FATCA Compliance

FATCA Adds to Brokers’ Compliance Burden

Brokers comply with FATCA even as they seek exemption from the law’s foreign insurance requirements.
By: | September 15, 2014 • 4 min read

Brokers are working to comply with the requirements of the Foreign Account Tax Compliance Act, which took effect July 1. At the same time, however, industry lobbyists are asking Congress and the Internal Revenue Service to exempt non-cash value premiums from the new tax evasion law.

“The compliance burden of this law is significant and there are some reports saying it could cost in the tens of millions of dollars,” said Joel Kopperud, director of governmental relations for the Council of Insurance Agents & Brokers (CIAB).

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As of July, brokers that collect premiums from their clients on behalf of foreign carriers must obtain certain IRS-generated forms from the carriers that they are FATCA-compliant or FATCA-exempt. In addition, the brokers must report each carrier’s status under that law to the IRS.

If an agency determines a carrier is not compliant or exempt, then a percentage of the premiums paid to them by their U.S. clients that have coverage with the foreign carrier will be withheld as taxes.

If an agency determines a carrier is not compliant or exempt, then a percentage of the premiums paid to them by their U.S. clients that have coverage with the foreign carrier will be withheld as taxes.

(This part of the law was deferred and will apply to premiums paid on insurance and reinsurance policies with effective or renewal dates of Jan. 1, 2015 or later.)

Forcing brokers to withhold a percentage of an insurance premium “would cause major business disruptions to insurance customers including the potential for lapses in coverage,” said Steve Chapman, partner with PwC’s financial services tax practice in New York City.

Fiduciary Responsibilities

J. Scott Tofil, senior vice president and chief financial officer of Beecher Carlson Holdings, Inc. in Atlanta, said his firm will collect the required forms from all of the foreign carriers that it works with, and they will be kept in an internal database shared with its parent company, Brown & Brown.

“If [the foreign carriers] cannot provide these forms, we cannot do business with them,” Tofil said.

“When the government added these requirements into the law, I really don’t think they paid attention to how brokers acting in a fiduciary capacity would be impacted.” — J. Scott Tofil, senior vice president and chief financial officer, Beecher Carlson Holdings

“As a fiduciary, the money we collect from our clients and put in trusts to pay premiums to carriers is never technically our money. So if we were forced to withhold 30 percent as this new law requires, we would not be able to submit full payment, and the carrier might cancel their insurance, which is why we will not place insurance with a carrier that cannot provide the correct paperwork.”

While that likely won’t happen for most of the foreign insurers, this new law places all brokers and agents in “an uncomfortable position,” he said.

“When the government added these requirements into the law, I really don’t think they paid attention to how brokers acting in a fiduciary capacity would be impacted,” Tofil said.

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Many states require brokers and agents to put the money for premiums into a trust and hold in a fiduciary capacity, he said. “Now you have the federal government telling you to take 30 percent from money and hold it, when the money isn’t yours to begin with.”

To aid broker compliance with FATCA, the CIAB provided an online portal that offers the forms required by the IRS for each foreign insurer, Kopperud said.

“This way, brokers don’t have to reach out individually for the certifications from all of the foreign insurers they work with — we will have done that for them,” he said. “This will be a one-stop shop for these certificates.”

The withholding requirements will likely not affect most brokers, as most will simply not conduct business with a foreign insurer that is not FATCA-compliant, said Vladimir Gololobov, CIAB’s director, international.

“But the reporting piece has a cost consideration that really comes into play, which will divert more brokers’ resources,” Gololobov said.

Tax Evasion Schemes

The reason insurance brokers were included in FATCA was that some foreign insurance products have an investment component, such as an annuity, that “unscrupulous” U.S. taxpayers could use to funnel money and evade taxes, said Dean Paik, a director at Rogers Joseph O’Donnell law offices in San Francisco.

FATCA was intended to stamp out tax evasion schemes, Paik said. In the past, U.S. taxpayers who wanted to avoid paying taxes would set up investment accounts at foreign institutions. The IRS wants to ensure that U.S. taxpayers can’t use insurance products with investment components to evade taxes, he said.

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When the law was passed in 2010, the brokers’ group believed that non-cash value insurance was not intended to be part of the law, but the IRS included noncash value premiums when they released final regulations implementing FATCA, Kopperud said.

CIAB is working with the IRS and Congress to clarify the situation, he said.

Non-cash value insurance is “simply irrelevant to FATCA’s goal of combating tax evasion, as property casualty insurance and reinsurance simply cannot be used as a vehicle to evade taxes,” Kopperud said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

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