In PLR 202109001, the IRS concluded that a domestic insurance company (the Taxpayer) that had retroceded risks to a related foreign reinsurer would not be treated as making a base erosion payment as a result of a proposed assumption reinsurance arrangement, whereby another related foreign reinsurer would assume those risks from the first foreign reinsurer.
Action item: Even though this ruling is directed only to the taxpayer that requested it, other taxpayers encountering potential BEAT issues by reason of reinsurance should consider the observations provided by the ruling when analyzing the application of assumption reinsurance to the BEAT.
The PLR may be helpful to taxpayers because it indicates an IRS view that for BEAT purposes the original cedant is not deemed to make a payment to the new assuming corporation in an assumption reinsurance arrangement. In other words, there is no deemed ‘recapture’ of the original contract, followed by a ‘deemed issuance’ of a new contract.
Note: The IRS has interpreted the regulatory requirement to apply general US federal income tax law for purposes of the BEAT to mean subchapter L principles, where appropriate, such as in the case of a reinsurance arrangement.
However, it is not clear to what degree the ‘sale’ nature of the assumption reinsurance transaction, as referenced by the ruling, would apply in other situations. For example, if FC1 (the assuming company) was replaced by a related domestic reinsurer (D), then would an assumption reinsurance arrangement create a deemed base erosion payment from D to FC2 (the foreign ceding company) for the amount of the premium? Alternatively, would the arrangement be treated as a sale by FC2 to D, consistent with Beneficial Life, thus requiring D to consider whether it has any amortization payments arising out of the purchase that gives rise to base erosion payments under Section 59A(d)(2).
Would the result be different if the nature of the underlying business was life insurance, and if D was subject to Part I of subchapter L? Note that Section 59A(d)(3) refers to a base erosion payment as a reinsurance payment which is taken into account under Section 803(a)(1)(B). Section 803(a)(1)(B) only takes into account premiums and other considerations arising out of indemnity reinsurance. However, Section 805(a)(6) provides a deduction for consideration paid for assumption reinsurance. Therefore, would Section 59A(d)(1), which generally provides that a base erosion payment is any amount paid or accrued for an allowable deduction by the taxpayer to a related foreign person, require a base erosion payment to be determined, notwithstanding the ‘sale’ treatment, in such a case?
Insurance Tax Leader, PwC US