ACLI Update Column

By Mandana Parsazad and Regina Rose

TAXING TIMES, August 2021

On May 28, the Biden Administration released a detailed Budget which included the “General Explanations of the Administration’s Revenue Proposals for Fiscal Year 2022” (Green Book). The extensive list of the Green Book revenue proposals echoed most of the proposals outlined in the Made in America Tax Plan[1] also released by Treasury in April. While the Made in America Tax Plan was targeted at corporate changes and paired as a pay-for with the American Jobs Plan focused on infrastructure, the Green Book also includes proposals affecting individual taxpayers that were part of the Administration’s later proposal entitled the American Families Plan. The Biden Administration’s American Families Plan released in late April included individual taxpayer proposals to raise revenue “to invest in children and families.” Most of those proposals were also included in the Green Book and are summarized below.

For corporations, the Green Book proposes to increase the income tax rate for C corporations from 21 percent to 28. Any increase in the corporate tax rate would have a particularly negative impact on life insurers because the industry was singled out and is paying for the tax rate decrease to 21 percent in the ten-year revenue window following the 2017 Tax Cut and Jobs Act (TCJA). The TCJA raised a total of $24.6 billion through life insurer specific provisions, making significant changes to life insurer reserve and deferred acquisition cost (DAC) provisions. An increase in the corporate rate would exacerbate the disproportionate impact of the TCJA on life insurer specific provisions.

The Green Book would also impose a 15 percent minimum tax on worldwide book income for corporations with income in excess of $2 billion. Until more details are available in the form of legislative language, the full impact to life insurers is unknown. Though life insurers are not an obvious target for the expressed purpose of the minimum tax on book income (which is aimed at corporations that report significant amounts of book income but pay no federal tax), details such as the definition of “book income” could play a significant role in the impact to the industry of such a tax, particularly if comprehensive income is used as the basis for the tax. The impact to regulatory capital could be significant from such a tax, depending upon the aforementioned details. ACLI is continuing to evaluate this proposal as more details become available.

For businesses with international operations, the Green Book would increase the rate of tax that applies to global intangible low-taxed income (GILTI) to 21 percent.[2] The doubling of the GILTI rate from its current 10.5 percent is coupled with two additional punitive changes. The first would repeal the high tax exemption to subpart F income and repeal the cross-reference to that provision in the GILTI rules. The second would replace the “global averaging” method for calculating the GILTI tax with a “jurisdiction-by-jurisdiction” calculation. This in turn has further negative impact on the credit companies receive for the foreign taxes they have paid on international income, resulting in a particularly negative impact for U.S. life insurers, placing them at a disadvantage when expanding offshore as compared to their non-U.S. counterparts.

The Green Book would also repeal the current base erosion and anti-abuse tax (BEAT) and replace it with the stopping harmful inversions and ending low-tax developments (SHIELD) rule, which would disallow deductions to domestic corporations or branches by reference to low-taxed income of entities that are members of the same financial reporting group. This provision is likely to have an impact on foreign parented life insurers and reinsurers. Unlike the BEAT, the SHIELD does not have a de-minimis amount of cross-border payments that would be excluded from the application of the regime. Of interest to all insurers and reinsurers is a footnote in the Green Book which takes away a provision which was clarified by the IRS regarding the BEAT. Specifically, the Green Book states:

"Corresponding provisions would take into account reductions in the gross amount of premiums and other consideration on insurance and annuity contracts arising out of indemnity insurance; deductions from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid for reinsurance; and insurance policy claims and benefits accrued and losses paid during a taxable year (which would be deductible payments that are within scope of the SHIELD)."

The Green Book also continues the Administration’s commitment to the multilateral effort on base erosion and profit shifting at the Organization for Economic Cooperation and Development (OECD). The Administration was successful in gaining support for a 15 percent global minimum tax in June at the G7 summit. On July 6, 131 countries committed to supporting the OECD Global Anti-Base Erosion proposal (GloBE) project.

A proposal to create qualified School Infrastructure Bonds (QSIBs), similar to Build America Bonds under prior law would be of particular interest to life insurers that supported the last recovery efforts in 2009 by purchasing Build America Bonds. However, as described, the QSIBs are limited in scope and amount to a total notional amount of $50 billion, available for 2022 through 2025.

Other proposals of concern that affect corporations would:

• Restrict deductions of interest expense of members of financial reporting groups for disproportionate borrowing in the United States, and
• Create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business and disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.

Finally, the Green Book also contained proposals to increase or modify taxes for individual taxpayers. In addition to raising the top marginal income tax rate to 39.6 percent for individuals with taxable income above $452,700 ($509,300 for married individuals),[3] the Green Book proposed to:

• Tax capital and qualified dividend income for taxpayers with adjusted gross income above $1 million at ordinary income rates, and
• Treat transfers of appreciated property by gift or on death as realization events. This in effect imposes a new and additional gift and estate tax.

ACLI continues to monitor the proposals from the Biden Administration and the resulting effects on life insurers. More clarity on the impacts of these proposals to life insurers should emerge as bills are proposed in Congress and legislative language is developed. ACLI will continue advocacy throughout 2021 to communicate the impacts to life insurers of these proposals and seek changes to limit negative outcomes to life insurers, products and consumers.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Mandana Parsazad is vice president, Taxes and Retirement Security, for the American Council of Life Insurers and may be reached at mandanaparsazad@acli.com.

Regina Rose is senior vice president, Taxes and Retirement Security, for the American Council of Life Insurers and may be reached at reginarose@acli.com.

Endnotes

[1] Treasury released The Made in America Tax Plan in early April shortly after the Administration released its comprehensive infrastructure American Jobs Plan in late March. In making the case for the proposals, the administration asserts they represent “key steps toward a fairer tax code that encourages investment in the United States, stops shifting of jobs and profits abroad, and makes sure that corporations pay their fair share.” The White House also indicates that the President intends to work toward reforming the Tax Code “so that it rewards work and not wealth and makes sure the highest income individuals pay their fair share.”

[2] This assumes a corporate income tax rate of 28 percent.

[3] This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return. After 2022, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current tax rate thresholds for the individual income tax.