Taxation in the U.S (Odomirok ch.26)

Question 1

What is the formula for TBEP?

Answer 1

WP - 0.8 x CHG(UEPR)
EP + 0.2 x CHG(UEPR)

Question 2

What is the formula for TBIL?

Answer 2

Incurred Loss - CHG(Reserve Discount)
Paid Loss + CHG(Discounted Reserves)

Question 3

What 4 things did the TCJA (2017) do?

Answer 3

-decrease corporate tax rate from 35% to 21%
-repeal in the election for use of company-specific payment patterns
-change in determination of interest rate
-addition of base erosion and anti-abuse tax (BEAT)

Question 4

What is the calculation for BEAT?

Answer 4

Additional tax paid is
min(0, regular income (incl BEAT) x 0.1 - regular taxable income x 0.21)

Question 5

What are the 3 components needed for the reserves?

Answer 5

undiscounted loss reserves (Schedule P, Part 1 + tabular discount)
discount rate promulgated by the U.S Treasury for that AY (corporate bond yields)
payment pattern (by LOB, new one every 5 yrs from IRS from industry Schd P, Part 1 data) =>
TCJA changes from company to industry patterns!!!!!

Question 6

When does BEAT apply?

Answer 6

part of U.S group of companies with avg(gross receipts) >= 500m past 3 years
Base erosion payments > 3% of deductions taken in current tax return
non US entity(s) have not elected to be US taxpayers

Question 7

What is the BEAT rate?

Answer 7

5% for 2018
10% for 2019 => 2025
12.5% after

Question 8

What is the formula for tax-basis income?

Answer 8

TBEP - TBIL + Investment Income
many adjustments from IRC

Question 9

What is understanding the impact of taxation good for?

Answer 9

pricing, reserving, capital model construction, and tax returns preparation

Question 10

Why is there a “revenue offset” for earned premium?

Answer 10

Under SAP, DAC is incurred immediately, this revenue haircut assumes 20% of WP is equal to acquistion costs, and prevents companies from getting a tax benefit from this

Question 11

Why do paid losses include a change in discounted reserves?

Answer 11

for long-tailed LOBs, often are priced @ an UW loss without considering TVM
should not receive a tax benefit for this temporary loss
more aligned with economic reality

Question 12

What items are subject to the proration rules?

Answer 12

tax-exempt municipal bonds
dividends received deduction for stockholder dividends
use pro-ration rate of 25%

Question 13

How is the impact of the change in payment pattern rules (TCJA) evenly spread?

Answer 13

Starting in tax-year 2018, the reserves were using AY 18 discounts
the change in the methodology (at that time) is spread evenly over the next 8 tax years
basically, if greater discount after TCJA, that increases income, we spread that burden over 8 years