ACLI Update
Budget Reconciliation Revenue Raising Legislative Recommendations
By Ryan Derry, Mandana Parsazad and Regina Rose
TAXING TIMES, December 2021
Please note that this update column is being provided as of mid-November 2021. By the publication of this edition of TAXING TIMES, additional proposals may have been introduced. ACLI will provide updates in the next issue of TAXING TIMES should any legislative developments change the below-mentioned provisions and analysis.
Both chambers of Congress passed a historic infrastructure bill that was signed into law by President Biden. The Infrastructure Investment and Jobs Act amounts to more than $1 trillion in federal investment in infrastructure, the largest piece of such legislation in more than a decade.
On Nov. 3, 2021, the House Rules Committee released the Build Back Better Act (Bill), a budget reconciliation proposal reflecting the consensus of House Democrats on spending and revenue priorities. On November 19, the House passed the November 3 version of the bill by a vote of 220 to 213. The tax provisions of the Bill are a scaled-back version of the reconciliation legislation’s revenue provisions that were approved by the House Ways and Means Committee on Sep. 15, 2021.
Since spring of this year, the Biden Administration proposed to increase the corporate income tax rate to 28 percent and the September House Ways & Means mark of the budget reconciliation revenue proposal would have increased the highest effective corporate tax rate to 26.5 percent. Unlike the previous version of the bill, the Build Back Better Act would not raise the corporate income tax rate or the marginal individual ordinary income or capital gains rates. Instead, it would impose a host of other taxes on corporations, most notably a minimum tax on book income of large corporations that is discussed in more detail below.
The White House released a Build Back Better Framework and Fact Sheet shortly before release of the revised Bill meant to “guide the drafting of legislative language.” Of note, the administration described the package as “fully paid for” thanks in part by “making sure that large, profitable corporations can’t zero out their tax bills, no longer rewarding corporations that shift jobs and profits overseas, asking more from millionaires and billionaires, and stopping rich Americans from cheating on their tax bills.” The White House also continued to reiterate that the proposal would not raise taxes on Americans earning less than $400,000 per year.
The following is a summary of some of the Bill’s provisions of most interest to life insurers.
Corporate and International Tax Reforms
Corporate Alternative Minimum Tax on Book Income of Large Corporations
In lieu of a corporate income tax rate increase, the Bill would subject corporations with income greater than $1 billion for three consecutive years to a 15 percent minimum tax on adjusted financial statement income. Those corporations would then pay the greater of the minimum tax or their regular tax liability. For foreign-owned corporations, U.S. companies that are part of the group would be subject to the minimum tax if the worldwide group has income greater than $1 billion for three consecutive years and the U.S. members of the group have consolidated average income of over $100M during that same three-year period. The minimum tax would be creditable and general business credits against the tax would be allowed.
Stock Buyback Surcharge
The Bill would impose a 1 percent surcharge on corporate buybacks of stock. The tax would be based on the value of any publicly traded American company’s stock that it repurchased during the tax year. There are several exceptions provided in the proposal that would not be subject to the excise tax.
Interest Expense Limitation
A proposed new section of the Internal Revenue Code (IRC) would prevent a deduction for disproportionate interest expense allocations to an international financial reporting group’s U.S. taxpayers. Generally, affiliated groups including life insurance companies have net interest income, rather than net interest expense. Accordingly, life insurance groups generally may not be subject to the new limitation.
Excessive Employee Remuneration
The IRC prohibits the deduction by publicly held corporations for compensation with respect to any covered employee to the extent such employee’s compensation exceeds $1,000,000. Covered employees include the CEO, CFO, and the other three highest compensated officers whose compensation must be reported to shareholders under Securities and Exchange Commission (SEC) requirements. The American Rescue Plan of 2021 expanded the scope of covered employee to include the five highest compensated employees not already so included, effective in years beginning after 2026. The September Ways & Means proposal would have accelerated to an earlier date this expansion of covered employees; however, the Bill passed out of the Rules Committee removed that acceleration and did not provide any meaningful changes to the deduction of executive compensation.
Modifications to Global Intangible Low-Taxed Income (GILTI)
The proposal would raise the current 10.5 percent GILTI tax rate to 15 percent and change the basis for the calculation of the tax from the current worldwide basis to a country-by-country basis. A favorable change would decrease the current 20 percent disallowance of foreign tax credits (FTCs) attributable to GILTI to 5 percent. More favorably, for purposes of determining the FTC limitation for GILTI, foreign source income would be determined by allocating only such deductions that are directly allocable to that income. In addition, GILTI FTCs would be carried forward like other FTCs, which is not allowed under current law.
The benefit of economic losses would be preserved as deductions against GILTI income to create or increase a net operating loss for a taxable year. In addition, a loss may be carried forward to offset future GILTI income, though this is also limited on a country-by-country basis. This is an improvement over the current GILTI rules.
Foreign Tax Credit Limitations
The proposal would require FTC determinations on a country-by-country basis for required U.S. inclusions of foreign income and branch income and separate country-by-country baskets for GILTI. Additionally, the carryforward of limited FTCs arising in years beginning after 2022 would be reduced from 10 years to five years and increased to 10 years for years beginning after 2030. The 1-year carryback under current law would be eliminated. The change in carryforward and carryback periods, combined with the country-by-country determinations could impact some companies significantly.
Base Erosion and Anti-Abuse Tax (BEAT)
The proposal would increase the BEAT rate to 10 percent for 2022, 12.5 percent for 2023, 15 percent for 2024, and 18 percent for 2025 and thereafter. Generally, under current law, the BEAT does not apply unless base erosion tax benefits are 3 percent or more of total deductions. This 3 percent de minimis rule would be repealed for tax years beginning after 2023 and would impact a number of companies, including life insurers. BEAT-able payments would not include amounts subject to an effective rate of foreign tax not less than the applicable BEAT rate, nor payments on which U.S. tax is imposed. Moreover, modified taxable income would take into account net operating losses (determined without any deduction which is a base erosion tax benefit) and general business tax credits would be allowed to reduce the BEAT.
Dates of enactment with respect to GILTI, BEAT, and FTC provisions were delayed in the Bill beyond the dates which were introduced in the September Ways & Means proposal.
Other Business Tax Provisions
The wash sale rules would be expanded to cover acquisitions by related parties, to provide a much broader definition of securities, and also to cover commodities, currencies, and digital assets. These changes would likely pose some significant administrative tracking challenges for life insurance companies and potentially some permanent disallowance of losses on assets sold and then acquired by related parties. ACLI is working to ensure economic losses incurred by related corporate taxpayers are not intended to be disallowed under this expanded rule.
Financial Statement Income Tax Accounting and Regulatory Capital Considerations
After TCJA was enacted in December 2017, a number of income tax accounting issues arose that were addressed 1) for U.S. GAAP purposes, by the SEC and the Financial Accounting Standards Board (FASB), and 2) for insurance company state regulatory reporting purposes, by the NAIC’s Statutory Accounting Principles Working Group (SAPWG) of the Accounting Practices and Procedures Task Force of the Financial Condition Committee. Some of that guidance was specific to TCJA, but some of it also could be relevant to the newly proposed tax law changes.
For GAAP accounting, entities were generally given an additional year after TCJA to true-up reasonable estimates that were made in the financial statements during the period of enactment of TCJA. It is unclear whether the newly proposed changes would, if enacted, receive a dispensation similar to that previously provided.
Statutory Accounting—The NAIC addressed two major issues relating to TCJA’s enacted changes in the tax law: 1) accounting for income taxes under Statutory Accounting Principles (SAP) and 2) tax factors in the determination of Risk-Based Capital (RBC).
- Since there is no tax rate increase included in the current Bill, there will be no need to update tax factors for RBC purposes. However, if a corporate tax rate increase were to emerge in a future version of the Bill, the tax factors developed in response to changes made by TCJA will need to once again be updated by the Life RBC working group at the NAIC if that new corporate tax rate is enacted as part of reconciliation legislation.
Conclusion
Although many of the administration’s proposals were incorporated in principle in the Build Back Better Bill, there are significant differences in the details, and noteworthy omissions like changes to the marginal tax rates. Some of these and other potential revenue-raisers could be considered in a future Senate version of the Bill, even if not included in a House-passed Bill.
ACLI continues to monitor legislative proposals in Congress and will report out on updates in the next edition of TAXING TIMES.
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.
Ryan Derry is senior legislative and regulation analyst for the American Council of Life Insurers and may be reached at ryanderry@acli.com.
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.