FATCA for Insurance Companies

1. FATCA for Insurance Companies Insurance Tax Conference November 5, 2010 Terrence Coppinger – Deloitte Tax Christopher Cramer – Hartford Financial Services Group

2. FATCA Discussion of Provisions affecting Insurance Companies

3. Overview • Foreign Account Tax Compliance Act (“FATCA”) provisions enacted on March 18, 2010 • Compliance with FATCA requires certain non-U.S. insurance companies to provide the IRS with information on U.S. persons • Non-compliance results in withholding on income and gross sales proceeds from certain U.S. investments • Effective for payments made after 2012, but can affect new policies, new accounts, and policy-holder documentation now

4. Key Characteristics of FATCA • Requires virtually all non-U.S. financial intermediaries (such as non-U.S. insurance companies) holding U.S. investments to enter into agreements with the U.S. Treasury to report U.S. Accounts • A 30% withholding tax can apply to the U.S. source income and gross sales proceeds of an intermediary, and account holders who do not agree to provide information or privacy waivers • Broad application - Non-U.S. banks, brokers, insurance companies, and foreign investment vehicles, regardless of size, unless exempted by guidance issued by the U.S. Treasury • Requires withholding agents to determine whether non-U.S. financial and non-financial foreign entities comply with FATCA • Implementation of new income and gross proceeds withholding on non-compliant entities and indirect owners • Collection and reporting of non-financial foreign entity ownership information to the IRS • The provisions of FATCA are generally effective for payments made after December 31, 2012

5. FFI Agreement to Avoid Withholding • Agreement with U.S. Treasury • An FFI must agree to the following: • Obtain information to determine which holders are U.S. Accounts • Comply with verification and due diligence procedures on such accounts as required by Treasury • Report annually • Deduct and withhold 30% on payments made to recalcitrant account holders, electing FFI’s and FFI’s that did not enter into an agreement • Comply with requests from Treasury for additional information • Where foreign law would prevent such reporting, to close the account if a valid waiver of the law cannot be obtained from account holder

6. What is an FFI? • “Foreign Financial Institution” FFIs are defined by reference to 3 alternative activities: • deposit-taking in a banking or similar business; • Savings banks, commercial banks, S&Ls, thrifts, credit unions, building societies • holding of financial assets for the account of others; • Broker dealers, clearing organizations, trust companies, custodial banks • engaging primarily in the business of investing, reinvesting, or trading in financial assets including securities, partnership interests, and commodities, and derivative interests therein. • includes, but is not limited to, mutual funds or their foreign equivalent), funds of funds (and other similar investments), exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools and “other investment vehicles.” • future guidance is expected to provide guidelines for determining what types of activity constitute investing, reinvesting or trading and when an entity is primarily engaged in such activity.

7. Documenting Accounts • Notice 2010-60 provides guidance regarding the due diligence required by the FFI to determine whether its accounts are U.S. or foreign • There will be separate treatments for financial accounts held by individuals and financial accounts held by entities. • There will also be separate requirements with respect to “pre-existing accounts” and “new accounts.” • Documentation must be obtained as follows: • In the case of existing accounts, the notice provides transitional rules which permit the FFI to document its accounts over a five year period • Exception for accounts with an aggregate value of less than $50,000 • Identification of accounts based on electronically searchable information in the FFI’s files which is deemed to be an indicial of US status • Within 2 years accounts with an aggregate value of $1,000,0000 or more • Within 5 years all accounts • For new accounts, generally must be documented at the time that the account is opened • The IRS can terminate agreements for non-compliance.

8. Reporting Accounts A financial account directly owned by specified U.S. entities and U.S. individuals • Generally, these include private entities and individuals subject to U.S. Income Tax (i.e. dual citizens, legal residents, and those who satisfy the substantial presence test) • Excludes RICs, REITs, tax-exempt entities, publicly traded corporations A financial account which is indirectly owned by a “substantial U.S. owner” through a foreign entity: “Substantial” is more than 10%: • of the vote or value of a corporation’s stock; • profit or capital interest of a partnership; or • beneficial interests in a trust. “Substantial” means 0% for investment entities.

9. Reporting Accounts • An FFI will meet the annual information reporting obligation under an FFI Agreement by providing the following information on each U.S. account: • Name, address and TIN of each account holder that is a specified U.S. person; • Name, address and TIN of each substantial U.S. owner of any account held by a U.S. owned foreign entity; • Account number; • Account balance or value • Highest of the month-end balances for the year • Must be reported in U.S. dollars • Treasury is requesting comments the extent to which gross receipts and gross withdrawals or payments from the account will be reported The IRS is developing a new form for reporting the information

10. Withholding Grandfathered obligations for withholding purposes • The new rules are generally effective for payments made after 2012, but they do not require any amount to be deducted or withheld from any payment under any “obligation” outstanding on March 18, 2012, or from the gross proceeds from any disposition of such an obligation. • the term “obligation” for this purpose means “any legal agreement that produces or could produce withholdable payments,” except that it does not include: • any instrument treated as equity for U.S. tax purposes • any legal agreement that lacks a definitive expiration or term (e.g., savings deposits or demand deposits). • a legal agreement for a brokerage, custodial and similar agreements to hold financial assets for the account of others and to make and receive payments on income and other amounts with respect to such assets. • Material modifications of obligations will result in the obligation treated as newly issued

11. Non-financial Foreign Entities (NFFEs) • All other foreign entities that are not FFIs Similar rule to that applying to FFIs: • All withholding agents must deduct 30% from any withholdable payment made to an uncooperative NFFE NFFE will be required to a 30% withholding tax on withholdable payments to NFFEs unless the NFFE: • Certifies to the withholding agent that it has no “substantial U.S. owners”, or • Provides the names, addresses, and U.S. Taxpayer Identification Numbers of “substantial U.S. owners” to the withholding agent to report the information to the IRS • The withholding agent must not know or have reason to know that the information provided by the NFFE is incorrect.

12. What is the impact on the Insurance Industry • What we currently know: • Insurance companies fall under the definition of an FFI • Notice 2010-60 provides an exception for insurance companies whose business consist solely of issuing insurance or reinsurance contracts without cash value. • These would include, for example, most property and casualty insurance or reinsurance contracts or term life insurance contracts. • No comparable exemption is provided for issuers of life insurance or annuity contracts with an investment component, although comments on the treatment and definition of such contracts are requested. • Annuity payments and proceeds from life insurance contracts received by non-U.S. persons from a policy or contract issued by a U.S. insurer, or its foreign branch, are currently treated as FDAP and considered “withholdable payments” under FATCA • Comments regarding Notice 2010-60 must be submitted by November 1, 2010

13. IRS Comment Letters Addressing the Insurance Industry • Submitted in response to Announcement 2010-22 • American Bar Association (ABA) Section of Taxation (16 August 2010) • Requests exclusion for property and casualty (P&C) companies and reinsurers. • That insurance policies and products not used to store wealth be expressly excluded • CEA – the European Insurance and Reinsurance Federation (26 July 2010) • Requests exclusion for P&C insurance and reinsurance products as policies do not present a risk of tax evasion. • Requests inclusion of non-U.S. life insurance policies from 2013 onwards, with an exclusion for existing policies. Asks effective date be extended to 2014 or 2015 for insurers. • Exclusion of policies with low risk of tax evasion, e.g. policies with cash conversion value not exceeding $50,000.

14. IRS Comment Letters Addressing the Insurance Industry • Submitted in response to Announcement 2010-22 • Canadian Life and Health Insurance Association, Inc (CHLIA) (15 June 2010) • Not many U.S. policyholders since Canadian insurers are prohibited from marketing in U.S. • Believes it would be extremely difficult, if not impossible, to comply if FATCA applied without limitation to new and existing policies. • Administratively infeasible to track and maintain residency information on all accounts • Association of Bermuda Insurers and Reinsurers (26 April 2010) • Requests exclusion for P&C companies writing insurance or reinsurance in the ordinary course of their business.

15. Notice 2010–60: Specific requests for comments

16. Notice 2010–60: Specific requests for comments (cont.)

17. Notice 2010–60: Specific requests for comments (cont.)

18. Notice 2010–60: Specific requests for comments (cont.)

19. FATCA and Insurance Companies: Is Your Company Ready to Meet Its Obligations?

20. Where Do You Start? • Develop a roadmap. An action plan is key to successfully dealing with the FATCA requirements. • Team Approach. The new law affects the enterprise so skills and teams across several disciplines must be integrated. • Ownership. Appoint someone to lead the project or risk having the project languish.

21. When Do You Start? • Start now even though the new reporting and withholding obligations apply generally to payments after 2012. • More guidance is coming. You need to be ready to make changes as soon as the final regulations are issued.

22. How to Get Started? • Get started by beginning to analyze the law and your situation so that you can identify – • your organization’s status and choices, • whether your accounts/owners are FFIs, NFFEs, U.S. persons, or not impacted, • affected systems and potential changes, • affected processes and potential changes, • any new reporting or filing obligations, and • any needed communications.

23. Determining Status • Notice 2010-60 indicates that “financial institution” is broad enough to encompass certain insurance companies. • Treasury and IRS do not view the issuance of insurance or reinsurance contracts without cash value as implicating FATCA. This includes, for example, most P&C insurance and reinsurance contracts or term life insurance contracts. • Treasury and IRS plan to issue regulations treating entities whose business consists solely of such contracts as non-financial institutions for FATCA purposes.

24. Determining Status (Con’t) • Notice 2010-60 also provides that other contracts such as life insurance (other than term life without cash value) or annuity contracts may present the risk of tax evasion that FATCA is designed to prevent. • Treasury and IRS have requested comments with respect to the appropriate treatment of entities that issue cash value contracts under FATCA as well as the appropriate definition of cash value contracts for FATCA purposes.

25. Key Choices • If you’re a FFI, should you accept 30% withholding or enter into an FFI Agreement with IRS and assume U.S. reporting and withholding responsibilities? • If you’re a NFFE, should you accept 30% withholding or identify your substantial U.S. owners? • If you’re a U.S. withholding agent, there’s not much choice. 30% withholding is required on withholdable payments.

26. Categorizing Your Accounts or Owners • FFIs should begin to identify which account holders are U.S. persons or foreign entities with substantial U.S. owners. • NFFEs should begin to identify whether you have any substantial U.S. owners. • Withholding agents should begin to identify which payees are FFIs, NFFEs, or not impacted and which payments are subject to withholding.

27. Systems and Procedural Changes • What system changes will be required by FFIs, NFFEs, and withholding agents to hold the various documentation and certifications? • What procedural changes will be required to review the status of the documentation and determine what reporting is required?

28. New Reporting and Filing Considerations • NFFEs may need to provide to withholding agents the name, address, and TINs of substantial U.S. owners. How? Format? • Withholding agents may be required to report the NFFE’s U.S. owner information to the IRS. How? Format? • FFIs and NFFEs may need to file U.S. income tax returns to claim treaty benefits on amounts subject to FATCA 30% withholding. • More issues to come…

29. New Reporting and Filing Considerations • NFFEs may need to provide to withholding agents the name, address, and TINs of substantial U.S. owners. How? Format? • Withholding agents may be required to report the NFFE’s U.S. owner information to the IRS. How? Format? • FFIs and NFFEs may need to file U.S. income tax returns to claim treaty benefits on amounts subject to FATCA 30% withholding. • More issues to come…

30. New Reporting and Filing Considerations • NFFEs may need to provide to withholding agents the name, address, and TINs of substantial U.S. owners. How? Format? • Withholding agents may be required to report the NFFE’s U.S. owner information to the IRS. How? Format? • FFIs and NFFEs may need to file U.S. income tax returns to claim treaty benefits on amounts subject to FATCA 30% withholding. • More issues to come…

31. Communications • What communications should be made by FFIs, NFFEs, and withholding agents to customers, vendors, and other affected parties? • When should those communications begin? • Who should the communications come from?

32. Questions • Any questions?