President Obama released his budget proposal for fiscal year 2012 on Monday, February 14. The proposed budget contains proposed tax changes that would affect the insurance industry. Most of these proposals are drawn from tax proposals made in previous years and not enacted.
Tax proposals in the new budget specifically targeting the insurance industry include the following:
- Disallow the deduction for non-taxed reinsurance premiums paid to affiliates.
This proposal revives legislative proposals going back some years dealing with U.S. insurers that reinsure risks with non-U.S. reinsurance affiliates. The proposal would deny a deduction for such reinsurance premiums if the non-U.S. reinsurer is not subject to U.S. tax on them.
- Modify rules that apply to sales of life insurance contracts.
This proposal is aimed at life settlement transactions and would expand information reporting rules to cover such transactions and also expand the definition of a “transfer for valuable consideration.” Similar budget proposals have been put forth in past years by the Obama administration.
- Modify dividends-received deduction (DRD) for life insurance company separate accounts.
This proposal revives similar proposals the Obama administration has made in prior budget proposals. Under the proposal, the DRD a life insurer could claim on dividends received on stock held in a separate account would be substantially reduced, and the DRD on stock dividends in the general account would be set at 15 percent.
- Expand pro rata interest expense disallowance for corporate-owned life insurance (COLI).
As in prior years, the Obama administration proposes to deny deductions for interest expense that a corporation could otherwise claim, to the extent allocable to life insurance with unborrowed cash values. This would be done by repealing the current law exception for corporate-owned life insurance on the lives of employees, officers and directors, with an exception for small business.
- Require information reporting for private separate accounts of life insurance companies.
This proposal is a revival of prior Obama administration proposals and it would require life insurers to file information returns with the IRS with respect to variable life or annuity contracts invested in a so-called “private separate” account (i.e., a separate account in which only a small number of contracts invest). This would enable the IRS to audit such separate accounts, with a particular eye toward compliance with the investor control doctrine.
- Repeal special estimated tax payment provision for certain insurance companies.
Property casualty companies can deduct unpaid loss reserves on a discounted basis, but if they make special estimated tax payments they can effectively deduct them on an undiscounted basis. This proposal would repeal this special estimated tax rule.
- Impose a financial crisis responsibility fee.
As was proposed last year, the Obama administration proposes to impose a financial crisis responsibility fee on “U.S. based bank holding companies, thrift holding companies, certain broker-dealers, as well as companies that control insured depositories and certain broker-dealers, with assets in excess of $50 billion.” This so-called “bank tax,” while aimed at banks, could apply to insurers that own insured depositary institutions.