Statutory Accounting Principles Working Group



Statutory Accounting Principles (E) Working GroupMaintenance Agenda Submission FormForm AIssue: Additional Elements under the Federal Tax Cuts and Jobs ActCheck (applicable entity):P/CLifeHealthModification of existing SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX New Issue or SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Interpretation FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Description of Issue: This agenda item has been drafted to consider statutory accounting and reporting guidance for the following items under the federal Tax Cuts and Jobs Act: Repatriation Transition Tax (RTT)Alternative Minimum Tax (AMT) CreditGlobal Intangible Low-Taxed Income (GILTI)This agenda item proposes an Interpretation to provide limited-time guidance for these items, with subsequent revisions to SSAP No. 101—Income Taxes, once the FASB formally addresses GILTI for U.S. GAAP purposes. (The RTT and AMT Credit are limited-time issues and are not expected to be included in SSAP No. 101.)Repatriation Transition Tax: The repatriation transition tax (RTT) is a one-time transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies. Under new section 965 of the Internal Revenue Code (IRC), these earnings are deemed to be repatriated. Under the guidance, foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. Key elements are noted below: The RTT is calculated in the 2017 tax return. It is not a temporary tax item and does not reverse in subsequent years. The RTT is an amount owed under the revised tax law, and is not impacted by future taxable income. Although the full amount of the RTT is owed, companies can elect to pay the liability over eight years under a set IRC schedule. If electing to make payments, the future RTT payments are due regardless of whether a company has future taxable income or losses. RTT Proposed Statutory Accounting Treatment: The RTT is a current-year tax item captured in SSAP No. 101, paragraph 3. The amount payable shall be recognized as a current-year expense with a liability recognized as a “current federal and foreign income tax” and not as a deferred tax liability (DTL), regardless of whether an entity elects to make payments of the amount owed or pay the full amount. Reporting entities that are subject to the RTT shall include the following narrative disclosure as part of the income tax disclosures in note 9: The total RTT owed under the TCJA, calculated in the 2017 tax return.A schedule of payments made and expected future payments to satisfy the RTT liability. This disclosure shall explicitly identify whether the insurance entity has remitted full payment of the RTT, or whether the reporting entity is electing to pay the liability under the permitted installments. If the reporting entity has fully remitted the RTT, this disclosure is only required in the year-end 2018 financial statements. Reporting entities electing to make payments shall include the disclosure through the year-end statutory financial statements for the year in which the last installment payment was remitted. AMT Credit: The Alternative Minimum Tax (AMT) has been repealed. If a reporting entity has AMT credit carryforwards, it can claim a recoverable of up to 50 percent of the remaining credits. Once the amount of the AMT credit is known by the reporting entity, it does not subsequently change with future taxable income. The amount recoverable by the reporting entity can be recovered through an offset to regular taxes, or ultimately received as a refund. Key elements are noted below:A reporting entity could realize all of its AMT receivable in the 2018 tax year if it is used to reduce its regular tax obligation. (It could also be used fully in 2019-2020 in this manner.)If the AMT credit carryforward is not used to reduce regular taxes, it can be recovered as a refund (50%) in tax years 2018 through 2020, with a 100% refund in 2021 irrespective of future taxable income.If the AMT credit will be received as a refund (and not as an offset to tax liability), it will be subject to U.S. federal administrative sequestration requirements, which reduce the amount paid by the federal government. (In 2017, the sequestration percentage was 6.6%, but this percentage varies yearly.)U.S. GAAP guidance permits reporting the AMT credit as a current-year recoverable or as a deferred tax asset (DTA). AMT Credit Proposed Statutory Accounting Treatment: The AMT credit qualifies as a current income tax recoverable pursuant to paragraph 9 of SSAP No. 101. Although qualifying as a current-year recoverable, NAIC staff is aware that some companies would prefer to report the AMT credit as a DTA. This preference is believed to be driven by rate regulations and concern that the current recoverable presentation would impact rates, as the improved presentation from the recoverable would be based on a tax law change and not company operations. Although the AMT refund qualifies as a current income tax recoverable, in order to mirror provisions permitted under U.S. GAAP, reporting entities may elect to report the AMT credit as either a current-year recoverable or as a DTA. If reported as a DTA, it would be subject to the statutory accounting admittance limitations for DTAs. Reporting entities that expect to receive the AMT credit as a refund, rather than as a reduction of liability, shall disclose the gross amount due, with recognition of a statutory valuation allowance (regardless if recognized as a current recoverable or DTA) for the amount of the refund not expected to be received as a result of U.S. federal sequestration. The statutory valuation allowance shall be adjusted yearly based on updated sequestration estimates. Reporting entities with an AMT credit shall include the following narrative disclosure as part of the income tax disclosures in note 9: Gross amount of AMT credit calculated in the 2017 tax return. Identification of whether the AMT credit was recognized as a current-year recoverable or DTA. Schedule of expected receipt of AMT credit, including identification of expected offset to tax liability or receipt as a refund. (The disclosure schedules shall remain in the statutory financial statements through the year-end statutory reporting period in which the AMT credit is fully utilized / received.) The following disclosure illustration will be proposed for inclusion in the A/S illustrations. This disclosure is not proposed to be data-captured, therefore, this will just be included for illustration purposes. Gross AMT Credit: $Statutory Valuation AllowanceReceived RecoverableRecognized RecoverableRecognized DTATotal 2018201920202021 Recoverable AMT Credit: $Expected to Offset Taxable Liability (No Sequestration)Expected to Receive as Refund (with Sequestration)Total(Should equal sum of recognized recoverable and recognized DTA)2018201920202021Global Intangible Low-Taxed Income Tax (GILTI): The Global Intangible Low-Taxed Income (GILTI) tax is a new tax under the TCJA, calculated each year on a portion of the controlled foreign corporations active income. Key elements are noted below: GILTI is included in the 2017 year tax return and subsequent tax returns. An amount owed for GILTI in any tax year is not a temporary tax item and does not reverse in subsequent years. Current amounts owed under GILTI would be captured as a current income tax in SSAP No. 101, paragraph 3. Assessments of changes in the basis differences in foreign entities could result with calculations of deferred tax items related to GILTI – This issue is whether existing basis differences will result in GILTI when they reverse. (Changes in foreign operations may result with deferred item calculations, but such calculations are expected to be overly complex and be based on theoretical values.) In January 2018, the Financial Accounting Standards Board (FASB) Staff Q&A Topic 740, No. 5 Accounting for Global Intangible Low Taxed Income identified that reporting entities may make a company election to recognize deferred items under GILTI. (The recognition of the deferred items does not impact current tax recognition for GILTI, but whether the FASB question issue is whether anticipated changes in the basis difference for foreign controlled entities shall result with projected deferred tax assets or deferred tax liabilities.) The FASB Q&A Topic 740, No. 5 also identified that FASB staff will be monitoring how entities that pay tax on GILTI are accounting and disclosing these deferred effects over the next few quarters. The FASB staff will provide a subsequent update so the FASB can consider whether accounting and disclosure improvements are needed for U.S. GAAP. GILTI Proposed Statutory Accounting Treatment: GILTI tax from the current-year tax return is a current-year tax item captured in SSAP No. 101, paragraph 3. The amount payable shall be recognized as a current-year expense with a liability recognized as a “current federal and foreign income tax” and not as a DTL. Under statutory accounting, reporting entities shall not recognize deferred GILTI tax for basis differences in foreign entities. As an exception to this general rule, reporting entities are permitted to recognize deferred tax items for basis differences expected to reverse as GILTI in future years if they have recognized deferred tax items for?basis differences expected to reverse as GILTI under U.S. GAAP. However, a reporting entity that has recognized deferred tax items for GILTI under U.S. GAAP may follow the statutory accounting general rule (no recognition of deferred tax items). Reporting entities that recognize deferred tax items for GILTI shall explicitly disclose this item in Note 9.? (NAIC staff will subsequently review this statutory accounting positions once FASB assesses for U.S. GAAP.) Existing Authoritative Literature: SSAP No. 101—Income Taxes provides the statutory accounting principles for current and deferred federal and foreign income taxes and current state taxes. SSAP No. 101 predominantly adopts FAS 109, but rejects specific FAS 109 paragraphs as they are not applicable to reporting entities subject to SSAP No. 101 or are inconsistent with the statutory accounting guidance. Relevant guidance from SSAP No. 101 is provided below: “Income taxes incurred” shall include current income taxes, the amount of federal and foreign income taxes paid (recovered) or payable (recoverable) for the current year. Current income taxes are defined as:Current year estimates (including quarterly estimates) of federal and foreign income taxes payable or refundable, based on tax returns for the current and prior years, except as addressed in paragraph 3.b., and tax loss contingencies (including related interest and penalties) for current and all prior years, computed in accordance with SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R) with the following modifications:The term “probable” as used in SSAP No. 5R shall be replaced by the term “more likely than not (a likelihood of more than 50 percent)” for federal and foreign income tax loss contingencies only.For purposes of the determination of a federal and foreign income tax loss contingency, it shall be presumed that the reporting entity will be examined by the relevant taxing authority that has full knowledge of all relevant information.If the estimated tax loss contingency is greater than 50% of the tax benefit originally recognized, the tax loss contingency recorded shall be equal to 100% of the original tax benefit recognized.Amounts incurred or received during the current year relating to prior periods, to the extent not previously provided, as such amounts are deemed to be changes in accounting estimates as defined in SSAP No.?3—Accounting Changes and Corrections of Errors (SSAP No.?3).In determining when tax loss contingencies associated with temporary differences should be included in current income taxes under paragraph 3.a., and therefore included in deferred taxes under paragraph 7, a reporting entity is not required to “gross-up” its current and deferred taxes until such time as an event has occurred that would cause a re-evaluation of the contingency and its probability of assessment, e.g., the IRS has identified the item as one which may be adjusted upon audit. Such an event could be the reporting entity’s (or its affiliate or parent in a consolidated income tax return) receipt of a Form 5701, Proposed Audit Adjustment, or could occur earlier upon receipt of an Information Document Request. At such time, the company must reassess the probability of an adjustment, reasonably re-estimate the amount of tax contingency as determined in accordance with paragraph 3.a., make any necessary adjustment to deferred taxes, and re-determine the admissibility of any adjusted gross deferred tax asset as provided in paragraph 11.State taxes (including premium, income and franchise taxes) shall be computed in accordance with SSAP No.?5R and shall be limited to (a) taxes due as a result of the current year’s taxable basis calculated in accordance with state laws and regulations and (b) amounts incurred or received during the current year relating to prior periods, to the extent not previously provided as such amounts are deemed to be changes in accounting estimates. Property and casualty insurance companies shall report state taxes as other underwriting expenses under the caption “Taxes, licenses, and fees.” Life and accident and health insurance companies shall report such amounts as general expenses under the caption “Insurance taxes, licenses, and fees, excluding federal income taxes.” Other health entities shall report such amounts as general administration expenses under the caption “Taxes, licenses, and fees.” State tax recoverables that are reasonably expected to be recovered in a subsequent accounting period are admitted assets. State taxes are reasonably expected to be recovered if the refund is attributable to overpayment of estimated tax payments, errors, carrybacks, or items for which the reporting entity has authority to recover under a state regulation or statute.Deferred Income TaxesBecause tax laws and statutory accounting principles differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains, and losses, differences arise between:The amount of taxable income and pretax statutory financial income for a year, andThe tax bases of assets or liabilities and their reported amounts in statutory financial statements.A reporting entity’s balance sheet shall include deferred income tax assets (DTAs) and liabilities (DTLs) related to the estimated future tax consequences of temporary differences and carryforwards, generated by statutory accounting, as defined in paragraph?11 of FAS?109.A reporting entity’s deferred tax assets and liabilities are computed as follows:Temporary differences are identified and measured using a “balance sheet” approach whereby statutory and tax basis balance sheets are compared;Temporary differences include unrealized gains and losses and nonadmitted assets but do not include asset valuation reserve (AVR), interest maintenance reserve (IMR), Schedule?F penalties and, in the case of a mortgage guaranty insurer, amounts attributable to its statutory contingency reserve to the extent that “tax and loss” bonds have been purchased;Total DTAs and DTLs are computed using enacted tax rates; A DTL is not recognized for amounts described in paragraph?31 of FAS?109; andGross DTAs are reduced by a statutory valuation allowance adjustment if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the gross DTAs will not be realized. The statutory valuation allowance adjustment, determined in a manner consistent with paragraphs 2025 of FAS 109, shall reduce the gross DTAs to the amount that is more likely than not to be realized (the adjusted gross deferred tax assets).Changes in DTAs and DTLs, including changes attributable to changes in tax rates and changes in tax status, if any, shall be recognized as a separate component of gains and losses in unassigned funds (surplus). Admitted adjusted gross DTAs and DTLs shall be offset and presented as a single amount on the statement of financial position.Admissibility of Income Tax AssetsCurrent income tax recoverables shall include all current income taxes, including interest, reasonably expected to be recovered in a subsequent accounting period, whether or not a return or claim has been filed with the taxing authorities. Current income tax recoverables are reasonably expected to be recovered if the refund is attributable to overpayment of estimated tax payments, errors, carrybacks, as defined in paragraph?289 of FAS?109, or items for which the reporting entity has substantial authority, as that term is defined in Federal Income Tax Regulations.(INT 06-12)Current income tax recoverables meet the definition of assets as specified in SSAP No.?4—Assets and Nonadmitted Assets and are admitted assets to the extent they conform to the requirements of this statement.The significant components of income taxes incurred (i.e., current income tax expense) and the changes in DTAs and DTLs shall be disclosed. Those components would include, for example:Current tax expense or benefit;The change in DTAs and DTLs (exclusive of the effects of other components listed below);Investment tax credits;The benefits of operating loss carryforwards;Adjustments of a DTA or DTL for enacted changes in tax laws or rates or a change in the tax status of the reporting entity; andAdjustments to gross deferred tax assets because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset, and the reason for the adjustment and change in judgment.Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): The Statutory Accounting Principles (E) Working Group has taken the following actions in response to the Tax Cuts and Jobs Act: Adopted INT 18-01: Updated Tax Estimates Under the Tax Cuts and Jobs Act. This interpretation provides a limited-time, limited-scope exception to SSAP No. 9 to not require recognition of changes in reasonable estimates from the Act as Type I subsequent events after the issuance of the statutory financial statements. Additionally, the INT provides instruction for reporting changes in deferred income taxes in the financial statements. This interpretation will be automatically nullified on Dec. 31, 2018.Exposed Agenda Item 18-01: Federal Income Tax Reform: This agenda item proposes nonsubstantive revisions to update guidance to reflect the revised federal tax code. This item was exposed through April 23, 2018 and the limited revisions are expected to be adopted in an interim June 2018 conference call. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: NoneConvergence with International Financial Reporting Standards (IFRS): Not applicable.Staff Recommendation:Staff recommends that the Working Group move this item to the active listing, categorized as an interpretation and expose tentative INT 18-03 – Additional Elements Under the Tax Cuts and Jobs Act to provide limited-time interpretation guidance for the Repatriation Transition Tax (RTT), Alternative Minimum Tax (AMT) Credit, and the Global Intangible Low-Taxed Income (GILTI) Tax. This INT is expected to be nullified in 2026, after the last payment is remitted under the RTT, but may be revised prior to nullification when the FASB issues guidance for the GILTI tax. Staff Review Completed by:Julie Gann, NAIC Staff – April 2018 FILENAME \p G:\DATA\Stat Acctg\1. Statutory\A. Maintenance\a. Form A\1. Active Form A's\2018\18-15 - TCJA Issues.docx ................
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