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House Budget Package Could Affect Life Insurers' Taxes

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What You Need to Know

  • The BEAT system could keep companies from reducing their federal income taxes by shifting revenue overseas.
  • A draft House Ways and Means amendment could replace the current complicated BEAT tax rate formula for affected revenue with a 15% BEAT tax rate.
  • A provision would classify use of international indemnity insurance or reinsurance to reduce taxable income as an unwelcome base erosion tax benefit.

Lawmakers in the House are considering a proposal that could change the tax rules for life and annuity issuers that work with insurers or reinsurers outside the United States.

If approved and implemented as written, the proposal could increase federal income tax bills for life insurers that, from the perspective of Congress, appear to be trying reduce their taxable income by sending some of their revenue to non-U.S. entities.

The House Ways and Means Committee has put the proposal in its version of the big “Build Back Better” budget reconciliation package being debated in the House.

Other House budget package proposals could, for example, add dental, vision care and hearing benefits to the basic Medicare benefits package.

The House Ways and Means Committee has been marking up, or debating and revising, the package since Monday and expects to vote on whether to endorse the package Wednesday.

The Base Erosion and Anti-Abuse Tax (BEAT) Rules

Congress and the Internal Revenue Service have developed “Base Erosion and Anti-Abuse Tax” (BEAT) rules in an effort to keep big international companies from reducing their total worldwide income tax bills by shifting revenue from one jurisdiction to another.

The current BEAT rules include specific provisions for insurers and reinsurers.

An affected company uses a complicated formula to calculate its BEAT tax amount.

The BEAT Modifications Proposal

The new, insurance-related proposal is part of the “Modifications to Base Erosion and Anti-Abuse Tax” section in a draft budget package amendment in the nature of a substitute to add Subtitle I, Legislative Recommendations Relating to Funding Our Priorities.

The BEAT section as a whole would change the rules companies and the IRS use to decide whether companies are shifting revenue to non-use entities to reduce their taxable income in unacceptable ways.

The provision would establish a 10% BEAT tax rate for affected corporate revenue for 2022, raise the rate to 12.5% for 2024, and increase the rate again, to 15%, for 2026, according to a section-by-section summary provided by House Ways and Means Chairman Richard Neal.

The reference to insurance and annuity contracts on page 602 of the draft, under the subhead “Base Erosion Tax Benefit,” in a portion of the BEAT modifications proposals that sets the rules for calculating modified taxable income.

BEAT rulemakers see a “base erosion tax benefit” as a company using the tax rules to reduce its income taxes in an unacceptable way.

The text defines “base erosion tax benefit” to include many types of uses of indemnity insurance premiums to reduce the “gross amount of premiums and other considerations on insurance and annuity contracts”  and many uses of reinsurance premiums to reduce the “amount of gross premiums written on insurance contracts.”

The Impact

The potential financial impact of the proposal on life insurers and reinsurers is unclear.

Analysts at the congressional Joint Committee on Taxation have predicted that the BEAT rule change provision as a whole could raise about $24 billion in added revenue from all affected companies over the 10-year period starting in 2022.

The Process

To become law, any budget proposals considered by House Ways and Means must be approved by the committee; approved, along with the rest of the budget package, by the House; approved by Senate and either signed into law by the president, or passed in spite of a presidential veto.

The IRS must then implement any new tax rule.

Life insurers could try to persuade the Biden administration, Congress or the courts to delay or block implementation of the new tax rule.

Rep. Richard Neal (Photo: Stefani Reynolds/Bloomberg)