Insurance Tax Conference

1. Insurance Tax Conference International Tax Issues Robert A. Fiscella November 4, 2011

2. Proprietary Notice • The material contained in this presentation has been prepared solely for informational purposes by Gen Re. The material is based on sources believed to be reliable and/or from proprietary data developed by Gen Re, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Presentation for International Tax Conference November 4, 2011

3. A New Paradigm • Because of the current economic crisis, both here in the United States and throughout the world, the long-existing discussions on comprehensive tax reform have now taken center stage • Unfortunately there is nothing realistic currently on the table nor is anything likely to happen soon, especially considering the current political climate in Washington, D.C. • Discussions have focused on a lower tax rate with a broader tax base, both for corporations and individuals, and on replacing our current worldwide corporate tax system with a territorial system Presentation for Insurance Tax Conference November 4, 2011

4. Repatriation Holiday • There have been some discussions in Congress concerning a second repatriation holiday • Whether it will happen is driven by the scoring of the bill • There is also concern about the effect of periodic repatriation holidays on companies’ policies on cash repatriation • To many people’s minds, the last repatriation holiday did not have the expected effect on the country. Much of the cash went to stock buy-backs and increases in executive compensation rather than to create jobs • Any future repatriation holiday may likely be tied to fundamental tax reform, especially with a move to a territorial tax system for corporations • There has been recent activity both for and against a repatriation holiday in Congress, with no real indication of the ultimate outcome. The Obama administration opposes it Presentation for Insurance Tax Conference November 4, 2011

5. U.S. Subpart F Rules – Basic Rules • Subpart F of the Code contains rules designed to ensure current taxation of certain types of income earned by a foreign subsidiary. This anti-deferral regime can accelerate U.S. tax on foreign income prior to the receipt of dividend distributions, causing the U.S. tax to be funded from other sources • It taxes certain U.S. shareholders of a controlled foreign corporation (“CFC”) and accelerates U.S. tax on certain undistributed earnings of a CFC • It was originally intended to tax passive income on a current basis Presentation for Insurance Tax Conference November 4, 2011

6. U.S. Subpart F Rules - Insurance Operations • Insurance income of a CFC is assumed to be taxable Subpart F income unless a specific exception to the general rule applies • Insurance Income (1987 - 1998) • Since 1987, U.S. tax law has required that certain underwriting income and all investment income earned by a CFC be taxed on a current basis • The law allowed an exclusion from current U.S. tax for underwriting income attributable to the insurance or reinsurance of risk located within the country of incorporation of the CFC (“home country risk”) Presentation for Insurance Tax Conference November 4, 2011

7. U.S. Subpart F Rules – Insurance Operations • Active Financing Exception (1999 - 2011) • Enacted as an important expansion of the Subpart F exception for global insurance/reinsurance operations headquartered in the United States • Initially enacted as a temporary exception to Subpart F, the provision has been extended on 5 separate occasions • Currently set to expire at the end of 2011 • Generally allows for deferral of underwriting income from home-country risk and certain cross-border risk business as well as investment income on assets used to support exempt insurance business Presentation for Insurance Tax Conference November 4, 2011

8. U.S. Subpart F Rules – Insurance Operations • U.S. headquartered insurers/reinsurers are moving from a subsidiary structure to a branch structure to reduce costs and provide capital relief, especially for European operations that will be subject to Solvency II • As this is happening, loss of the active financing exception to Subpart F will greatly increase these companies’ Subpart F income in the future • All investment income and all cross-border underwriting income will be treated as Subpart F income, greatly increasing the taxable income of U.S. headquartered insurers/reinsurers • It will also impact the effective tax rate reported by such companies for financial reporting purposes Presentation for Insurance Tax Conference November 4, 2011

9. U.S. Subpart F Rules – Insurance Operations • The legislative outlook for the extension of the active financing exception is unclear • Nothing is expected to happen in the current session of Congress • Most likely this exception will be taken up with other extenders after the Presidential election in 2012 during the “lame duck” session of Congress • There has been one proposal to make active financing permanent, but this is not likely to gain traction since it results in substantial loss in revenue during a period of discussions about deficit reduction • Extenders may, however, become part of the overall discussion on tax reform such that they may become permanent. Otherwise, they must be paid for Presentation for Insurance Tax Conference November 4, 2011

10. U.S. Subpart F Rules – Insurance Operations • Absent either extension or permanent enactment of the active financing exception, U.S. headquartered insurers/reinsurers who have gone to a branch operation can consider making an election under Code section 964(d) to treat their branches as separate foreign corporations in order to reduce their Subpart F exposure • This would exempt home-country risk business from Subpart F income on a “branch-by-branch” basis • Any amount transferred or credited from such branches to the controlled foreign corporation’s home office is treated as a dividend paid by one CFC to another CFC • An election made under this Code section is permanent unless revoked with the consent of the Service Presentation for Insurance Tax Conference November 4, 2011

11. Current International Insurance Tax Issues • Increasing globalization of the insurance industry • Many cross-border transfer pricing issues and permanent establishment (“PE”) issues have resulted • The global economic crisis has led to an increased use of transfer pricing and, in particular, PE issues as revenue raisers in many foreign jurisdictions • Tax audits are on the rise, especially in the U.S. insurance industry and especially in international operations • Previously transfer pricing was often used as an alternative to PE adjustments, with the threat of the latter as a means of reaching agreement on the former • The rules have changed, with taxing authorities pursuing PE issues more because of greater revenue potential Presentation for Insurance Tax Conference November 4, 2011

12. Current International Insurance Tax Issues • Insurance company risks • PE issues - KERT functions - where is the underwriting decision made to bind the company on a particular risk? • Issues arise as to profit attribution to a PE • Finding of a PE can result in more revenue to a taxing authority than imposition of an arm’s length transfer price because the taxing authority will attempt to tax both underwriting income and related investment income • Structure of operations, including arm’s length service agreements, can ameliorate the issues Presentation for Insurance Tax Conference November 4, 2011

13. Neal Bill • Under the Neal bill, recently re-introduced, the use of foreign affiliated reinsurers to migrate U.S. insurance risks offshore to avoid U.S. tax would be curtailed by deferring a deduction for a portion of reinsurance premiums paid to foreign affiliates and then excluding from income any reinsurance recovered thereon • It would apply to any reinsurance premium paid to an affiliated corporation if, with respect to such affiliated corporation, such premium is neither Subpart F income nor otherwise subject to U.S. tax • A foreign group can avoid the deduction disallowance by electing to be subject to U.S. tax currently on the premiums and net investment income from affiliated reinsurance of U.S risk Presentation for Insurance Tax Conference November 4, 2011