29-Oct-2018

H.R. 1 – THE UNEXPECTED CHRISTMAS TALE

“And the more the Grinch thought of this Who Christmassing, the more the Grinch thought 'I must stop this whole thing!'" 

- Dr Suess, How the Grinch Stole Christmas 

Last December – exactly two days before Christmas Eve – the Trump administration's US tax reform snuck in like a Grinch in the night.  

Industry professionals and service providers collectively spat out their eggnog as the holiday festivities screeched to a halt.  

But just as the Whos in Whoville were unfazed by the Grinch's antics, so too did Cayman's captive insurance industry quickly realise that H.R. 1 would have minimal impact.  

No change here 

When Insurance Managers Association of Cayman (IMAC) members were asked whether they saw any changes to their filing requirements, 70% of respondents reported no change whatsoever.  

This doesn't come as a surprise. Captive companies in Cayman, with a US parent(s), already pay tax each year on profits generated either directly to the IRS or through the parent(s), regardless of whether the beneficial owners receive any cash distributions.   

Cayman captives were also not impacted by H.R. 1’s “mandatory repatriation provisions” – enacted to put US corporations on the same playing field as companies who are deferring their foreign income or not paying tax on their offshore earnings. Again, because most Cayman captives are already taxed when earned, there is no change to be seen here either.  

And while H.R. 1’s Base Erosion and Anti-Abuse Tax may affect captives with large for-profit US parent companies, most of Cayman’s captive owners will largely be unaffected.  

So no changes whatsoever? 

Not quite. Cayman’s captive owners won’t see substantial changes in filing, but they may see a shift in how their taxable income is calculated. For example,
  • they could see a slowing down of deductions for unpaid losses, thanks to new loss reserve discounting rules; 
  • the insurance exception to the Passive Foreign Investment Company (PFIC) rules has also been modified so that it is now only available to foreign insurance companies with insurance liabilities that constitute more than 25% of its total assets; and 
  • any Cayman insurance company owned by 11 or more unrelated shareholders who are insuring all unrelated third-party risks such as automobile warranties could be affected by this.  

The good news about H.R. 1 

For the captives in Cayman that have elected to be treated as a US domestic taxable entity, H.R. 1 actually brings good tidings: 

1. a decrease in the top marginal tax rate from 35% to 21%; 
2. the corporate alternative minimum tax is repealed; and 
3. net operating losses of property and casualty insurance companies are unaffected. 

 

What happens next?  

Perhaps the most refreshing data from the IMAC survey is this: less than 2% of the responses indicated an interest in changing domiciles because of US tax reform.  

If there is anything to take away from the story of H.R. 1, it is that Cayman has proven it has no intention of avoiding compliance. With largely unaffected captives and happy, confident owners, Cayman will continue to do what it does best – be a leading domicile for captive insurance while responding innovatively to an ever-changing market.  

Better luck next time, Mr. Grinch.