A new Base Erosion Anti-abuse Tax (BEAT) regime has been enacted in the United States of America (US) as part of the recently enacted package of tax reform measures in December 2017. The insurance industry is likely to be one of the industries most affected by the new BEAT regime.
Insurance companies having any connection with the US are impacted in myriad ways by the recent US tax reform. This applies whether they are domestically owned by US persons or multinational companies and whether specialising in reinsurance or life or general (P&C) insurance.
In relation to measures which affect cross border insurance transactions, the new rules introduce a veritable smorgasbord of catchy acronyms, from BEAT (Base Erosion Anti-Abuse Tax), to GILTI (Global Intangible Low Taxed Income), through to FDII (Foreign Derived Intangible Income) and the related QBAI (Qualified (tangible) Business Asset Investment).
Added to these measures that affect international transactions are a range of changes that impact US insurance companies which conduct business solely in the US domestic market. These include technical amendments on the calculation of taxable profits, restricting the use of NOLs (Net Operating Losses carried forward) to 80% of profits in any one year and the interaction of these federal corporate income tax changes with potential changes to State and local taxes, where the final position is not yet known.
The costings produced by the Houses of Congress that show how the Corporate Income Tax (CIT) rate reduction to 21% is to be paid for indicate that a fair proportion of this reduction is expected to be funded from increased tax revenues from the insurance industry. The scale of this increase suggests that, more than for any other industry, the impact of tax reform measures may be transformative. The scope of change is expected not just to affect tax liabilities of insurers but to have an impact on capital, with potential knock on impacts on the availability and cost of insurance.
BEAT is the regime introduced as part of the tax reform measures with the most immediate impact for insurance groups. For tax years beginning after 2017, US taxpayers have to pay federal CIT in the higher amount of a tax liability calculated based on standard CIT rules, applying the new 21% rate, or a tax liability as calculated under the new BEAT regime.
The BEAT regime operates like a new minimum tax, with certain payments to foreign affiliates (“BEAT payments”) added back in arriving at the alternative taxable profit. Essentially, the US tax base is adjusted upwards by the amount of such BEAT payments, and to this figure is applied a BEAT tax rate which is set at 5% for tax periods beginning in 2018, then at 10% until 2025 when it will be increased to 12.5% for tax years beginning after 2025.
The BEAT provisions only apply to certain large taxpayers. A taxpayer will only be in scope where it is a member of a group which has average US gross receipts (measured on a global group basis) for the past three years in excess of US$500 million. The global group includes US companies and US branches who are under common control of greater than 50%.
Furthermore, BEAT only applies where BEAT payments to related parties (25% common ownership relationship) exceed 3% of total allowable tax deductions under standard CIT rules (excluding the cost of goods sold and some other tax deductible expenses, which are not likely to afford significant relief to the insurance industry). A 2% ratio is applied to banks and broker-dealers.
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