Insurance Market Update - December 2010

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 Editor

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.

Background

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...