The draft FATCA regulations released on 8 February 2012 incorporate some of the changes and exclusions that the insurance industry has been lobbying to include. However, it is apparent the exclusions and reliefs do not go as far as many were hoping.
Although there are now exclusions for life protection business, as well as some pension and other tax efficient savings products, insurers will need to consider individual product terms and conditions in detail to determine whether they meet the relevant conditions for exclusion.
Coinciding with the draft regulations release, a joint statement was issued by the UK, US, France, Germany, Spain and Italy on information sharing between these jurisdictions. It seems this may lead the way to simplified reporting requirements for entities in these jurisdictions. However, it also opens the door for a multi-territory FATCA regime with reciprocity on information sharing, as between the EU territories covered.
Highlighted below are the key points for the insurance sector arising from these recent releases:
- Only “cash value” insurance contracts and annuity contracts are within the scope of FATCA. Companies should consider whether their products have a “cash value”, as specifically defined in the draft regulations, as there may well be “boundary" issues.
- There are exclusions intended to exempt "risk products" and a specific exclusion for “term life insurance contracts” which is intended to take out life protection products. Overall, the insurance savings business will be squarely caught by FATCA unless certain specific exclusions apply.
- The industry has lobbied hard for exclusions for regulated local retirement savings products. The draft regulations do exclude certain group and individual “retirement and pension accounts”; however there are eligibility conditions. Individual retirement products in jurisdictions where individuals may contribute more than 50,000 $ a year to personal (rather than group products) will remain within scope of FATCA; other FATCA criteria may also be more onerous than local requirements.
- Both entity and individual pre-existing insurance accounts with an aggregate balance of less than 250,000 $ are excluded from the identification and documentation requirement (there is a 50,000 $ de minimis for individually held non-insurance accounts, so this is clearly an insurance-specific relaxation).
The carve-outs for insurers provided in the draft regulations are not as broad as hoped for:
- Exemption for general insurance and life protection products
- Not all regulated retirement savings products will be exempt
- Pre-existing insurance policies below 250,000 $ are outside of scope of the documentation review
- Limited other exclusions
There are exclusions for “deemed compliant” FFIs, however these do not appear broad enough to be of significant use to the majority of insurance companies.
Pension management companies may be classified as NFFEs – if all their pension scheme customers fall within one of the financial account exemptions.
There is an exclusion from withholding, including passthru withholding, for certain “grandfathered obligations” which will cover some insurance policies in effect on 1 January 2013.
More reliance can be placed on existing customer take-on procedures for documentation of new policies. However insurers will still need to consider the systems impact of the required review of all information collected.
Insurers will still need to consider backbook remediation, however the increased 250,000 $ threshold may make this less onerous.
Certain areas of the draft regulations still do not translate well for insurers:
- FFI agreements
- Policy valuation
- Foreign passthru payments
Insurers will need to ensure that where the customer relationship and information is obtained, held or managed by a third party, that they have sufficient information from and assurance over those third party processes to ensure their own FATCA compliance (e.g., third party insurance agents).