US tax reforms not expected to impact on captive formations

The US Tax Cuts and Jobs Act 2017 represents the first major overhaul to federal taxes since 1986, and there are provisions that both US and international captives must be wary of. But changes are not expected to impact the numbers of captives formed.

Those were some of the conclusions of a panel discussion called “Tax Reform: Accounting for the Captive Impact”, held at a CICA 2018, with speakers Robert “Skip” Myers of Morris, Manning & Martin; Karey Dearden, executive director, Ernst & Young; and Matt Gravelin, principal, Johnson Lambert.

Some of the impacts on domestic captives include the general corporate provisions, most notably, the reduction of the corporate tax rate from a graduated system of up to 35 percent down to a flat 21 percent.

Furthermore, the panel noted that the repeal of alternative minimum tax (AMT) is going to be a good thing for corporations including captives.

In terms of international captives, beginning in 2018 the definition of a US shareholder would be extended to US persons that owned 10 percent or more of the voting power or value of a foreign corporation.

Deaden said this could significantly impact some captive structures – especially group captives.

But Gravelin does not expect tax reform to have any impact on the overall formation of captives, and stressed the importance of speaking to a tax advisor to fully understand the changes.

He added that he is often asked whether captives are losing value as a result of these changes.

“The value of the captive still exists - if you are forming for tax reductions you are not forming for the right reasons,” he said.

Dearden also emphasised the importance of getting the necessary advice for international captives.

“You should do a review of your captive arrangement and see what the tax arrangements are going to be impacting,” said Dearden.