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Paul Zimmerman
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The Tax Cuts and Jobs Act: Offshore Insurance Subsidiaries Dance to a Different BEAT

Congress has come up with yet another good acronym – BEAT (Base Erosion Anti-abuse Tax). As is typically the case, when Congress uses an acronym in legislation, it is inevitably accompanied by complexity. BEAT, as referenced in the Tax Cuts and Jobs Act (the “Act”) is no exception.

BEAT hits companies that employ offshore vehicles to reduce their tax bills. For insurance companies, this means that BEAT impacts offshore reinsurance affiliates. More specifically, it imposes a new tax charge on transactions made by US-based companies and their offshore related parties that reduce their US tax base.

Before the Act, a multinational corporation resident in the US was subject to US tax on its worldwide income, and active foreign earnings were subject to US tax only when they were repatriated to a domestic parent. This system created incentives for multinational companies to shift income away from the US to lower-tax jurisdictions and to defer the repatriation of active foreign source earnings back to the US.

The term ‘‘base erosion’’ generally refers to tax reduction strategies employed by multinational corporations that generally include deductible payments made to related foreign parties, such as interest, payments for services, royalties and know-how payments. In the case of insurance companies, base erosion payments can include premiums or other consideration for offshore reinsurance, return premiums and premiums paid for reinsurance on behalf of other insurers. These insurance payments are specifically included in the definition of the ‘base erosion payments’ under the Act.

The Act taxes base erosion payments paid or accrued in tax years that begin after December 31, 2017, in which case ‘‘applicable taxpayers’’ are required to pay the base erosion anti-abuse tax which operates as an alternative minimum tax. The BEAT is the amount by which a US corporation’s income tax liability, computed without taking into account certain deductible base erosion payments, exceeds its regular income tax liability after reduction for certain tax credits. While the BEAT is generally intended to operate as a minimum tax, for companies with NOL carryforwards it will effectively result in an excise tax on any deductible outbound payments to a related party. In the case of insurers, it imposes a minimum tax on income adjusted for base erosion payments to their offshore reinsurers affiliates. The minimum tax rate is 5% this year, climbing to 10% between 2019 and 2025 and 12.5% thereafter. This is on top of the 1% or 4% excise tax that is charged on premiums paid to overseas reinsurers.

The following example illustrates, in a simplified way how the BEAT will work in 2018.


For purposes of the new tax, ‘‘applicable taxpayers’’ are corporate groups that have average gross receipts of more than $500M in the previous three tax years and for which base erosion tax benefits amount to at least 3% of a group’s total US tax deductions. Of course, various nuances and special rules must also be considered when computing a company’s BEAT liability, and further IRS guidance is expected in this regard. To that end, we are still awaiting Treasury Regulations to be published, which hopefully will shine much needed light on this complex tax. In the meantime, it is likely that insurers operating in the US that transfer significant amounts of premiums to their reinsurance affiliates in Bermuda or elsewhere offshore will incur substantially increased tax bills.

The best advice is to consult with your tax advisor or attorney who can weigh the benefits of your business’s structure. For more information on this topic or for assistance, please feel free to contact the corporate and tax specialists at Michelman & Robinson, LLP: Ian Shane (ishane@mrllp.com), Michael Poster (mposter@mrllp.com), Eric Simonson (esimonson@mrllp.com) or Peter Cifichiello (pcifichiello@mrllp.com).

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.