8 August 2018Accounting & tax analysis

BEAT provisions in US Tax Reform may drive redomestications

Tax reform is affecting every corporation in the US and the captive industry is no different. The Base Erosion Anti-Abuse Tax (BEAT) provisions in particular may drive captives to redomicile onshore.

This is according to a panel, ‘Tax Reform: Where the Dust Settled’, speaking at the VCIA annual conference in Burlington, Vermont. Speakers included Tom Jones, McDermott Will & Emery; Charles "Chaz" Lavelle, partner at Bingham Greenebaum Doll; Jeffrey Webb, senior manager in the financial services practice of Deloitte Tax; and Bruce Wright, partner at Eversheds Sutherland (US).

“A lot of companies are thinking of moving onshore to avoid this, or alternatively making the 953(d) election which would treat the offshore company as a domestic company,” said Wright.

“Over the course of the year there will be a lot of structuring to get around the BEAT provision.”

The BEAT only affects very large captives as the rule is leveraged against controlled groups with average annual gross revenues of over $500 million for a three-year taxable period.

“If the control group meets the $500 million and 3 percent test, it’s subject to BEAT,” noted Wright.

Tax reform also changed the attribution rules for controlled foreign corporations (CFC), a corporation located outside the US with 50 percent or great shareholder ownership, with each shareholder each owning 10 percent or more of the company.

Offshore captives owned by US shareholders can still make the 953(d) election, which permits the CFC to be taxed as a US company. Profits from the captive will be taxed at the new post-tax reform rate of 21 percent (previously 35 percent) unless the captive writes less than $2.3 million in gross written premium and the shareholders make the 831(b) election.

The panel highlighted that the goal of the Tax Reform Act is to make US businesses more competitive in the global market. It reduces the corporate tax rate and also move to a territorial tax system compared to a worldwide tax system.

While there are numerous provisions affecting captive insurance companies, there was no direct change to section 831(b) captives, the PATH Act provisions or IRS Notice 2016-66.