The Impact of FATCA on Non-U.S. Insurance Companies
Global financial services industry
The final regulations for Foreign Account Tax Compliance Act (“FATCA”) provide important detail and clarification regarding the implementation of the FATCA requirements that could significantly impact Non-U.S. Insurance companies. The regulations attempt to coordinate with both the current information reporting and withholding rules as well as the new Intergovermental Agreements (“IGAs”). The IGAs are agreements between the IRS and the tax authorities of other jurisdictions that enable FATCA implementation within the foreign jurisdiction. Two different model IGAs have been drafted with different reporting and registration mechanisms including a reciprocal version of the Model 1 agreement that provides for reporting from the U.S. to the foreign jurisdiction.
Enacted in 2010, FATCA requires foreign financial institutions (“FFIs”) to report the identities of their U.S. accountholders to the IRS. Failure to comply results in the imposition of a 30% withholding tax levied on any payment of U.S. source income to the non-compliant FFI. To avoid the tax, FFIs must enter into a formal FFI agreement with the IRS to share the identities of U.S. account and asset holders, or comply with the requirements of an IGA, if applicable. Unless exempted, other non-financial foreign entities (“NFFEs”) seeking to avoid the tax will be required to provide information regarding certain of their U.S. owners to withholding agents.
The final regulations released on January 17, 2013 provide exceptions and exclusions to the withholding requirements and address many of the concerns raised after the release of the proposed regulations in February 2012. The regulations also suggest a broader framework of international cooperation seeking to ease challenges of FATCA compliance on foreign entities. Moreover, the regulations attempt to harmonize many of the FATCA requirements with the model IGAs. The U.S. government is still negotiating with several countries around the world to conclude IGAs. In addition, the regulations summarize the simplified administrative approach to registering and entering into an FFI agreement with the IRS through the “FATCA Registration Portal”. The IRS released a draft of Form 8957, Foreign Account Tax Compliance Act Registration. While paper registration will be permitted, the IRS strongly encourages all FFIs to register online.
Overall, the final regulations along with Notice 2013-43 have eased some of FATCA’s compliance deadlines; however, insurers that are impacted still may need to undertake substantial work to overcome any implementation challenges. Insurance companies should begin now to analyze FATCA’s implications on processes, systems, and business relationships.
The final regulations attempt to simplify a number of definitions concerning insurance companies to make the rules easier to comprehend. However, the definitions still leave some room for judgment and interpretation and may raise challenges to apply consistently for organizations with global operations.
“Compliance has become a top priority for foreign insurance companies given the increasing regulatory burden and push by regulators for additional transparency. The new FATCA rules are far-reaching, and may permanently impact many aspects of the entire insurance operations lifecycle.”
The final regulations expand the definition of FFI to include a “specified insurance company” defined as an insurance company, or a holding company that is a member of an expanded affiliated group that includes an insurance company, and the insurance company or holding company issues or is obligated to make payments with respect to cash value insurance or annuity contracts. The final regulations define an insurance company as an entity or arrangement “regulated as an insurance business under the laws, regulations, or practices of any jurisdiction in which the company operates or does business” and has gross income arising from insurance activities that exceed 50% of its total gross income, or alternatively, has assets related to insurance activities that exceed 50% of its total assets. The notable change from the insurance company definition found in the proposed regulations is the use of local law to determine whether the entity is an insurance company.
FATCA defines a cash value contract as an insurance contract (other than a reinsurance contract between two insurance companies or a term life insurance contract) that has an aggregate cash value exceeding $50,000 at any time during the calendar year. If an insurance company limits cash value to under $50,000, it can effectively be excluded from the definition of an FFI unless it satisfies another FFI category. However, if the cash value of any of its insurance contracts can vary and may eventually exceed $50,000, the insurance company should carefully consider whether it should classify itself as an FFI.
Certain term life insurance contracts are exempted from the definition of a financial account subject to FATCA provided that (i) the periodic premiums are level and paid at least annually during the period of the contract or until the insured attains age 90, (ii) the contract has no contract value that any person can access without terminating the contract, and (iii) the amount payable upon cancellation or termination of the contract does not exceed the aggregate premiums paid for the contract less the sum of mortality, morbidity and expense charges. The final regulations specifically exclude contracts “held by a transferee for value” from the definition of a term life insurance contract. Therefore, it appears that life settlement contracts will not benefit from the term life insurance contract exclusion and would be included in the definition of a financial account. Furthermore, life settlement contracts may also fall under the definition of a custodial account, which are considered to be financial accounts under the final regulations.
The final regulations exclude the following amounts from the definition of cash value and therefore not subject to FATCA:
- Payments solely by reason of the death of an individual insurance under a life insurance contract;
- Personal injury or sickness benefits or a benefits providing indemnification of an economic loss incurred upon the occurrence of an insured event;
- Refunds to the policyholder of a previously paid premium under an insurance contract;
- Certain policyholder dividends; and
- Returns of advance premiums or premium deposits for insurance contracts in certain situations.
These exclusions are intended to scope out of FATCA general insurance coverage and pure protection coverage such as most term life insurance, disability insurance, health insurance, and property and casualty insurance all of which lack the investment component FATCA seeks to identify. Foreign companies will need to consider whether products issued in their own jurisdiction meet the criteria for these exclusions as well as certain other exclusions including certain tax favored retirement and pension accounts and tax favored non-retirement savings accounts.
Notes from the final regulations
- 953(d) companies – For foreign insurance companies that have elected domestic status under Code section 953(d), the final regulations continue to include such entities in the definition of an FFI, based on the rationale that the manner in which a foreign insurance company and its United States shareholders are taxed is immaterial to the need for reporting U.S. account/policyholders. However, the final regulations stipulate that 953(d) companies that are licensed to do business in the United States will be treated as U.S. persons. Thus if a 953(d) company meets neither the definition of an FFI, because, for example, it does not issue cash value insurance products, nor the definition of a U.S. person, because it does not have a license to do business in a U.S. state, it will be an NFFE.
- Insurance company holding companies – The final regulations note that a holding company of an insurance company can be classified as an FFI if “it issues or is obligated to make payments with respect to a cash value insurance contract or annuity contract, regardless of whether it would otherwise be treated as an FFI.” The rationale for including holding companies in the definition of FFI is a concern that an insurance company within the group could avoid its FATCA responsibilities by funneling withholdable payments through a holding company.
- Use of local law definitions – The IRS acknowledges that using U.S. tax law definitions for “annuity contract” and “life insurance contract” might prove difficult for some foreign companies. The final regulations therefore provide for the use of “plain language definitions” and incorporate, when possible, references to local law definitions and practices. For example, the final regulations define an annuity contract as including a contract “that is considered to be an annuity contract in accordance with the law, regulation, or practice of the jurisdiction in which the contract was issued, and under which the issuer agrees to make payments for a term of years.”
- Excise tax under code section 4371 – The final regulations continue to treat insurance and reinsurance premiums paid to foreign insurers as U.S. source Fixed, Determinable. Annual periodic (“FDAP”) income, even in cases where such premiums are subject to the excise tax under Code section 4371. The IRS explains that although the policy behind the excise tax is similar to that behind withholding under Chapter 3 (Code section 1441), thus
making Chapter 3 withholding unnecessary, the purpose behind FATCA withholding is demonstrably different. That is, an incentive to become participating FFIs, rather than a tax on the income of the issuer.
- Indemnity reinsurance – The final regulations exclude indemnity reinsurance contracts between two insurance companies from the definition of “cash value insurance contract.”
- Group cash value or group annuity contracts – A participating FFI may treat an account that is a group cash value (i.e., group life) insurance contract or group annuity contract as a non-U.S. account until the date on which an amount is payable to an employee/beneficiary, if the participating FFI obtains a certification from the employer that no employee is a U.S. person. A group cash value insurance contract or group annuity contract must meet the following requirements;
- The group contract issued to an employer covers twenty-five or more employees;
- The employee is entitled to receive contract value and to name beneficiaries for amount payable upon death of the employee; and
- The aggregate amount payable per employee/beneficiary does not exceed $1,000,000.
- Beneficiaries of cash value life insurance contracts – A participating FFI may presume that the beneficiary of a cash value life insurance contract is a foreign person unless the participating FFI has actual knowledge that the beneficiary is a U.S. person.
- Deemed-compliant FFI - Local FFI and FFIs with only low value accounts – The local FFI registered deemed-compliant FFI category and the FFI with only low value accounts certified deemed-compliant FFI category are now applicable to certain local insurance companies and insurance companies with only low-value accounts. There are significant restrictions on the use of this deemed-compliant status, including a restriction against having, or any member in its expanded affiliated group having, a place of business outside of a single country (other than a location to conduct administrative activities). Large insurance groups may not be able to take advantage of these deemed-compliant statuses but may certainly prove helpful to small local insurance companies.
Given the release of the final regulations, insurance companies should begin (or continue) to analyze their entities, products and customer information, determine whether they are FFIs under the regulatory definition, and determine whether any deemed-compliant statuses may apply. This decision process should take into consideration any IGA’s already or soon to be entered into by the FFI’s jurisdiction.
Specific questions to consider:
- Is the foreign legal entity an FFI or a non-financial foreign entity (NFFE)?
− If the legal entity writes or maintains life insurance contracts with cash value or annuity contracts, it will typically be considered an FFI (unless all such contracts fall within the financial account exceptions)
− If the legal entity only writes or maintains contracts exempted from the definition of financial account and does not conduct other FFI activities, it will typically be considered an NFFE.
- Does an FFI intend to be a participating FFI or a non-participating FFI?
− A participating FFI will not be subject to 30% withholding on its U.S. source cash flows; a non-participating FFI will be.
− All FFIs within an affiliated group will be required to either enter into an FFI agreement to become a participating FFI or qualify as a deemed-compliant FFI. In most situations, one non-participating FFI within an affiliated group may taint the whole group.
- Does the foreign legal entity write policies that are considered “financial accounts” for U.S. customers?
− The insurance company will need to consider its existing KYC and onboarding processes to determine the changes required to identify and document U.S. persons, and will need to develop systems to report on them in accordance with the FATCA requirements. Withholding will be confined to customers that are non-participating FFIs or recalcitrant account holders.
- What are the reporting and withholding requirements of a participating FFI with respect to cash value life insurance policies or annuities written to U.S. persons or certain entities owned by U.S. persons?
− The FFI must report the identity (i.e. name, address, TIN) and certain financial information (i.e., account balance, payments made on the account) with regard to U.S. accounts, and where necessary withhold on certain payments to financial accounts or impacted payees that are non-compliant to the extent another withholding agent has not performed the required withholding.
− Withholding is not required for certain contracts outstanding on July 1, 2014 (“grandfathered obligations”).
− Life insurance contracts outstanding on July 1, 2014 that are payable upon the earlier of attaining a stated age or death and term certain annuity contracts are considered grandfathered obligations, as will be other life insurance contracts outstanding on that date with a stated expiration or term.
Important FATCA dates in 2013 and 2014
|August 19||FATCA registration portal will be accessible for registration|
|April 25||Last date an FFI can register with IRS to ensure inclusion in the June 2, 2014 IRS FFI list|
|June 02||IRS scheduled to publish first “GIIN” list|
|July 01||Grandfathered obligations cutoff|
|July 01||USWA & FFI to begin new account onboarding|
|July 01||Begin income withholding (excluding certain offshore payment of U.S. source income)|
|December 31||FFI & USWA to complete documenting/remediating preexisting accounts that are considered “prima facie FFIs”|
** Other Withholding/Reporting requirements phase in from 2015 through 2018
To learn more
The final regulations are extensive and complicated, and the changes from the proposed regulations are substantial. This document attempts to highlight certain important provisions of the final regulations which generally impact insurance industry and do not represent a broad-based summary of all of the changes. If you are directly or indirectly affected by the compliance obligations of the final regulations, you will likely want to understand the implication of these rules, exceptions and frameworks on your business and products and take affirmative steps soon with respect to FATCA implementation. If you wish to discuss the final regulations or any FATCA related matters, please contact one of our FATCA contacts listed on the following pages.
As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.