Jason Parker, CPA, is a Tax Manager for Larson & Company. Jason specializes in tax provision work for insurance companies.

 

Domestic insurance companies may have a couple of challenges to prepare for if the Biden administration’s proposed plan goes through. Along with its fiscal year 2022 budget, the administration penned the American Jobs Plan and the American Families Plan—two bills that would require funding. That funding would come from the Made In America Tax Plan. A well-known piece of President Biden’s plan is a corporate tax hike, which would directly influence insurance companies since they are taxed as corporations. Another part of the proposed tax plan aimed at strengthening American companies’ competitive advantage is Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD). By implementing a global minimum tax rate, SHIELD could have undesirable consequences in the insurance market.

A major piece of President Biden’s tax plan is an increase in the corporate tax rate to 28%. Prior to the Tax Cuts and Jobs Act (TCJA), the highest marginal corporate tax rate was 35%, but that was cut drastically under the Trump administration to 21%. Under the TCJA some changes to insurance taxation were made to help pay for that tax cut, including an adjustment to loss reserve discounting making the deduction for tax reserves smaller. Now those changes will remain in effect, and the corporate tax rate will go up, potentially creating a double effect on insurance companies. How the insurance industry will ultimately be affected remains to be seen.

In addition to bumping up the corporate tax rate, the current administration’s tax plan will have an impact on the reinsurance market as it aims to take away advantages of foreign investments. One of the stated objectives of the Made In America Tax Plan is to “make American companies and workers more competitive by eliminating incentives to offshore investment” and other strategies[1]. While making American companies more globally competitive is a great vision, the global market can play a key role in improving the performance of American companies. The reinsurance market is a prime example of this. Many U.S.-based insurance providers enter into reinsurance agreements to spread financial risks, and many of the reinsurers are foreign-based.

The TCJA employed a tool called the Base Erosion and Anti-abuse Tax (BEAT) to reduce offshore investment incentives. The BEAT effectively imposed a 10% “tax on reinsurance cessions by U.S. insurers to affiliated offshore entities”[2]. The projected tax revenue from the BEAT was $4 billion annually, but it has failed to come close to that. United States insurers avoided the BEAT through two adjustments—reinsuring through non-affiliates and retaining more risk domestically. President Biden’s answer to this is to replace the BEAT with Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD).

SHIELD would introduce a global minimum tax rate to try to level the playing field between multinational companies headquartered in the United States and foreign countries. The reinsurance market is by nature a global market, and thus reinsurance would be directly impacted by SHIELD. If U.S. insurers continue to purchase foreign reinsurance, the increased tax burden would be passed on to the primary insurer, and eventually to the consumer purchasing insurance. Alternatively, U.S.-based insurers could potentially respond by retaining more risk at home (as was seen under the BEAT). They could also enter into more reinsurance agreements with domestic reinsurers, which may not be an option, given that there are fewer major domestic reinsurers. Even if they manage to reinsure more domestically, that could defeat the objective of spreading out risk.

The Made In America Tax Plan would send ripples reaching the insurance industry. In addition to dealing with a higher corporate tax rate, there are other potential issues relating to the reinsurance market, of which American insurers need to be aware. While President Biden’s proposal to replace the BEAT with SHIELD would attempt to make America more globally competitive, the plan could hurt American insurance companies by making reinsurance, a major piece of many insurers’ business plans, more costly and more difficult. Targeted changes to the proposed plan would be prudent and welcomed by insurers.

[1] The Made In America Tax Plan (U.S. Department of the Treasury)

[2] Biden Tax Plan Hits Global Reinsurance (Jerry Theodorou) https://www.insurancejournal.com/blogs/2021/06/07/617665.htm

 

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