IRS urged not to extend RPII tax treatment to commercial insurers

27-04-2022

IRS urged not to extend RPII tax treatment to commercial insurers

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US property and casualty insurance trade associations have written to the IRS opposing a proposed expansion of its definition of “related party insurance income” (RPII). The changes would expand the scope of transactions giving rise to RPII.

The letter comes from the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, and the Reinsurance Association of America, together representing the majority of US P&C insurers. 

The proposals change the treatment of insurance income for “US shareholders” from “controlled foreign corporations” (CFCs) by broadening the definition of both in Code Section 953(c). 

The associations argue that the section was originally designed to limit unintended tax advantages for US taxpayer owners of offshore captive insurers.

“The proposed regulation has applied a special rule meant for captive insurers to commercial insurers and reinsurers, contrary to the intent of the statute,” the signatories write. 

“The proposed regulation creates a new concept of a ‘related insured’ that significantly expands the definition of RPII and causes routine, non-tax motivated, ordinary insurance transactions to be treated as RPII.”

According to the letter, the proposals would undermine exceptions, meaning a US shareholder in a commercial insurer or reinsurer does not recognize RPII income. Moreover, the new proposals would require “information about related persons and their affiliates not available to commercial insurers and reinsurers in the ordinary course of business”.

The letter explains that insurers use affiliate reinsurance to transfer risks to a group reinsurer pooling risks from different geographic areas; and transfer risks to reinsurers outside their corporate group to limit liability on specific risks. 

The expanded definition would mean routine transactions between affiliates would generate RPII income, requiring reporting.

“To offer coverage at reasonable rates and operate efficiently with a low risk of insolvency, insurers diversify their risks by line of business and geographically, often on a global basis,” the associations write.

The letter is signed by David Pearce Jr, vice president and director of tax policy at the American Property Casualty Insurance National Association, Jonathan Rodgers, director of financial and tax policy at the National Association of Mutual Insurance Companies, and Joseph Sieverling, senior vice president and director of financial services at the Reinsurance Association of America.

IRS, Property & Casualty, Tax, Insurance, Reinsurance, North America

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