UK: Insurance Market Update – December 2010

Last Updated: 20 December 2010
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Welcome to this December edition of the Insurance Market Update, which considers one of the issues facing the life insurance industry, the Foreign Account Tax Compliance Act ("FATCA").

Insurers are currently focusing on the all important date of 1 January 2013 when the new Solvency II regime comes into effect. On this same date a new US tax regime, part of the US crack-down on tax evasion, will come into force with a potentially significant impact on UK life insurers.

In this month's edition, Anne Hamilton and Chris Tragheim discuss the provisions enacted by FATCA, why it is relevant to UK life insurers and how this might affect them. They then address the main areas where the insurance industry is trying to lobby the US tax authorities in the hope of reducing the burden of this new legislation. Finally, they give an outline of the next steps for FATCA and how insurers should prepare for its implementation.

We hope you find this edition informative and, as always, your comments and suggestions for future themes or topics are welcome.

Rabih Gemayel

For UK insurers, 1 January 2013 is the date when the Solvency II regulatory regime is expected to take effect. However, it is also the start date for a new US tax regime, which could yet have significant impact for UK life insurers.


The US Foreign Account Tax Compliance Act ("FATCA") provisions were enacted1 in 2010. Their goal is to prevent tax evasion by US persons holding assets offshore, by providing the authorities with sufficient information to ensure that tax is paid. These proposals have a very high level of bi-partisan political support.

So why is this US tax crack-down of relevance to UK life insurers?

The FATCA provisions seek to obtain information about investments held overseas by US persons from the foreign financial institutions (FFI) which administer those investments. The definition of an FFI includes all non-US life and general insurance companies.

To comply, an FFI would need to obtain information about every holder of every account across its group, comply with procedures to identify US accounts, and report annually on any US account. An FFI which does not agree to comply will be subject to a penal withholding tax of 30% on all the US "withholdable payments" it receives, including both interest and repayment of capital. Whilst any incremental withholding tax may ultimately be repayable, it is likely there will be a significant delay and thus a significant cash flow cost.

The FATCA provisions also impose a 30% withholding tax on payments to non-financial foreign entities (NFFEs) unless they disclose any substantial US owners or certify that no US persons hold a defined level of ownership (NFFEs which are part of a quoted group are exempted).

Insurance products – within and out of scope

Regulations which provide the detail of the new law are currently being developed by the US tax authorities. The insurance industry is lobbying to scope out as much insurance business as possible from the regime, thus mitigating the cost of compliance for insurers. It is doing so by encouraging efforts to be focused on entities or products most likely to be used for US tax evasion.

A consultation document2 was issued by the US tax authorities in August. The formal period for comment has ended but we understand that comments will be accepted on the Notice until the end of 2010, and on the FATCA provisions more generally on an ongoing basis.

The three main strands of lobbying are discussed below.

1. Risk contracts – The Notice recognises that insurance contracts "without cash value" – broadly, without surrender value – should not be within the remit of FATCA. Companies writing only risk products will be treated as NFFEs; informal indications are that risk products will also be excluded from FATCA compliance rules for those writing risk and savings products.

2. Savings contracts – The US tax authorities remain concerned that insurance savings products could be used in tax evasion. Strong representations are being made that this assumption is too broad and that many savings products should be excluded as "low risk". As the US authorities have yet to respond, we recommend that companies and trade groups should continue to identify low risk products and provide evidence to support that status.

The following characteristics of low risk products have been suggested:

  • Products approved locally as a retirement plan – including individual and group plans, and insurance of such plans
  • Products subject to high local tax – including UK life policies taxed under the I minus E regime
  • Products which are targeted only at markets not likely to include significant US persons – such as products offered by a domestic company to local residents
  • Products in which US persons cannot invest
  • Products in which the amount a person can invest is limited

3. In-force business – The FATCA provisions apply to existing as well as new business. Notice 2010-60 recognises that it will be harder to identify US persons within the existing customer base than those within new business, and proposes a phased approach over five years.

However, identifying all US persons who hold existing insurance policies is likely to be impossible even over five years. Thus, the focus of representations is to exclude inforce insurance policies in full, or at least to leave in scope only very high value contracts or those with obvious US indicators.

Conflict between FATCA and domestic law or regulation

In many jurisdictions there will be conflict between FATCA and local law or regulation. For example:

  • EU and other data protection rules preclude the provision of information to the US
  • Local law may prevent the unilateral closure by a life company of an in-force policy, or changes to policy terms to permit it
  • Regulatory approval to change contract terms may be impossible to achieve for new policies by 1 January 2013
  • Withholding of US tax by a non-US insurer may not be permitted under local law

These conflict-of-law constraints are being raised with the US tax authorities, and with national Governments. The UK Treasury is aware of the issues.

There are numerous other practical issues for life insurance business – such as identifying all policies not held by an individual, obtaining look-through information about them, and dealing with tax on pass-through payments.

Next steps

The US authorities recognise the challenge in implementing these provisions in an effective way. They are seeking engagement with affected businesses. We believe there is a real opportunity for insurers to influence the outcome, so that the focus is on new business which might otherwise present a real risk of being used for US tax evasion. Groups who have met with the US authorities have found that they are in listening mode, and are very receptive to practical solutions.

Many groups have assessed their exposure to the 30% withholding tax, and have also undertaken a high level review across key territories to understand what key exclusions would minimise the impacts for them. Some are now starting to undertake more extensive impact assessments. We believe that all insurance groups should be assessing their position, supporting relevant trade body lobbying, and considering whether to make their own representations.


1 The provisions form part of the Hiring Incentives to Restore Employment (HIRE) Act 2010

2 Notice 2010-60 entitled "Notice and request for Comments Regarding Implementation of Information Reporting and Withholding Under Chapter 4 of the Code"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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