Houston
10 January 2018
Reporter: Ned Holmes

John Dies: Captives must be mindful of Trump’s tax reform


Captives need to be mindful of the changes brought by Trump’s US tax reform plan, despite its positive effect on the insurance industry in general, according to John Dies, managing director of tax controversy at alliantgroup.

The Tax Cuts and Jobs Act, which was signed into law on 22 December 2017 by President Trump, brings a permanent cut on corporate tax rates and a temporary cut on individual rates.

The decrease in tax rate means improved profitability and therefore represents a positive for the insurance industry in general.

Although this improved profitability will in turn impact the competitiveness of the market, Dies explained that while rates may go down, he doesn’t expect this to have a huge effect on the captive market.

Dies commented: “I don’t expect captive insurance to take a competitiveness hit, although, it’s undeniable that insurance rates and other things may go down as these companies margins go up because they’re going to try and compete with each other.”

He continued: “I don’t think it will have a huge impact on the captive market. Now I will say captives need to be mindful. Where captives will see this is in underwriting, in feasibility studies, and things like that when you’re setting up your captive or revisiting your premiums.”

The Tax Cuts and Jobs Act will also impact captives utilising the 831(b) tax provision, known as micro-captives, and the captives using Passive Foreign Investment Companies (PFIC) and Controlled Foreign Corporations (CFC).

For micro-captives, the reform is a mixed bag. The cuts may allow them to afford insurance they couldn’t before, or to get higher policy amounts, allowing them to be better insured.

However, a decrease in tax rates means the importance of deductions goes down because when people pay less taxes the utility of deductions is impacted.

In addition, people will owe less in tax so their needs for deductions are likely to be reduced and one of the benefits of 831(b) captives, that the payment of premiums is a business expense which is a deduction, will be affected.

Dies suggested that this swing in deductions across the market is unlikely to make a material difference.

He said: “The majority of folks who are using 831(b) captives will not use any of these changes as a reason to stop. Either they will get more coverage or they will stay where they are.”

Trump’s tax reform plan will have a more negative impact on those captives using PFICs and CFCs.

New tax laws may now catch some offshore captives under the harsh PFIC regime and reduce the benefits as US tax (and potentially interest) will be applied to income earned.

In addition, US companies with foreign captives will now face an expanded definition of US shareholder for purposes of CFC determination. The new law will look to the value of ownership, or weight of vote in the foreign company, rather than just on weight of vote as was previously the case.

Furthermore, any prior CFCs will face the "deemed repatriation" provisions where any prior untaxed earnings and profits from CFCs will also now be included as income and taxed in the US.

Dies explained that these two changes will mean an adjustment on the treatment of foreign companies and foreign-owned companies that have US ties, some of which may be captives.

He added: “PFICs and CFCs are going to have to look at what these changes do for them and their bottom lines.”

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