Treasury and the IRS on September 1 released final regulations (Final Regulations) under Section 59A (the base erosion and anti-abuse tax or BEAT). These regulations finalize proposed regulations published in the Federal Register on December 6, 2019. The final regulations retain the basic approach and structure of the proposed regulations. Important for the insurance industry is the treatment of reinsurance premiums paid as deductions for purposes of the waiver election.
The ability to make the BEAT waiver election with respect to reinsurance premiums is a welcome change. The election may be useful to taxpayers that are subject to BEAT by reason of meeting the base erosion percentage threshold (generally 3%). The election could enable them to avoid BEAT completely, especially if they can only get below the base erosion percentage threshold by including reinsurance premiums in the total amount waived as deductions.
The election to waive a deduction can be made for a specific amount. Accordingly, the election may be made to waive deductions for an amount that is just enough for the base erosion percentage to fall below the threshold. The Final Regulations provide that the waived deductions must be removed from both the numerator and denominator to compute the base erosion percentage computation.
The waiver of the deduction for reinsurance premiums (as any other deduction) would increase taxable income. A taxpayer that is facing BEAT but that has several options available to mitigate the BEAT exposure should model out the various scenarios. For example, increasing taxable income (by shifting income into the current year) and appropriate use of credits that offset BEAT may be preferable to waiving deductions.
Insurance Tax Leader, PwC US