The insurance industry is bracing for the July 1, 2014, implementation of an anti-money laundering statute, the Foreign Account Tax Compliance Act, which some say could be burdensome for agents and brokers.
The legislation, updated regulations of which are expected in January from the U.S. Treasury Department, could require that insurance premiums paid to foreign entities that are not registered with the Internal Revenue Service are subject to a 30% withholding regimen.
While the original intent of the law, which was signed in 2010, was to prevent tax-evasion by U.S. entities placing funds overseas via investment vehicles, the law also applies to some property/casualty placements.
To comply with FATCA, insurers must be documented and registered with the IRS and be issued a Global Intermediary Identification Number, said New York-based Denise Hintzke, global tax leader for FATCA compliance with Deloitte Tax L.L.P.
As the Department of the Treasury works to finalize regulations, time is growing short.
“We are expecting the final regulations in January and forms in February,” Ms. Hintzke said. “I think that it was already going to be a tight timeframe to implement. With the regulations out in January, that leaves less than a full six months, which will be even more difficult.”
Faced with the choice becoming part of the compliance process or potentially running afoul of it, most insurers are likely to choose to participate.
“Most will probably register,” said Ms. Hintzke, a process which is “not overly complicated” and should take some 30 to 40 minutes to do, she added.
There may be, however, insurers that elect not to do so. “A company may just decide that they do not want to be registered with the U.S. Government,” said Ms. Hintzke.
Of the costs and burdens associated with compliance, the withholding requirement is particularly troublesome for insurance brokers and policyholders, some observers say.
“You can't withhold 30% of the premium, because you can't bind business without full payment,” said Scott Sinder, general counsel for the Washington-based Council of Insurance Agents and Brokers.
If business is not bound, said Mr. Sinder, clients are not insured, and insurers could refuse claims on unbound business.
Such a requirement could force certain players to consider making changes in business activities, experts say.
Many companies in the insurance industry are reviewing whether coverage can be bound if FATCA withholding is applied, said New York-based Steve Chapman, financial services tax partner with Pricewaterhouse-Coopers L.L.P., in an email. ”These considerations are forcing carriers and clients to make business decisions around whether to do business with noncompliant FATCA carriers — many will be simply unwilling to transact with noncompliant carriers.”
The costs and efforts associated with compliance also could pose a burden to brokers and agents.
“The insurance industry — really more specifically agents, brokers and consultants — have welcomed and embraced an environment of full disclosure and transparency,” said Kansas City, Kan.-based Nancy Mellard, executive vice president and general counsel with the employee services division of Cbiz Inc., a professional services firm. “However, with these compliance statutes, which continue to be forced upon us, the redundancies of these types of compliance requirements are burdensome and potentially cost-prohibitive.”
The industry has made its position known to the Internal Revenue Service and the Treasury, but to no avail.
“The IRS has decreed that all insurance transactions must fall under this legislation. We sought relief when they made the determination in 2102, when they determined they would bring all insurance transactions under the tent of compliance,” said Joel Wood, senior vice president of government affairs for the CIAB.
“We have argued before the IRS to reassess this, and that effort will continue, although to date we have not had any reconsideration,” added Mr. Wood.
Support from Treasury
For its part, Treasury appears fully committed to FATCA and says it sees substantial support for the legislation and its goals.
“We are pleased by this significant international support and are working diligently to finalize all related guidance to ensure that financial institutions have time to effectively prepare and comply,” said a Treasury Department spokeswoman in an email. ”We are planning to finalize the regulations on account withholding and due diligence requirements early next year and there is no consideration for a delay.”
The IRS did not respond to requests for comment. However, Mr. Sinder pointed to recent comments made by a Treasury official indicating that the effective dates will not be postponed as further dashing any hopes of a delay or change in implementation.
Those elements of compliance that have been portrayed by the industry as being potentially onerous, such as adding entire new systems and staff, may not be necessary, however.
“The requirements companies have to put in place should be on top of things already in place, including reporting and documentation,” said Ms. Hintzke.
At Aon P.L.C., this is indeed the case
Aon has been preparing for FATCA implementation for more than a year and formed a corporate team in 2012 to lead the overall implementation effort and to oversee internal and external communications, said Chicago-based Andy Jenn, Aon Risk Solutions' senior vice president of global projects.
“Aon is integrating the FATCA processes into the existing organization structure and does not anticipate the need to establish any new business units or teams,” said Mr. Jenn. ”We will, however, identify a "responsible officer' as required by FATCA to certify the status and compliance of our entities designated as foreign financial institutions as required by the FATCA regulations.”