NAIC accounting and tax reform updates

Authored by Carrie Small and Dan Buttke

There are currently several exposure drafts outstanding with the National Association of Insurance Commissioners’ (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) with a comment deadline of June 22, 2018, that could impact insurers, as follows:

  • 2018-16, Statements of Standard Accounting Practice (SSAP) No. 1 – Summary Investment Schedules Updates; would revise Appendix A-001 to maintain a breakout between public and nonpublic unaffiliated common stock and to use the current mortgage type categories on Schedule B mortgages;
  • 2018-15, INT 18-03 – Additional Elements Under the Federal Tax Cuts and Jobs Act; an interpretation (INT) was drafted to address the remaining elements from the Tax Cuts and Jobs Act (TCJA). Items addressed include: 1) repatriation transition tax, 2) AMT credit, and 3) global intangible low-taxed income tax (GILTI). See additional details below;
  • 2018-08, SSAP No. 56 – Private Placement Variable Annuities; would limit the products captured within the scope of that guidance to products that qualify as life insurance under Internal Revenue Code (IRC) §7702 and for which the insurer holder is not subject to investment risk;
  • 2017-32, Issue Paper – SSAP No. 30 – Unaffiliated Common Stock; proposes substantive revisions to SSAP No. 30. Key elements include: 1) common stock definition, 2) inclusion of closed-end funds and unit investment trusts, and 3) reporting enhancements on Schedule D-2-2;
  • 2017-33, Issue Paper – Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging; details the U.S. generally accepted accounting principles (GAAP) revisions from ASU 2017-12 with initial staff assessments. The exposure requests comments on the assessments, the revisions needed to incorporate suggested modifications, and the differences in derivative accounting between Statutory Accounting Principles (SAP) and U.S. GAAP that should be retained;
  • 2016-20, Issue Paper – ASU 2016-13, Credit Losses; details U.S. GAAP concepts from ASU 2016-13 and identifies possible concepts for statutory accounting consideration. The exposure specifically requests input on other elements that should be assessed as part of an expected credit loss model under statutory accounting.

INT 18-03, Additional Elements Under the Federal Tax Cuts and Jobs Act (TCJA)

This interpretation provides additional statutory accounting and reporting guidance for the following items under the TCJA as additional guidance to SSAP No. 101 – Income Taxes: 1) repatriation transition tax, 2) alternative minimum tax credit and 3) global intangible low-taxed income (GILTI).

Repatriation transition tax

The repatriation transition tax, under Internal Revenue Code (IRC) section 965, is a one-time transition tax on the foreign earnings of foreign subsidiaries of certain U.S. companies that are deemed to be repatriated. Cash and cash equivalents are taxed at a 15.5 percent rate, while remaining earnings are taxed at an 8 percent rate; both rates are achieved by way of a rate equivalent deduction. The repatriation tax is calculated within the 2017 federal income tax return and can be paid in a single installment, or spread over eight years if an election is made by the reporting entity.

Per the SAPWG interpretation, the repatriation tax should be treated as a current year tax expense under SSAP No. 101, paragraph three, with a related current federal and foreign income tax payable. A deferred tax liability should not be set up, even if the company elects to make installment payments over the eight year period. Reporting entities subject to the repatriation transition tax would be required to include additional narrative disclosures within footnote nine; including, the amount of repatriation transition tax due as calculated within the 2017 federal income tax return as well as the schedule of payments made and expected to be made to satisfy the liability. An explicit statement indicating whether the reporting entity has remitted the liability in full or is electing to pay under the required installment method must also be included. For those entities electing the installment method, this narrative disclosure must be included until the final installment payment is remitted.

Alternative minimum tax credit

As part of the TCJA, the alternative minimum tax (AMT) was repealed effective Jan. 1, 2018. For companies that had an AMT credit carryforward recorded at Dec. 31, 2017, this credit can now be recovered through an offset to regular taxes, or received as a refund. If not used to reduce the reporting entity’s tax obligation (e.g., the reporting entity has a taxable loss), the AMT credit carryforward can be recovered as a refund in tax years 2018 through 2020 at 50 percent per year, with any remaining credit fully refundable in 2021. If the AMT credit carryforward is expected to be recovered as a refundable credit, it will be subject to U.S. federal administrative sequestration requirements which will reduce the amount refunded by the federal government (i.e., in 2017, the sequestration percentage was 6.6 percent). U.S. GAAP guidance does permit entities to report the AMT credit carryforward as either a current year recoverable or as a deferred tax asset (DTA).

Although the SAPWG interpretation states that the AMT credit carryforward qualifies as a current income tax recoverable pursuant to paragraph nine of SSAP No. 101, it also recognizes that some reporting entities may prefer to report the AMT credit carryforward as a DTA. The interpretation, similar to U.S. GAAP guidance, will allow reporting entities to report the AMT credit carryforward in either manner (i.e., as a current income tax recoverable or a DTA). If reported as a DTA, it would be subject to the admissibility test under paragraph 11 and could potentially end up as a nonadmitted DTA. For reporting entities that expect to receive the AMT credit as a refund, rather than as a reduction of the tax liability, a valuation allowance shall be established for the amount not expected to be received as a result of sequestration. Reporting entities would be required to include additional narrative disclosures within footnote nine, including the gross amount of the AMT credit carryforward available, whether it is being recognized as a current year recoverable or a DTA, and a schedule of the expected receipt of the AMT credit, including identification of expected offset to the tax liability or receipt as a refund. These disclosures should be included within the statutory footnotes until the AMT credit carryforward is fully utilized or received.

Global intangible low-taxed income tax

GILTI is a new tax under the TCJA; calculated each year on a portion of a controlled foreign corporation’s active income. This tax should be included within the 2018 tax return, if applicable, and subsequent returns. The tax due is a current tax expense and not a temporary tax item. However, the Financial Accounting Standards Board (FASB), through Staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, recognized that a company may elect to recognize deferred items under GILTI for the basis differences for foreign controlled entities.

Per the SAPWG interpretation, the GILTI tax from the current-year tax return should be treated as a current year tax expense under SSAP No. 101, paragraph three, with a related current federal and foreign income tax payable. From a deferred perspective, reporting entities generally should not recognize deferred GILTI tax for basis differences in foreign entities under statutory accounting guidance. However, per the interpretation, reporting entities would be permitted to recognize deferred tax items for these basis differences if they have recognized deferred tax items for such basis differences under U.S. GAAP. They are not required to do so, but if they do choose to recognize the deferred tax item, the reporting entity would be required to explicitly disclose this in footnote nine.

Other legislative updates

On June 5, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). This bill includes two NAIC legislative priorities, including: 1) language from the Senior Safe Act which encourages reporting of suspected financial exploitation and 2) text of the International Insurance Capital Standards Accountability Act which formalizes structures for congressional oversight, increased transparency in international standard-setting and consultation with state insurance regulators.

For more information on this topic, or to learn how Baker Tilly insurance specialists can help, contact our team.


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