Ca Capti tives es: : Policy cy & Regulatory En - - PowerPoint PPT Presentation

Ca Capti tives es: : Policy cy & Regulatory En Environment

Ryan Work Vice President, Government Relations Self-Insurance Institute

• f America (SIIA)

2019 DCIA Spring Forum

Lessons of the B-26

116th Congress: At a Glance

100 New Members

• 64 Democrats
• 36 Republicans
• 40 New Female

Members

• Congressional Cliques
• Tri-Caucus Sway

2020 Election

21 Democratic Candidates Primary Traffic Partisan Gridlock Voter Enthusiasm/ Partisanship Increase

Co Congr gres essional Ag Agenda: a: Wh What to

• Ex

Expect in 2019 2019

Policy Issues:

• ACA/ Health Cost
• Immigration/ Dreamers
• Infrastructure
• Tax

Focus Areas:

• Executive Branch Investigations (House)
• Federal Court Appointees (Senate)
• 2021 Redistricting (Party)

Cu Curr rrent Ca Captive Is Issues ues

2018 Tax Reform Guidelines

• Rates & Timing
• Corporate
• Offshore Taxes (CFC-NCFC)

Tax Court Cases

• Avrahami/ Reserve/ Syzygy

PATH Act/ Notice 2016-66 State Activities

SI SIIA Ca Captive A Act ctivities

Legislative/ Regulatory Advocacy

• PATH Act Clarifications
• Notice 2016-66
• Tax

IRS/ Treasury Meetings

• Education
• Scope Narrowing
• Benchmarks

Educate & Meet with Policymakers

• General Captive Education
• Congressional & Industry Support

SI SIIA Ca Captive Manager Co Code o

• f Co

Conduct

Principles:

• Integrity, conflict of interest, confidentiality,

advertising and practice management. Goals:

• Anticipating industry challenges
• Easily understandable for clients, policymakers

and regulators;

• Professional differentiator for SIIA members

and managers; and

• Needed level of uniform professionalism to the

industry. Feedback/ Actions:

• TN Now Requiring Sign-Off from Captive

Managers

• Code Task Force

Ne New F Face ces: I : IRS/ T S/ Treasury

Acting IRS Comm. David Kautter

• Back as Asst. Treasury Sec. (OTP)

New at Treasury Insurance Section

• Angela Wallit

New IRS Chief Counsel

• Michael Desmond

New IRS Comm. Charles Rettig

• Chaired IRS Advisory Council
• Active in ABA Tax Section
• Tax Fraud Attorney

IR IRS LB&I: &I: Cap aptiv tive e Cam ampaig paign

Goal: Ensure “that US multinational companies are paying their captive service providers no more than arm’s length prices”.

• “Excessive pricing…inappropriately shift taxable income

to foreign entities and erode US tax base.”

• OECD rules for arm’s length pricing for transactions

between controlled entities.

• Foreign captive subsidiary transactions providing

services exclusively for the parent or multinational group.

• Arm’s length price is determined “by taking into

consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary”.

• Campaign identified through LB&I data analysis and IRS

employees.

IR IRS View w of ERCs

Dirty Dozen

• Curb abusive arrangements through

audits, investigations, and litigation.

• “…devoted substantial resources with

more than 500 docketed cases in Tax Court.”

• “…promoters, accountants or wealth

planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of insurance.”

• Reference to Court Cases
• Notice 2016-66 Reporting Requirements

& Information Collections

• Tied in with Trusts & Conservation

Easements What was not included:

• No mention of PATH Act
• “Captives may…advance inter-

generational wealth transfer objectives and avoid estate and gift taxes. “

Tax Court Focus

• Organized/ Operated as Insurance

Company

• Capitalization
• Valid & Binding Policies
• Reasonable Premiums/ Arms Length

Transactions

• Actual & Paid Claims

PATH Act Clarifications: 2018 Omnibus

1) Clarify look-through for reinsurance or fronting arrangements 2) Clarify specified assets ( under Test 2 ) to mean aggregate amount of related assets owned by spouse/ relation.

• Two-year grace period when acquiring ownership

through inheritance or death. 3) Spousal Clarification JCT leaves up to Treasury Department guidance related to ownership, premiums, gross revenue, and factors taken into account under applicable State law for assessing risk.

No Notice e 2016-66: 66: Tr Transactions of Interest

• Nov. 2016: IRS issued Notice 2016-66 designating most

831(b) captives as “Transactions of Interest”

• Notice triggers disclosure requirements for both

participants and material advisors

• Filing Requirements:
• 831(b) Captive owner has at least 20% of the captive

AND:

• The captives’ losses and loss expenses are less

than 70% of premiums earned less policyholder dividends, or

• Captive has made loans benefiting affiliates.

IRS Notice: Industry Impact

Total 831(b) captives in survey 2,397 Total number of Forms 8886 and 8918 15,021 Total cost of compliance $22,186,800 Average cost per captive to file all Forms 8886 and 8918 $9,257 Total hours of compliance 121,755 Average hours per captive for compliance 50.97

Ø Annual cost to prepare Form 1120PC federal tax return: $1,000 to $4,000/ yr. Ø Average cost to complete Notice reporting (per captive): $9,257. Ø Form 8886 IRS estimate:10.16 hrs. recordkeeping/6.25 hrs. preparation. Ø Form 8918 estimate: 9.79 hours for completion.

Wha What’s s Next?

• IRS reviewing filings:
• Abusive vs non-abusive structures.
• What will IRS Determine?
• Deleted from TOI category
• Designated as Listed Transactions
• IRS Exams: Blanket Audits
• Global Settlement
• Need for scope narrowing

15

St State I Issues: : NR NRRA & Self & Self- Pr Procurement Mi Microsoft

• soft

Joh Johnson son & Joh Johnson son

Domiciles vs. Non-Domiciles Captive Insurers Clarification Act Clarifies captives are excluded from ‘nonadmitted insurers’ for purposes of Dodd-Frank. Means captive would be taxed and regulated by the state of domicile, not necessarily where the business’s corporate headquarters is located.

SI SIIA A Advoc

• cacy

cy St Strategy

Ø Create education and stabilizing proactive position for captive industry Ø Partner with Treasury on narrowing focus to appropriately review captive structures Ø Engage captive owners as storytellers Ø Create Congressional Champions Ø Active Industry Participation

Ta Takeaways/ Questions

Ø Educate Policymakers/ Regulators Ø IRS Has Critical Eye on Captives Ø Need Technical Guidance & Focus Ø Congress Has Created Path Forward Ryan Work Self-Insurance Institute of America rwork@siia.org WWW.SIIA.ORG