A threefold coalition of associations representing US property and casualty insurance companies has written a comment letter in response to the Internal Revenue Service’s (IRS’) proposed amendments to related party insurance income (RPII).
Addressed to Lily Batchelder, assistant secretary for tax policy at the Department of Treasury and Charles Rettig, IRS commissioner, the comment letter contends that the IRS’ proposed regulation has inappropriately applied a special rule meant for captive insurers to commercial insurers and reinsurers that would defy the intent of the statute.
The current Section 953(c)(2) creates a special rule for captive insurance companies. This defines RPII to be “any insurance income attributable to a policy of insurance or reinsurance with respect to which the person insured is a US shareholder in the foreign corporation or a related person to such shareholder”.
In January, the IRS released proposed regulations altering the rules for determining and including RPII under Section 953(c), as well as amendments relating to the aggregate treatment of domestic partnerships and S corporations that own stock in passive foreign investment companies (PFICs).
The new section includes two new definitions of “related insured”: a pass-through entity if a related insured owns stock in the foreign corporation indirectly; and a person that is more than 50 per cent owned by the US shareholder of the foreign corporation.
The expanded scope of the latter would include routine transactions between affiliates into the definition of RPII; since affiliates in different jurisdictions are typically 100 per cent owned by the holding company, this satisfies the 50 per cent ownership threshold and a substantial amount of reinsurance transactions would be treated as taxable to US shareholders.
These routine transactions between affiliates are generally performed for the purpose of risk diversification across lines of business and geographies to limit liability on specific risks, stabilise loss experience and protect against catastrophes.
The comment letter explains that these new definitions alter the concept of a “related insured” into one that “significantly expands the definition of RPII and causes routine, non-tax motivated, ordinary insurance transactions to be treated as RPII”.
“The new definition of “related insured” equates routine commercial reinsurance transactions which do not involve tax avoidance motives with those of the captives that were the target of Section 953(c).”
The letter continues: “By applying a rule intended to prevent tax avoidance by captive insurance companies to commercial insurance and reinsurance companies, the proposed regulation is inconsistent with the intent of the statute. The extension of Section 953(c) to commercial reinsurance is unwarranted. It is essential that any new rule make a clear distinction between captives and commercial insurance companies.”
The letter concludes by recommending the IRS does not adopt the new definitions of “related insured”.
The letter is signed by David Pearce, vice president and director of tax policy at the American Property Casualty Insurance Association, Jonathan Rodgers, director of financial and tax policy at the National Association of Mutual Insurance Companies, and Joseph Sieverling, senior vice president and director of financial services at the Reinsurance Association of America.
