductions) attributable to their base erosion payments. The new provision imposes an additional tax equal to the excess of this minimum tax amount over the taxpayer’s regular tax liability (calculated after certain tax credit entitlements).
A non-U.S. person receiving any such payment is treated as related to the payor for the purpose of implementing the relationship requirement referenced above if the foreign person either (i) owns 25% or more of the payor, (ii) is related to the payor or any 25% owner of the payor under Code Sections 267 or 707, or (iii) is related to the payor under the transfer pricing rules of Section 482.
Taxpayers that engage in significant cross-border affiliate insurance or reinsurance programs should assess the impact of these new provisions on such programs. The payment of insurance or reinsurance premiums to a related non-U.S. person would likely qualify as base erosion payments and subject such taxpayer to this additional tax.
Restructuring these programs, including potentially to elect to have the non-U.S. insurers/reinsurers treated as U.S. persons under Section 953(d) of the Code, may be required to maintain economic efficiency. In this regard, taxpayers should also take into account certain other insurance-related changes implemented by the TCJA (including changes made to the calculation of insurance reserves), and should also note that cross-border premiums appear to continue to be subject to the Code Section 4371 federal excise tax on certain cross-border insurance.
1 As a historical matter, prior proposed legislation introduced over the past few years by Senator Mark Warren (D-VA) and Representative Richard Neal (D-MA) addressed this concern with respect to cross-border reinsurance premiums by deferring a deduction for the premiums related to such coverage until the insured event occurs. The current inclusion of insurance premiums within the base erosion provisions of the TCJA may be an offshoot of these prior proposals.
2 For the first year that the new provisions apply, this rate is reduced to 5%. For tax years beginning after 2025, this rate is increased to 12.5%.