Session D: Global Tax Reporting for Insurance Products 

 Moderator: Phil Ferrari 

Ernst & Young LLP  

Presenters: John Adney 

Davis & Harman LLP 

2016 Product Tax SeminarJohn Adney, Davis & Harman,LLPPhil Ferrari, Ernst & Young, LLP

Global Tax Reporting for InsuranceProducts

September 9, 2016: 10:00 a.m. – 11:00 a.m.

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Disclaimers• These slides are for educational purposes only and are not

intended, and should not be relied upon, as accounting or tax advice.

• The views and opinions expressed are solely those of the presenters and not those of Ernst & Young, LLP or Davis & Harman, LLP.

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SOCIETY OF ACTUARIESAntitrust Notice for Meetings

Active participation in the Society of Actuaries (SOA) is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion that may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided at both official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics orother forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities:

•DON’T discuss your own, your firm’s, or others’ prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins.•DON’T stay at a meeting where any such price talk occurs.•DON’T make public announcements or statements about your own or your firm’s prices or fees, or those of competitors, at any SOA meeting or activity.•DON’T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers.•DON’T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so.•DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section.•DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information.•DO be alert to improper activities, and don’t participate if you think something is improper.

If you have specific questions, seek guidance from your own legal counsel or from the SOA’s Executive Director or legal counsel.

Instructors

• Phil Ferrari (Moderator) Ernst & Young, LLP

• John AdneyDavis & Harman, LLP

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Overview

• Tax reporting of distributions from life insurance and annuity contracts

• Taxation and reporting• Foreign Account Tax Compliance Act (FATCA)• Common Reporting Standard (CRS)

• Practical implications• Open discussion

Tax reporting of distributions from life insurance and annuity contracts

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Taxation and Reporting – Overview• IRC Section 72(e) – Amounts not received as an annuity

• Applies to life insurance and non-qualified deferred annuities• Surrenders, withdrawals• Distributed policyholder dividends

• Basis-first (FIFO) distribution rules apply to life insurance contracts that are not Modified Endowment Contracts (MECs).

• Income-first (LIFO) distribution rules apply MECs and non-qualified deferred annuities.

• Loans, assignments and pledges• 10% penalty tax may also apply

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Taxation and Reporting – Overview (cont.)

• To properly tax report, companies must:• Track cost basis, or investment in the contract• Identify payments/distributions subject to tax• Obtain necessary information on policyholders

• General tax reporting requirements:• U.S. financial institutions are accustomed to reporting to

the IRS on gross distributions and taxable income paid to U.S. customers and perform withholding where required on distributions to foreign-based customers.

• Form 1099-R• Form 1042-S

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FATCA – Overview• The U.S. imposes income tax on its citizens wherever

they reside, taking into account their income worldwide, and, generally applying the same rules, taxes non-citizens who reside anywhere within U.S. taxing jurisdiction.

• With the globalization of the economy and the availability of investment opportunities in foreign jurisdictions, it is now harder for local tax authorities to collect tax on income and sales revenue.

• FATCA, IRC sections 1471-1474, attempts to identify U.S. persons earning unreported income outside the U.S.

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FATCA – Overview (cont.)

• FATCA enhances the IRS’s ability to collect tax imposed on income earned by U.S. persons through non-U.S. investments and/or non-U.S. accounts

• How does FATCA work?• A 30% withholding tax on “withholdable payments” is

made to foreign entities – foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs).

• The withholding tax is not imposed if an FFI becomes a “participating” FFI, agreeing to report annually certain information with respect to the financial accounts of U.S. persons.

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FATCA – Overview (cont.)

• How does FATCA work (cont.)?• Intergovernmental agreements (IGAs) were set up so FFIs

could report to their own governments rather than IRS; IGAs enable foreign governments to obtain similar information on their citizens or residents from the IRS

• Withholdable payments include income distributions from U.S.-issued life insurance and annuity contracts.

• U.S. life insurers are withholding agents with respect to payments they make, and so they need to be sensitive to FATCA compliance in making withholdable payments.

• Non-compliance causes the U.S. withholding agent to be liable for the 30% tax.

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Common Reporting Standard – Overview• CRS – officially called the Standard for Automatic

Exchange of Financial Account Information – is a globally coordinated effort for governments’ exchange of data/information on a resident’s assets/income, automatically in a standard format.

• The CRS was modeled on FATCA, but applies to payments to individuals as well as entities.

• It was developed by the Organization for Economic Co-operation and Development (OECD).

• The OECD’s CRS documents include the Standard, a model Competent Authority Agreement (CAA) and a “commentary” providing interpretive guidance.

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Common Reporting Standard (cont.)

• The CRS parallels the IGA structure of FATCA – there is no withholding tax, as the information sharing is voluntary between governments.

• Information sharing is based on bilateral CAAs or on adherence to a multilateral version of the CAA.

• U.S. insurers will be required to undertake CRS reporting when the U.S. becomes a “reporting jurisdiction”.

• Full U.S. participation in the CRS requires action by Congress, so timing may not be soon but companies should be planning for it.

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Common Reporting Standard (cont.)

• Widespread acceptance of the CRS is now under way, with implementation expected in 2017-2018.

• Below are some key considerations when comparing the requirements of FATCA and the CRS, as relevant to U.S. and foreign life insurance companies

• Who must report? • On what and to whom must the reporting be done?• What must be reported?• What due diligence must be undertaken to assure

accuracy and completeness?

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Common Reporting Standard (cont.)

• Key considerations: Who must report?• FATCA: FFIs that are “specified insurance

companies,” i.e., those that issue cash value insurance or annuity contracts

• CRS: “reporting financial institutions,” which include specified insurance companies, but institutions required to report are defined by country of residence (if the country is a “reportable jurisdiction,” i.e., it participates in the CRS)

• Note: both FATCA and the CRS contain many exceptions, not all of which are identical

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Common Reporting Standard (cont.)

• Key considerations: On what and to whom must the reporting be done?

• FATCA: insurance and annuity contracts (per local law definitions) that contain “cash value” (broadly defined) beneficially owned by U.S. persons, subject to de minimis and other exceptions

• CRS: “reportable account” includes cash value insurance and annuity contracts of residents of reportable jurisdictions

• Note: CRS reliance on tax residency; again, many exceptions, differences between FATCA and CRS

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Common Reporting Standard (cont.)

• Key considerations: What must be reported? • The two regimes require much data that are similar –

name, address and TIN of policyholder; policy or other account number; value of the contract and the currency used for reporting; gross proceeds paid or credited during the reporting year.

• But the two regimes are not identical in their requirements – e.g., the CRS requires the date and place of birth of the individual taxpayer, whereas FATCA does not.

• Note: U.S. insurers do not currently report on policies absent distributions or exchanges.

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Common Reporting Standard (cont.)

• Key considerations: What due diligence must be undertaken to assure accuracy and completeness?

• In general, both regimes require KYC/AML-type due diligence, i.e., Know your Customer / Anti-Money Laundering-type analysis

• Requirements are more exacting for new policies vs. pre-existing ones (under the CRS, local law in each reporting jurisdiction defines the dividing line).

• Different requirements apply to individual vs. entity-owned policies and to low- vs. high-value policies.

• The CRS relieves reporting on a death benefit where an insurer lacks information on the death beneficiary.

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Practical implications

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Cross-Border Implications – An Example • Assume a Canadian resident purchases a life

insurance policy from a Canadian insurance company and becomes resident in the U.S.

or• A U.S. citizen purchases a life insurance policy from a

U.S. insurance company and becomes a Canadian resident.

• To avoid current taxation of inside buildup, the policy of the U.S. citizen or resident must comply with IRC Section 7702.

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Cross Border Implications (cont.)

• Likewise, the policy of the Canadian resident must comply with the “exempt test” under Canada’s Income Tax Act.

• IRC Section 7702 does not align well with the exempt test, although compliance could occur by happenstance.

• Under FATCA, if the Canadian insurer (i.e., an FFI) receives US-source income (such as on investments), then to avoid the 30% withholding tax, it must report on the U.S. resident-owned policy (policy number, cash value, etc.), either to the IRS or to the CRA.

• The CRA will then share the data with the IRS.

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Cross-Border Implications (cont.)

• Under the CRS, similarly, the U.S. insurer would report to the IRS the same type of data on a policy owned by a U.S. citizen who is a Canadian resident.

• The IRS would then share the data with the CRA.

• In both cases, the local tax authorities would possess information for identifying potential compliance issues with IRC Section 7702 or the exempt test, as applicable.

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Open discussion

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Q&A• What are the impacts of FATCA/CRS-type reporting

requirements on insurance company operations, both for those that have “low impact” (low impact does not mean “no impact”) and for those that have large impact, such as a global, multiline, top-tier insurance and annuity writer?

• What legislative or regulatory actions will need to occur to implement the CRS in the U.S.?

• Given the complexities in implementing the CRS worldwide, how can its application be kept uniform, and who will interpret it?

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