19 June 2018Accounting & tax analysis

Tax reform positive for US captives but mixed bag for offshore

Tax reform is generally positive for US-domiciled captives and a mixed bag for offshore captives, however it has not affected any credit ratings, according to an AM Best briefing.

The Best's Briefing, 'Tax Reform: No Impact on Captive Ratings Anticipated', noted that there may however be some positive impact for offshore captives that have made the Section 953(d) election under the Internal Revenue Code, which allows them to be taxed as a US corporation. The briefing sugguested that some parent companies are now considering alternative captive strategies because of the changes.

AM Best's intent behind the briefing is to outline "how certain provisions of Tax Cuts and Jobs Act may affect captives, with the caveat that the vast differences in corporate formations, the ways in which business is transacted and the jurisdictions in which the companies operate makes a 'one size fits all' assessment as to how tax reform has impacted captives is impracticable."

While tax law changes apply to the 2018 tax year, AM Best noted that the reduction in the corporate tax rate - along with the repeal of the alternative minimum tax - benefits captives in 2018 as the rate reduction required that aptives revalue their deferred taxes at the new lower corporate tax rate of 21 percent.

The credit ratings of AM Best-rated captives has not been affected by tax reform to date.

"In many cases, the reduced corporate tax rate has resulted in higher net income, but for others, changes to the business structure may have affected operating performance," AM Best said. "US-parented captives in foreign domiciles are working to achieve the most efficient solutions from an operations and cost perspective. Management teams considering strategic alternatives in the wake of tax reform continue to keep AM Best abreast as they contemplate changes to existing business or new corporate formations."