12 January 2018Accounting & tax analysis

Tax advantages of international captives may decrease under US tax reform

The tax advantages of international captives may decrease as a result of The Tax Cuts and Jobs Act, which may in turn lead to decreased usage, according to George Hansen, senior industry research analyst at AM Best.

International captives are significantly impact by territorial taxes and the base erosion anti-abuse tax (BEAT), Hansen noted.

“The territorial taxes (toll charge) will lead to charges on tax deferred foreign earnings while the BEAT will increase taxes over and above regular tax liabilities as companies subject to the tax are required to add back deductible payments made to foreign affiliates in determining modified taxable income,” he explained.

An AM Best briefing, “First Look – Tax Reform 2018”, noted that the insurance industry will see overall benefits from the reduced corporate tax rate as a result of the legislation, however will partially be offset by certain revenue enhancements that will impact life and P&C companies.

In particular, a repeal of all net operating loss carrybacks could reduce total adjusted and risk-based capital for life insurers.

US domestic captives will be impacted in a similar fashion as direct writers, and may have to make adjustments in the dividend policy to its parent, according to Hansen.

“Life captives may see reductions in admitted deferred tax assets due to the repeal of net operating loss carrybacks,” said Hansen. “Tax reserves for life captives generally will be lower, leading to higher taxable income. Life captives will see higher required capital as RBC factors for life are post-tax, resulting in higher factors.”

Hansen added that domestic P&C captives will also face similar issues with respect to dividends, in addition to higher discount rates and higher proration for dividends received on tax-exempt interest.