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Tax acts address foreign entities doing business in U.S.

Tax Acts Address Foreign Entities Doing Business in U.S.

Over the last few years, a good deal of concern has been directed by taxing authorities toward foreign entities doing business within the United States. The concern is evinced by different provisions that have been enacted or promulgated since 1986:

1986 Reform Act - Reclassify foreign source investment income of a foreign property/casualty insurer as U.S. source income if it is effectively connected with a U.S. trade or business.

1986 Reform Act - Enactment of branch profits tax provisions which can result in additional tax on foreign insurers engaged in trade or business in the U.S. to the extent of 30 percent of the net annual reduction in U.S. net equity.

Prop. Reg. [section] 1.882-4, published July 31, 1989, which would allow the IRS to impose tax on gross income of foreign insurer (presumably with no reduction for paid losses, reserves, etc.) if a return covering activities which constitute a U.S. trade or business were not filed within one year of the prescribed due date of such a return.

1988 Reform Act - Enactment of Section 6114 of the Internal Revenue Code, and promulgation of Temp. Reg. [section] 301.6114-1T (September 11, 1989), which would require that foreign or domestic entities relying on treaty provisions to reduce their U.S. tax burden file a notice.

For example, a Bermuda insurer relying on the permanent establishment provision of the Bermuda treaty to avoid being subject to U.S. corporate income tax, would have to file such a notice.

Of course, some of these concerns are ameliorated if the foreign insurance entity elects to have its "related person insurance income" (generally, income received from U.S. owner-insureds and their affiliates) treated as effectively connected with a U.S. business under IRC [section] 953(c)(3)(C). If the company elects to be treated as a domestic company under IRC [section] 953(d), the condition also improves, because either election would require a waiver of all treaty benefits. Nonetheless, the constant "chipping away" seems to signal increased interest in this area and could result in increased audit activity in the future. Thus, foreign insurers must ensure that their activities do not constitute doing business for United States tax purposes.

No Obligation to File

In Private Letter Ruling 8850003, the IRS discussed a situation in which a self-insurer of general liability risks was not required to file Form 1099 reflecting payments to insureds. The taxpayer described in the ruling manufactured equipment and was subjected to many lawsuits by its customers' employees who were injured using the equipment. Settlement payments were generally made by the taxpayer manufacturer to injured parties and their attorneys as co-payees.

IRC [section] 104(a) (2) provides an exclusion from income for the amount of any damages received on account of personal injuries or illness (except for medical expenses deducted in a prior year). The IRS concluded that the payment of the claims for reimbursement of medical expenses incurred and to be incurred, lost wages and earning capacity and damages sustained by a spouse or parent for loss of services could be excluded from income under IRC [section] 104(a)(2). The only exception being a medical expense that was taken as a deduction in a prior year. However, because the manufacturing company could not have known the extent to which medical expenses had been deducted, that portion of the payment was also exempted from the Form 1099 reporting. Thus, no 1099s are required to be filed regarding such payments.

P. Bruce Wright is a member of the New York Bar. Mr. Wright is also a member of the law firm LeBoeuf, Lamb Leiby and MacRae.
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Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Jan 1, 1990
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