THE GENERAL INSURANCE ASSOCIATION OF JAPAN

Transcription

1 April 27, 2012 THE GENERAL INSURANCE ASSOCIATION OF JAPAN Non-Life Insurance Building, 9 Kanda Awajicho 2-Chome, Chiyoda-Ku, Tokyo , Japan Tel: Fax: kikaku@sonpo.or.jp CC:PA:LPD:PR (REG ) Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, D.C VIA ELECTRONIC MAIL (IRS-REG ) Re: Comments on the Proposed Foreign Account Tax Compliance Act ( FATCA ) Regulations Dear Sirs or Madams: We, the General Insurance Association of Japan (GIAJ), appreciate the opportunity to provide the Department of the Treasury (Treasury) and the Internal Revenue Service (the IRS ) with our comments on the proposed FATCA regulations. The GIAJ is an industry organization comprised of 26 member companies which account for about 95 percent of the total general insurance premiums paid in Japan. We have serious concerns about the possible effects FATCA may have on Japanese general insurance companies, and thus, we have a strong interest in any developments regarding this matter. We understand the legislative intent behind FATCA, a measure taken by the U.S. government to prevent tax evasion by U.S. taxpayers through the transfer of their assets overseas. In our previously submitted comments to Notice and Notice , we urged Treasury to exempt Japanese general insurance companies from being treated as foreign financial institutions (FFIs) due to the very low tax evasion potential associated with general insurance contracts issued in Japan. Executive Summary We respectfully request that Treasury consider the following comments in promulgating the final regulations. A. Total Loss Lapsed Contracts, as defined in Section A.2 of this letter, which are pure protection insurance in nature should be exempted from FATCA

2 B. We propose an additional category of deemed-compliant FFIs for general insurance companies. C. We recommend de minimis thresholds of US$250,000 for new insurance contracts and US$50,000 or more for new accounts of other financial products. D. We propose that account identification for insurance contracts and information reporting to the IRS be required only when there is a payment of a maturity refund or surrender benefit upon termination or cancellation of a contract. E. We urge Treasury and the IRS to consider the following issues to mitigate the unduly excessive burden imposed on general insurance companies. (1) Reinsurance (2) Transitional exception (3) Contracts to be excluded from FATCA Detailed Comments A. Request to treat Total Loss Lapsed Contracts as Pure Protection Insurance (1) General insurance contracts subject to the FATCA provisions 1. Request to treat Total Loss Lapsed Contracts as pure protection insurance For the reasons discussed below, we request that Total Loss Lapsed Contracts that meet the following requirements be treated as pure protection insurance and thus exempted from FATCA: (a) At the time of entering into an insurance contract, the policyholder is a resident of Japan; (b) In the event of damage to insured property and person (buildings, furniture, personal injury/physical damage), when the full insurance benefits are paid out, the beneficiary loses the right to receive any maturity refund; and (c) Any payment of insurance benefit or maturity refund is to be deposited into a bank account maintained by a participating or deemed-compliant foreign financial institution in Japan. Even if our requests are not fully granted, we respectfully request that at the very least the final regulations adopt a $250,000 de minims exception based on the amount of insurance benefits or maturity refund paid under Total Loss Lapsed Contracts

3 2. Outline of general insurance products in Japan The proposed FATCA regulations released on February 8, 2012 define cash value insurance contracts as insurance contracts with a cash value greater than zero. We believe that general insurance products with a savings element (hereinafter referred to as Total Loss Lapsed Contracts ), a type of general insurance products sold in Japan, should be treated as pure protection insurance. Like other traditional general insurance products, Total Loss Lapsed Contracts provide insurance coverage for risks that may arise from everyday life. Although Total Loss Lapsed Contracts provide for a surrender value, we believe that such products should be treated as pure protection insurance and exempted from FATCA due to the following product features which present little opportunity for U.S. persons to evade tax. (a) In the event of damage to insured property and person (buildings, furniture, personal injury/physical damage), when the full insurance benefits are paid out, the beneficiary loses the right to receive the entire maturity refund or any portion of the aggregate premiums paid for the contract. Accordingly, such insurance contracts would not have any cash value. [See Figure 1] (b) The total premiums paid over the life of the insurance contract exceed the maturity refund. [See Figure 2] - 3 -

4 (Figure 1) Timing of payment : when the insured event occurs (Case 1: Insured event occurs and full payment of insurance benefit) Total premiums paid insurance premiums (pure protection) deposit premiums (principal for maturity refund) Only general insurance benefit is paid deposit premiums will be returned (maturity refund) When an insured event occurs resulting in a payment which equals or exceeds the coverage limit, the insurance contract terminates. Any maturity refund consisting of the aggregate premiums paid and the return on such premiums will not be refunded

5 (Figure 2) Timing of payment : at maturity (Case 2: No occurrence of insured events; payment of maturity refund) Total premiums paid insurance premiums (pure protection) deposit premiums (principal for maturity refund) maturity refund When an insurance contract matures without the occurence of an insured event, a maturity refund will be refunded. The maturity refund will be paid out of accumulated deposit premiums and the return earned on such premiums. None of the regular premiums will be a source of the maturity refund. Generally, the total premiums paid exceeds the maturity refund. Insured amount (JPY80 = $1) Death/ residual disability benefit Hospitalization benefit (per day) Outpatient benefit (per day) US$62,500 US$30 US$10 Premium (per month) US$220 Maturity refund Total premiums paid US$13,200 US$12,50 Calculation is made assuming a 5 year of insurance period, a monthly payment (60 months), and a class A job rank

6 (2) Background and reasons why Total Loss Lapsed Contracts in Japan should be treated as pure protection insurance and thus exempted from FATCA 1. Total Loss Lapsed Contracts are uncommon in Japan Total Loss Lapsed Contracts account for only a small portion of all general insurance contracts issued in Japan. In 2010, these contracts comprised 0.16% of the total contracts issued by Japanese general insurance companies. Except for these contracts, the remainder of general insurance contracts issued in Japan will be contracts that offer pure insurance protection, which are outside the scope of FATCA. Furthermore, overseas offices of Japanese general insurance companies do not issue Total Loss Lapsed Contracts. 2. Total Loss Lapsed Contracts are not used by U.S. persons for tax evasion purposes (a) Restrictions on foreign insurance companies Although there are certain exceptions, U.S. insurance regulations basically prohibit cross-border underwriting of risks in the U.S. by foreign insurance companies. Thus, Total Loss Lapsed Contracts are not permitted being issued in the United States. In the event foreign insurance companies violate such regulations, we understand that a penalty may be imposed. (b) Product features In the event there is total loss of the insured property, the policyholder will not receive any maturity refund nor any portion of the aggregate premiums paid for the contract. Accordingly, the nature of Total Loss Lapsed Contracts is very different from the depository accounts usually associated with tax evasion by U.S. persons. In most cases, Total Loss Lapsed Contracts in Japan have an insurance period of up to five years. Both the cash surrender value in the event of a cancellation or termination and the amount of maturity refund generally do not exceed the aggregate premiums paid on the contract. Moreover, although a policyholder can borrow under the contract, the amount borrowed is to be deposited only to a bank account in Japan. Therefore, it is unlikely that U.S. persons would acquire such contracts for tax evasion purposes. Unlike other financial products, Total Loss Lapsed Contracts are issued only to residents in Japan. A U.S. resident is unlikely to be a policyholder of Total Loss Lapsed Contracts issued by a Japanese general insurance company. Therefore, the risk of tax evasion by U.S. persons using Total Loss Lapsed Contracts is inherently low

7 Because Japanese laws and regulations govern Total Loss Lapsed Contracts, a transfer of these contracts to an insurance company located outside Japan is not possible. Also, from a practical point of view, the possibility of U.S. persons taking out Total Loss Lapsed Contracts is extremely low because policyholders must be a resident in Japan. (c) Tax system in Japan Due to the following features of the tax system in Japan, we believe that it is highly unlikely that U.S. persons would consider using Total Loss Lapsed Contracts in Japan for purposes of evading U.S. tax. (i) Japanese residents are required to pay tax on income earned in Japan. (ii) When Japanese general insurance companies pay a refund in excess of a specified amount (e.g., more than 1 million yen, which is approximately US$8,000, for a payment made at maturity), they must submit a payment record to the tax office in Japan. B. Additional category of deemed-compliant FFI for insurance companies (1) Proposal for additional category of deemed-compliant FFI We request an additional category of deemed-compliant FFI for general insurance companies be provided in light of the regulatory hurdles and the business environment in which such insurers operate. We direct your attention to the fact that there is a very low possibility of general insurance contracts being used for tax evasion, and actual sales to U.S. persons are negligible. For these reasons, we propose to add a workable and efficient category of deemed-compliant FFI for general insurance companies that meet the following requirements: 1. The insurance company is licensed and regulated under the laws of its country of incorporation as an insurance company or similar organization authorized to issue insurance contracts in the ordinary course of its business; 2. The insurance company does not issue insurance contracts to policyholders outside its country of incorporation; 3. The insurance company does not issue insurance contracts to non-residents in its country of incorporation; 4. The insurance company submits tax documents or withholds tax under the tax law of its country of incorporation; 5. At least 98% of the insurance accounts are held by residents of the country in which the insurance company is incorporated; 6. The insurance company is to implement policies and procedures to ensure that it does not open or hold accounts for any U.S. person who is not a resident of the - 7 -

8 country in which the insurance company is incorporated, a non-participating FFI, or any corporation substantially owned by a U.S. person, or is to report on the opening and maintaining of U.S. accounts to the IRS to the extent such reporting does not conflict with domestic regulation; and 7. With respect to an account that is held by a non-resident of the country in which the insurance company is incorporated, that is opened on or after December 31, 2011and prior to the procedures described in above (6) are applied, the insurance company is to implement the policies and procedures for preexisting accounts to identify U.S. accounts, and in case such accounts are identified, reports those accounts to the IRS to the extent such reporting does not conflict with domestic regulation. (2) Background and reasons why an additional category is necessary For the reasons described below, we request to add an additional category of deemed-compliant FFI aimed at reducing the excessive compliance burden that would be placed on Japanese general insurance companies. 1. Extremely low possibility of U.S. persons using Total Loss Lapsed Contracts for tax evasion (a) As mentioned previously, the U.S. and other countries have regulations that generally require insurance companies to hold a license issued by the country of incorporation to underwrite risks in their home country. (b) For this reason, insurance companies are established generally for the purpose of issuing insurance contracts in their country of incorporation and do not issue contracts outside the country of incorporation or registration. Therefore, the possibility of U.S. persons using foreign insurance companies for tax evasion is extremely low. (c) Accordingly, we believe that further easing the requirements for a deemed-compliant FFI would achieve the purpose of FATCA and reduce the administrative burden on the U.S. government and FFIs

9 2. Relationship with Japanese domestic law (Japanese Privacy law and Japanese Insurance law, etc.) (a) General insurance companies in Japan may not unilaterally terminate an insurance contract nor withhold tax on an insurance pay out. This applies not only to Total Loss Lapsed Contracts, but also with respect to other insurance contracts. (b) General insurance companies in Japan may not disclose information on a policyholder to a third party without the consent of the policyholder. In the event a general insurance company needs to report information on the policyholder, it must obtain consent to disclose information as there has been no prior ruling on the issue. This applies not only to Total Loss Lapsed Contracts, but also with respect to other insurance contracts. 3. Difficulty in refusing insurance contracts with U.S. persons (a) The business of general insurance in Japan is highly public in nature. The Comprehensive Guidelines for Supervision of Insurance Companies issued by the Japanese Financial Service Agency stipulate that those engaged in the insurance business should ensure the sound and appropriate operation of their business, maintain fairness in insurance solicitation, protect insurance policyholders, and contribute to people s stable life and sound development of the national economy. Moreover, facing an era of aging population and a low birth rate, general insurance supplements the public sector in providing social welfare and is expected to maintain and provide a business environment for product development that meets diverse and evolving consumer needs. (b) Therefore, general insurance companies in Japan are prohibited from refusing to issue general insurance contracts to anyone, including U.S. persons who reside in Japan. For this reason, it is not possible to fully refuse the issuance of general insurance contracts to U.S persons. In order to comply with the purpose of FATCA, we believe that reporting to the IRS should be done to the extent that there is no conflict with Japanese law. C. Revised thresholds for new accounts In the case of insurance contracts, an account balance of US$250,000 or more is considered the benchmark value for engaging in international tax evasion. Because a de minimis threshold of US$250,000 was provided to exclude pre-existing contracts from due diligence review, we request that the IRS provide the same US$250,000 threshold for new insurance accounts. In addition, we request that the IRS provide a de minimis threshold of US$50,000 or more for new accounts of other financial products

10 D. Account identification procedures and information reporting upon a payment of a maturity refund or surrender benefit According to the proposed FATCA regulations, insurance companies are required to report the cash value of insurance contracts to the IRS on an annual basis. Based on the reasons discussed below, insurance companies should be required to report to the IRS only when there is a payment of a maturity refund or surrender benefit to a beneficiary of the contract. (1) Avoidance of non-matching of information reporting between U.S. persons and FFIs As part of the FATCA rules, the IRS has required U.S. persons to report foreign financial assets to the extent the total value of such assets exceed a certain threshold. We anticipate that there will be non-matching of information reporting between U.S. persons and FFIs. A policyholder will be able to assess the cash value of insurance contracts only upon requesting a termination or cancellation of a contract. Usually, a policyholder would not know the cash value of the insurance contract. For this reason, we believe that it is more difficult for policyholders to report the cash value of such contracts, when compared to reporting the value of other financial products. Accordingly, we request that account identification for and information reporting of insurance contracts be required only when there is a payment of a maturity refund or insurance benefit. If our request is granted, we believe that non-matching of information reporting between U.S. persons and FFIs would be reduced significantly. (2) Mitigation of administrative burden on general insurance companies General insurance companies usually calculate cash value of an insurance contract only after receiving a request by the policyholder to terminate or cancel the contract. General insurance companies do not maintain systems that calculate cash value of every insurance contract at a certain point in time. In order to comply with the annual reporting requirements under FATCA, general insurance companies will need to invest and incur significant systems development and implementation costs. If general insurance companies are required to report only when a payment of maturity refund or surrender benefits is made, we believe such burdensome administrative cost can be eased. (3) Request for reporting requirements comparable with U.S. insurance companies U.S. insurance companies are required to report payments of maturity refunds or surrender benefits to the IRS only when a payment is made to a beneficiary of the contract. In order to ensure a fair treatment with U.S. insurance companies, we

11 believe that foreign insurance companies should be required to report to the IRS only when a payment is made to a beneficiary. Otherwise, we believe that Treasury and the IRS would be imposing an unfair obligation on foreign insurance companies. (4) Liquidity of general insurance contracts By nature, general insurance contracts are not very liquid. Compared to other financial products, we believe that there is less need on the part of Treasury and the IRS to assess the account balance or value of the contracts at a certain point in time, E. Other requests 1. Reinsurance The proposed FATCA regulations do not provide clear guidance on reinsurance. Since direct insurance companies maintain information on reinsurance contracts, reporting requirements on reinsurance companies may only cause unnecessary administrative burdens, and thus, we request that reinsurance be out of scope of FATCA. 2. Transitional exception As for FFIs located in countries whose government is negotiating with the U.S. government on FATCA under the framework of an intergovernmental agreement, we request that the IRS provide a transitional exception to exempt such FFIs from complying with FATCA until government-level negotiations are completed and domestic law is put in place. As a result of intergovernmental negotiations and the application of new domestic law, requirements which differ from those required under the current FFI agreement may be implemented. In such a case, if a transitional exception is not provided, FFIs may have to comply with two different types of requirements which would cause additional costs and administrative burdens. This would violate the interests of consumers. 3. Contracts to be excluded from FATCA The following categories of general insurance contracts with a savings element should be excluded as they present no opportunity for U.S. persons to evade tax:

12 F. Conclusion (a) General insurance contracts regulated under Japanese law that provide asset formation for workers. Premiums are paid only by checkoffs. Examples of these contracts include: (i) Japanese 401k based on Japanese Defined Contribution Pension Law (ii) Asset formation products based on Japanese Worker s Property Accumulation Promotion Act (b) General insurance contracts aimed at providing employee fringe benefits. Premiums are paid only by checkoffs. (c) General insurance contracts in which the employer receives insurance proceeds, including insurance benefits, payments at maturity, cash surrender value. These insurance contracts are based on worker s compensation insurance provided under Japanese law. We would highly appreciate it if you would continue to provide us opportunities to submit comments and exchange views on the implementation of FATCA in a transparent manner. We also hope that you consider our requests to treat Total Loss Lapsed Contracts as pure protection insurance and exclude from the scope of FATCA, provide an additional category of deemed-compliant FFI for insurance companies, establish a de minimis threshold for new accounts, and consider the other requests made in this comment letter. Sincerely yours, Masao Gomi General Manager General Insurance Association of Japan

13 Testimony on the public hearing on FATCA on May 15, 2012 April 27, 2012 CC:PA:LPD:PR (REG ) Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, D.C VIA ELECTRONIC MAIL (IRS-REG ) Re: Request to speak at the public hearing on the Proposed Foreign Account Tax Compliance Act Regulations (REG ) Dear IRS: The General Insurance Association of Japan (GIAJ) respectfully requests an opportunity to speak at the public hearing on the Regulations Relating to Information Reporting by Foreign Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities (the Proposed Regulations ) scheduled for May 15, We would appreciate and welcome this opportunity at the hearing to present our proposal on the Proposed Regulations. The topics we plan to discuss using at the hearing are: Description of Total Loss Lapsed Contracts ( TLLC ) Basis for our requesting an exemption of TLLC Enclosed is a copy of our testimony at the hearing. opportunity to discuss them with you. We are looking forward to the Sincerely yours, Masao Gomi General Manager General Insurance Association of Japan 1

14 Testimony on the public hearing on FATCA on May 15, 2012 April 27, 2012 GENERAL INSURANCE ASSOCIATION OF JAPAN PUBLIC HEARING ON PROPOSED REGULATIONS 26 CFR PART 1 and 301 Re: Regulations on the Foreign Account Tax Compliance Act ( FATCA ) Thank you for the opportunity to testify today. My name is Hodaka Sakuragawa. I am here as a representative of the General Insurance Association of Japan, also known as GIAJ. GIAJ is an organization representing 26 licensed general insurance companies which account for about 95 percent of the total general insurance premiums paid in Japan. As I have only limited time today, I would like to focus my testimony on key items from the comment letter that GIAJ submitted last month. My discussion today will be mainly about Total Loss Lapsed Contracts, which is a category of general insurance contracts in Japan with a savings element. The proposed FATCA regulations released on February 8, 2012 define cash value insurance contracts as insurance contracts with cash value greater than zero. Please note that Total Loss Lapsed Contracts account for only a small portion of all general insurance contracts issued in Japan and, if these contracts are exempted from FATCA, the remainder of general insurance contracts issued in Japan is completely outside the scope of FATCA. In our comment letter, we requested that the Total Loss Lapsed Contracts which meet the following requirements be treated as pure protection insurance and exempted from the FATCA provisions. 1) At the time of entering into an insurance contract, the policyholder is a resident of Japan; 2) In the event of damage to insured property and person (buildings, furniture, personal injury/physical damage), when the full insurance benefits are paid out, the beneficiary loses the right to receive any maturity refund; and 3) Any payment of insurance benefit or maturity refund is to be deposited into a bank account maintained by a participating or deemed-compliant foreign financial institution in Japan. Please take a look at the appendix on the last page of the document we submitted. 2

15 Testimony on the public hearing on FATCA on May 15, 2012 This figure shows a visual image of Total Loss Lapsed Contracts. You can see from this figure that if the maximum amount of insurance benefit is paid out, due to loss of property, the policy holder will not receive any maturity refund or any portion of the aggregated premiums paid. Total Loss Lapsed Contracts sold by Japanese general insurance companies essentially insure against damage resulting from incidental accidents in everyday life. These contracts insure against damage to buildings/furniture located in Japan and covers cost of hospital care and hospital visits for death resulting from personal injury of residents in Japan. For example, in the event that there is complete damage to buildings covered by fire insurance, and the full insurance benefits are paid out, none of the maturity refund or insurance premiums paid will be returned to the policy holder. Unlike standard financial products, we consider these products to be insurance contracts providing pure protection, in the event there is an accident resulting in total loss of the insured property. Hence, these insurance contracts do not have any cash value in the event of total loss. In addition, as we noted in our comment letter, we believe the possibility of Total Loss Lapsed Contracts to be used for tax evasion by US persons is extremely low for three reasons. (a) First, I d like to point out the restrictions placed on foreign insurance companies. Insurance regulations in the U.S., basically, with certain limited exceptions, prohibit foreign insurance companies from issuing contracts that insure U.S.-based risks. Thus, Total Loss Lapsed Contracts are not permitted being issued in the United States. (b) Next, I want to point out the product features. Unlike other financial products, Total Loss Lapsed Contracts are regulated under domestic law and regulations. Therefore, such contracts cannot be transferred to insurance companies or other companies located within and without the country of its organization. (c) Finally, I want to comment on the tax system in Japan. Japanese residents are required to pay tax on income earned in Japan. Furthermore, when Japanese general insurance companies pay a refund in excess of a specified amount, they must submit a payment record to the tax office in Japan. Therefore, based on the reasons that I just described, we believe the possibility for such contracts to be used for tax evasion is very low. 3

16 Testimony on the public hearing on FATCA on May 15, 2012 As for details on my discussion today, I ask that you refer to the comment letter GIAJ submitted last month. We hope you will note that there is almost no possibility for Total Loss Lapsed Contracts issued by Japanese general insurance companies to be used for tax evasion by U.S. persons. Thank you very much for your time and consideration of this matter today. 4

17 Testimony on the public hearing on FATCA on May 15, 2012 Appendix Timing of payment : when the insured event occurs (Case 1: Insured event occurs and full payment of insurance benefit) Total premiums paid insurance premiums (pure protection) deposit premiums (principal for maturity refund) Only general insurance benefit is paid deposit premiums will be returned (maturity refund) When an insured event occurs resulting in a payment which equals or exceeds the coverage limit, the insurance contract terminates. Any maturity refund consisting of the aggregate premiums paid and the return on such premiums will not be refunded. 5