The overall thrust of the US tax reform was not only to reduce the federal corporate tax rate (from 35% to 21%), to switch the US corporate tax system to a territorial system but also, and importantly for international insurance operations, to encourage activities in the US with both a carrot and a stick.
On 22 December 2017, the US Tax Cuts and Jobs Act was signed into law representing the most significant US tax reform in 30 years. This reform potentially has significant impacts for international insurers operating in Ireland. Most provisions take effect from 1 January 2018 and insurance groups impacted by the new rules are already taking action to minimise the adverse impacts.
On the positive side, dividends received in the US from 10% owned non-US subsidiaries will be exempt from US tax going forward; making the US a territorial system for the first time. This will facilitate foreign subsidiaries moving funds efficiently back to the US where required and where permissible from a regulatory perspective. A one-time transition tax, which can be paid over 8 years, of 15.5% for cash or other liquid assets or 8% for illiquid assets will apply on undistributed, non-previously taxed post-1986 earnings of a CFC (controlled foreign company). To the extent that unrepatriated earnings, of Irish insurance companies with US parents, are held in cash or liquid securities to support insurance reserves, the earnings of the Irish insurer are likely to be subject to the higher rate of tax in the US.
As well as the general corporate tax rate reductions, the carrots to encourage activity in the US, include the foreign derived intangible income (FDII) provisions which encourage the provision of services from the US with a lower tax rate of 13.125% applying to exported services. While eligible income does not include insurance income, US headquartered insurance groups may look to take advantage of this provision and evaluate what cross border services could be provided from the US as opposed to elsewhere.
On the other side, one of the provisions likely to immediately create difficulties for international (re)insurers located in Ireland is the provision around Base Erosion and Anti-Abuse Tax (BEAT). Broadly, where certain thresholds are exceeded, this measure requires the calculation of an alternative minimum tax in the US that may disallow a deduction in the US for foreign related party payments. The legislation seeks to deny a deduction for gross premium payments out of the US without relief for any payments made by the foreign affiliate to the US such as ceding commissions or benefit payments. This could impact significantly on international (re)insurers located in Ireland receiving premium payments from affiliated companies in the US, from 1 January 2018. If the impact is significant enough for particular groups, we are likely to see restructuring of business between the US and Ireland in Q1 and throughout the remainder of 2018.
New provisions for global intangible low taxed income (GILTI) effectively impose a global minimum tax on US parented or owned group companies outside the US. This provision essentially seeks to impose additional tax on CFC income in excess of a pre-determined return (10%) on tangible assets. Most foreign insurance CFC’s hold limited amounts of tangible assets. Therefore, many insurance company CFC’s that meet the Active Financing Exemption (AFE) in the US could still be subject to the GILTI rule because the new rules do not include a carve out for AFE qualifying income. It will be important for Irish subsidiaries of US entities to be involved in the exercise to model the impact of GILTI.
These more onerous rules, mean that many global groups with international operations under their US subsidiaries are looking to move those lower tier subsidiaries out from under the US.
It is clear from the above that the potential impact of US tax reform on international (re)insurers in Ireland could be far reaching and 2018 at the very least will see an assessment of the impact of US tax reform on overseas operations and could see restructuring of Irish operations, particularly, and most immediately, where the impact of the BEAT provisions is significant.