Life insurance companies won a major legislative victory when Congress passed and President Bush signed an economic stimulus package that retroactively extends the 2001 treatment of investment income earned by foreign subsidiaries of U.S. financial services firms.
The legislation extends the 2001 treatment of the affected income under Subpart F of the tax code for five years retroactive to Jan. 1, 2002.
Moreover, the package contains a provision allowing life insurers with foreign subsidiaries to use the reserving method of the foreign country, if it can be shown that the reserving method cannot be used to hide income from the IRS.
Previously, life insurance complained they had to calculate reserves twice, once using the foreign methodology and again using U.S. methodology.
Moreover, life insurers argued the U.S. methodology often resulted in a smaller reserve calculation than the foreign country required.
The five-year extension was an added victory for the industry. In his fiscal year 2003 budget, the president proposed only a two-year extension.
Jack Dolan, a spokesman for the American Council of Life Insurers, says the Subpart F language is significant in that it will help secure the future of U.S. life insurers that operate overseas.
However, Dolan says, ACLI will still seek a permanent extension of the Subpart F language.
Enactment of the stimulus package means the affected income will be subject to U.S. taxation only after the parent company receives it. Without the extension, the income would have been immediately subject to U.S. tax as soon as it was earned by the subsidiary, even if the parent had not received it.
Financial services companies argued this treatment differs from that afforded similar income earned by commercial companies. Moreover, they said, this puts U.S. financial services firms at a competitive disadvantage versus foreign companies.
However, the stimulus package also threw something of a curve ball at the life industry. The package contains a three-year suspension of Section 809 of the tax code, the provision that imposes a tax on mutual companies based on the earnings of stock companies.
However, there is no suspension of Section 815 of the tax code, which deals with policyholder surplus accounts held by stock companies. Sections 809 and 815 had been linked in the life industrys lobbying efforts.
ACLI had no comment on the outcome.
However, another source, who asked not to be identified, told National Underwriter that House Ways and Means Committee Chairman Bill Thomas, R-Calif., believed there was a genuine fairness issue facing mutual companies due to Section 809.