Foreign Account Compliance: Are Insurance Policies Included?

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The Foreign Account Tax Compliance Act (FATCA) was enacted as a comprehensive measure to combat offshore tax evasion—a noble enough goal. But FATCA’s comprehensiveness is also a sore point for many in the financial services industry, especially insurance carriers and producers. In comments to regulators, one foreign life insurance trade organization, the Association of International Life Offices (AILO), recently called FATCA’s requirements “onerous and disproportionate to the risk involved.”

Passed as part of H.R. 2847, the Hiring Incentives to Restore Employment Act (HIRE Act) on March 18, 2010, FATCA combats tax evasion by requiring disclosure from foreign institutions about accounts held by individuals, including U.S. citizens, and institutions that may be subject to U.S. tax. Many life insurance and annuity contracts are considered “accounts” under the act, although FATCA doesn’t generally apply to property, casualty, and term life insurance contracts.

AILO is a trade organization with most of its membership comprising international life insurance companies based in the European Economic Area (EEA) (e.g. Iceland, Liechtenstein and Norway) and U.K. Crown Dependencies (e.g. Jersey, Guernsey and the Isle of Man). AILO submitted its FATCA comments to the IRS “in the spirit of working helpfully with the U.S. authorities to promote an outcome that achieves the intention of FATCA, whilst keeping the cost burden placed on AILO member companies and their policyholders to a minimum.” The comments are extensive; we summarize the main points.

Private Banking Accounts

The IRS has expressed interest in applying the private banking account rules to insurance companies. Foreign financial institutions (FFIs) are subject to more stringent research and reporting requirements for private banking accounts.

The AILO letter notes that private banking clients receive a different level of service than insurance clients. And unlike a private banking relationship—which usually entails sustained contact between the financial institution and the client—insurance companies often don’t have sustained contact with their clients. After a policy is issued, the company may not have contact with the client for years.

As a result of the unique relationship between international insurance companies and their clients, locating information about existing clients can be difficult for insurance companies.

High-Value Accounts

FFIs are subject to especially stringent requirements for accounts with a value of $500,000 or more. The institution is required to perform a “diligent review” of files—including both paper and electronic files—associated with the account. AILO notes that the $500,000 threshold is exceedingly low for insurance policies. There’s also the issue that the value of an insurance policy may be severely reduced by surrender charges.

AILO offers two proposals for application of the high-value account rules to insurance policies. First, they suggest that carriers be exempted from the high-value rules if their average premiums across all their products are less than $1 million. As an alternative, AILO suggests raising the threshold to $1 million in premium payments.

Recalcitrant Account Owners

Foreign insurance companies often have a great deal of trouble getting information from their clients that is necessary to comply with FATCA. A “recalcitrant account holder” is an account holder who fails to provide documentation of its status as either a U.S. or foreign person or fails to provide the financial institution with a waiver. As mentioned above, life insurance companies face different challenges than other FFIs when requesting information from their clients. Contact with clients may not be sustained, and clients may be unwilling or unable to provide carriers with requested information.

AILO requested that the IRS clearly define when an insurer has made sufficient attempts to contact its clients.

Conclusion

Some components of FATCA that make sense when applied to FFIs like banks may not make sense when applied to foreign insurance companies and may increase compliance costs to the point that the companies reconsider their U.S. investments. After all, the U.S. only has jurisdiction over foreign insurance companies to the extent they invest in the U.S.

The IRS would be well-advised if it carefully considers AILO’s suggestions and clearly defines application of FATCA to foreign insurance companies. Although the intent beyond FATCA is noble, now is not the time to jeopardize foreign investment in the U.S.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.

See also The Law Professor's blog at AdvisorFYI.

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