March 18, 2024
Heather Harmon
Tax Policy Advisor
Office of Tax Legislative Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Re: Submission Regarding Foreign Parented Multinational Insurers whose U.S. Subsidiaries Rely on NAIC Statements and Application to CAMT
Dear Heather:
We appreciate the efforts of the Internal Revenue Service (“IRS”) and Department of the Treasury (“Treasury”) in addressing the myriad of issues that exist for foreign parented multi-national insurers with substantial U.S. operations under the Inflation Reduction Act of 2022 (P.L. 117-169), in particular the corporate alternative minimum tax (“CAMT”). We especially appreciate the range of issues that have been addressed in various notices clarifying the definition of “applicable financial statement” (“AFS”) under Section 56A to allow a separate company financial statement of a single entity to be the appropriate AFS.
Notwithstanding valuable guidance provided in Notice 2023-64, we request that Treasury and the IRS consider a special exception for the separate company financial statements of a single entity that are filed with an insurance regulator in the form, and using the accounting principles, prescribed by the National Association of Insurance Commissioners (“NAIC”). We recommend that such NAIC financial statements be permitted as an exception to the general rule set forth in the Notice, and an NAIC financial statement should be allowed a higher priority than the AFS of the foreign parent group. To that end, we have attached proposed regulatory and preamble language for your consideration to be included in a forthcoming NPRM.
Background
For U.S. tax consolidated groups included in a foreign parented multinational group, the IRS and Treasury announced in Notice 2023-64 that forthcoming regulations will generally prioritize the AFS of the parent of a group. Consequently, multinational groups that have U.S. members that use separate AFS will be required to adapt the financial statements of the foreign parent to create an AFS of the U.S. tax consolidated group. Although these U.S. subsidiaries currently report their income as part of the foreign parent's consolidated financial statements to external shareholders and debt holders, we suggest that the U.S. insurance entities included in the consolidated U.S. tax return, which have separate company AFS prepared in accordance with NAIC requirements, should be allowed to give their NAIC statements a higher priority than the financial statements of the parent group. Financial statements prepared in accordance with NAIC requirements serve as the best reflection of book income, and have long-standing acceptance of IRS, Treasury, and the courts.1 To require use of the parent's consolidated financial statement in this context would be burdensome and would also result in distortions. Because an NAIC annual statement is so widely accepted for all other Federal income tax reporting purposes, we strongly suggest that such annual statements should be similarly accepted for CAMT purposes.
A separate company financial statement prepared in accordance with NAIC requirements is referred to as an “annual statement.” The annual statement is filed by an insurance company each year with the insurance departments of states, territories and the District of Columbia to report annual income and must be attached to the tax return of any U.S. taxpayer that is an insurance company. An annual statement also encompasses a pro forma annual statement if the insurance company is not required to file the NAIC annual statement.2 The use of NAIC statements is supported by the separate company exception in Reg. 1.451-(3)(a)(5).
The Internal Revenue Code has long recognized the value of an annual statement to establish corporate income for these companies. In fact, an NAIC annual statement is used as the starting point for life insurance taxable income. This practice was established as a business practice and has been accepted by the IRS. In fact, annual statements are routinely relied on for this purpose in an IRS Examination context. More importantly, an insurance company must make its tax computations in a manner consistent with the method required by the NAIC for use in its annual statement unless otherwise provided by a specific provision in the Internal Revenue Code.
Pursuant to Section 811(a), a life insurance company is generally required to use the same method of accounting for tax purposes as is used for regulatory accounting purposes. It is important to note that the income tax return for all life insurance companies subject to US Federal income tax are subject to Section 801 and must file using Form 1120-L and attach an annual statement.3 To determine a life insurance company's life insurance reserves under Section 807, the company generally uses the higher of 92.81 percent of its loss reserves determined in accordance with the reserving method prescribed by the NAIC or the net surrender value of the contract. Life insurance reserves generally estimate the present value of future benefits payments under a life insurance company's contracts determined using methods prescribe by the NAIC for preparing its annual statement.4
Moreover, the courts have routinely upheld the reliance on the NAIC annual statements to determine the components of gross income for insurance companies.5
Recommendation
We would ask that the CAMT guidance continue the reliance on a company's NAIC annual statement for purposes of Federal income tax reporting. The CAMT, as such, does not require a new financial statement when existing financial statements will suffice and provide the necessary book income information. For this reason, we ask that an NAIC should be accepted for purposes of CAMT determinations. Importantly, entities that prepare NAIC annual statements should not be required to create new financial statements for purposes of calculating the CAMT — such a requirement would not be in the spirit of the new legislation, required in any of the statutory provisions to Section 56A or the statutory provisions or legislative history to Section 451 and its underlying regulations. Existing standalone AFS should be sufficient for this purpose, as there is no statutory indication that the creation of new financial statements is required or requested.
We appreciate the significant time, resources and efforts being allocated by Treasury and the IRS to implement the IRA and CAMT. However, should you have any further questions, concerns or requests for additional clarification, please feel free to contact Ellen McElroy at (202) 383-0948 or Kriss Rizzolo at (202) 383-0908.
Sincerely,
Ellen McElroy
Kristan Rizzolo
Eversheds Sutherland
Washington, DC
EM/cc
Attachment:
Insurance CAMT AFS Definition Draft Language
ATTACHMENT
Proposed Language — Use of Regulatory Financial Statement as Applicable Financial Statements under Section 56A(c)(2)(A):
(a) General. If the financial results of a taxpayer are reported on the applicable financial statement for a group of entities, rules similar to section 451(b)(3) should apply on a separate company basis.
(b) Foreign Parented Multinational Corporations with U.S. Insurance Taxpayers. For purposes of determining the applicable financial statement for U.S. taxpayers (including consolidated return group members and US insurance branches of foreign corporations) under this section, in the case of foreign-parented multinational corporations with US domestic insurance taxpayers (in either subsidiary or branch form), any audited financial statement filed for regulatory purposes should be considered the applicable financial statement for purposes of this section. For the purposes of this section, financial statements filed for regulatory purposes shall have priority, even if the foreign-parented multinational corporation prepares financial statement for external shareholders or external parties which include the US domestic insurance taxpayers.
For example, financial statements prepared in accordance with the form prescribed by the National Association of Insurance Commissioners (NAIC) should be considered the applicable financial statement, unless another financial statement prepared on a separate company basis for the insurance taxpayers for external purposes is higher in the hierarchy under section 451(b)(3). If an audited financial statement is not filed for regulatory purposes and there is no other financial statement for the taxpayer that otherwise applies under section 451(b)(5), then insurance taxpayers should use their NAIC pre-tax financial accounting treatment net income as reported on Schedule M-3 as their applicable financial statement income for purposes of this section.
Example:
Facts — A foreign parented multi-national publicly held company in Italy has 12 wholly owned operating companies of which six operate in the United States, three in Italy and three in Canada. Of the six companies in the United States, three are Life Insurance Companies under Subchapter L and two are asset managers and all are under a U.S. holding company. All six U.S. companies participate in the filing of a life/nonlife consolidated return. The financial statement prepared for external shareholders by the Italian public company is on an IFRS (International Financial Reporting Standards) basis which is the only financial statement prepared for external parties. For the six U.S. companies, the two asset managers prepare separate company financial statements on a U.S. GAAP basis which are used to obtain external financing, the Life insurance companies prepare financial statements on an NAIC basis for regulatory purposes and on no other basis of accounting, and the holding company prepares a standalone financial on a IFRS basis for internal use.
Applicable Financial Statement (AFS) Analysis — In determining the AFS for the U.S. consolidated taxpayer, the hierarchy of Section 451(b)(3) will apply and each includible company in the U.S. consolidated tax return must separately determine its AFS.
The holding company AFS would be its IFRS separate company statement.
The AFS for the two asset managers would be their US GAAP statements.
The AFS for the life insurance companies would be their NAIC statements as they are the only statements prepared for external purposes. Life insurance companies must use their regulatory statements, i.e., NAIC statements, as their applicable financial statement for purposes of this section. These financial statements are higher in the hierarchy than any other external statement that exists for this type of regulated industry.
Language to Consider including in Preamble:
In the case of foreign parented multinational corporations with US life insurance taxpayers which prepare a consolidated financial statement for external shareholders or other external parties, Section 56A(c)(2)(A) or Section 56A(c)(2)(B) does not impose a requirement that such statement be “deconstructed” as Notice 2023-64 imposes, and the result considered the starting point for determining the AFS for U.S. taxpayers included in such statements. Notice 2023-64 suggested a “deconstruction” of foreign parented multi-nationals consolidated financial statements. However, we believe the approach we have taken in the proposed regulations is a more equitable approach. Rather, consistent with the hierarchy under Section 451(b)(3) and the Treas. Reg. §1.451-3(a)(5), each US taxpayer must apply the hierarchy on a separate company basis to determine the appropriate AFS for that company. The AFS should therefore be determined on a bottom-up basis to arrive at the AFS of each U.S. corporation included in the U.S. taxpayer's group.
Consistent with this position, Treas. Reg. §1.451-3(h)(1) mandates such a bottom-up approach where separate company statements are of an equal or higher priority. This bottom-up approach deploys a company-by-company aggregation to determine the consolidated tentative minimum taxable income for the group. This bottom-up approach is necessary as the regulations under Section 451 provide no guidance on how, after determining the AFS for each member of the includible group, to mechanically arrive at a consolidated financial statement which is necessary as the corporate alternative minimum tax is a consolidated tax.
Notice 2023-64 acknowledges that a bottom-up approach is necessary in certain situations but does not extend this to foreign parented multinational corporations. Furthermore, under Notice 2023-64, these foreign parented multinationals are precluded from applying the hierarchy on a separate company basis which is in direct contradiction to the intent of 451(b)(3) and Treas. Reg. 1.451-3(h).
Since the corporate alternative minimum tax is a consolidated tax, the AFS for the U.S. taxable group must be determined separate and distinct from the AFS for the consolidated foreign parented multinational group which contains numerous entities which are not U.S. taxpayers. As it is typical that no AFS will exist for the includible members of the US tax group, this determination can only be properly made by determining the AFS for each includible corporation and then aggregating them into a pro forma AFS for the consolidated US tax group. The deconstruction of the worldwide financial statements violates the required hierarchy under Treas. Reg. §1.451-3(a)(5) as mandated by Section 56A(b). Notice 2023-64 recognizes this in certain situations, but does not extend this treatment to foreign parented multinationals. These proposed regulations have now extended this treatment to all US domestic insurance taxpayers to create a more equitable result.
FOOTNOTES
1Indeed, the NAIC (then the National Convention of Insurance Commissioners) annual statement was first incorporated into the Internal Revenue Code as the basis for computing taxable income of property and casualty insurance companies in the Revenue Act of 1921, Pub. L. 67-98, Ch. 136, §246(b)(1) and was incorporated in the the calculation of life insurance taxable income as far back as the Life Insurance Company Income Tax Act of 1959, Pub. L. 86-69, §2.
2Treas. Reg. §1.6012-2(c).
3Similarly, all domestic nonlife insurance companies file Form 1120-PC, which include organizations described in Section 501(m)(1) that provide commercial-type insurance and organizations described in Section 833. The gross income of a nonlife insurance company that is subject to tax under Section 831 includes the combined gross amount earned during the tax year from investment income and from underwriting income, as premiums earned during the tax year, less losses incurred and expenses incurred. All of these amounts are computed on the basis of the NAIC annual statement. These entities are also obligated to provide an annual statement, including the underwriting and investment exhibit for the year covered by the return.
4Reserves for property and casualty insurance companies similarly are based on the NAIC annual statement. To determine a property and casualty insurance company's losses incurred deduction under Section 832(c)(4), the company determines the difference between its discounted unpaid losses (its “loss reserves”) outstanding at the beginning and the end of the tax year and adds that to its paid losses (this calculation also take into account paid loss adjustment expenses, i.e., cost of administering claims, and the change in the insurer's reserves with respect to loss adjustment expenses). A loss reserve is the estimate of amounts that an insurer will have to pay for (a) losses that have been reported but not yet paid, (b) losses that have been incurred but not yet reported, and (c) the administrative cost of resolving claims. An insurance company's discounted unpaid losses start with the estimate of its unpaid claims determined on an actuarial basis, as reported on the company's NAIC annual statement.
5See, e.g., Commissioner v. Standard Life & Accident Ins. Co., 433 U.S. 148 (1977); Sears, Roebuck & Co v. Commissioner, (1992, CA7) 972 F2d 858, 92-2 USTC ¶50426, reh den (1992, CA7) 1992 US App LEXIS 25976, revg on this issue (1991) 96 TC 61; American International Group v. United States, (1997, Ct Fed Cl), 38 Fed Cl 274, 97-2 USTC ¶50725; Continental Ins. Co. v. United States, (1997, Ct. Cl.) 474 F.2d 661.
END FOOTNOTES
