Life insurance and annuity sellers may soon find themselves helping the Internal Revenue Service (IRS) identify U.S. persons who have invested in non-U.S. financial accounts.
Tax specialists at PricewaterhouseCoopers L.L.P., New York, talk about the new requirements, which are part of the Foreign Account Tax Compliance Act of 2010 (FATCA), in a bulletin on FATCA.
Congress passed FATCA in March 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, the tax specialists say.
FATCA requires financial institutions to help locate the U.S. persons with the non-U.S. financial accounts. It defines insurance companies as financial institutions, and it defines many insurance contracts as financial accounts.
FATCA seems unlikely to apply to term life insurance, reinsurance or group benefits without cash value, but it could apply to group retirement and pension plans, and it seems most likely to apply to mutual funds, investment management operations, banking operations, and annuity products, life products and group benefits with cash value, the tax specialists say.
An insurer will have to analyze any foreign company before making a payment to determine if the company must comply with FATCA rules. If the insurer finds the company has not complied, the insurer must withhold a 30% withholding tax on the payment.
Non-U.S. insurers will have to tell the IRS about any U.S. policyholders and payments made by the U.S. policyholders, and non-financial foreign entities will have to “either provide the identity of any substantial U.S. owners or certify that there are none,” the tax specialists say.
“For example,” the tax specialists say, “a non compliant [foreign financial institution (FFI)] receiving gross proceeds of $1 million on the sale of a U.S. Treasury bond from the FFI’s proprietary trading account (even if held for just a day) could be subject to a $300,000 withholding tax.”
Originally, the rules were supposed to take effect Dec. 31, 2012; now the rules are set to take effect Jan. 1, 2014. The tax specialists are recomending that insurers start to apply due diligence processes for high-risk products by July 1, 2013.
For insurers, one challenge is that most of the guidance issued has applied to banks, the tax specialists say.
Insurers may need 12 to 18 months to set up the systems needed to comply with the new rules, and they need answers to questions such as whether any grandfathering provisions will apply and how FATCA will interact with other countries’ privacy laws.
“FATCA is not just a tax initiative but an operational requirement,” the tax specialists warn.