FATCA and the Common Reporting Standard Applied by Life Insurers – a Few Practical Considerations

Within the insurance industry, automatic exchange of information under Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) is mainly relevant to life insurers, since non-life insurance and reinsurance activities generally do not give rise to classification and reporting obligations under these regulations.

Life insurance activities (technically, the fact of issuing or being obligated to make payments with respect to “cash value” or “annuity” contracts) give rise to the qualification as a Financial Institution for both FATCA and CRS purposes, and life insurers exercising such activities consequently do have specific classification and reporting obligations with regard to these regulations.

So what are the main issues in respect of life insurers applying automatic exchange of information under FATCA and CRS and what is a practical approach to implementation?

1. FATCA and CRS classification of life insurance products: often, but not always, the same.

The classification rules under FATCA and CRS may give rise to differences in classification of the same life insurance or pension product from a FATCA and CRS perspective. The issues can be technically complex.

To give a concrete example, under the FATCA Model 1 Intergovernmental Agreements (IGAs), amongst others, certain regulated and tax-favoured retirement and pension accounts are, under restrictive conditions, excluded from the notion of Financial Accounts. One of these conditions is related to the fact that the annual contributions should be limited to USD 50.000 or less, or that there is a maximum lifetime contribution limit of USD 1.000.000 or less (on an aggregated basis with other contracts the subscriber may have). The CRS contains a similar exclusion under the same conditions as those defined in the Model 1 IGAs.

However, under CRS, an additional separately defined exclusion may apply for accounts that are “substantially similar” to such excluded accounts, present a low risk of being used to evade tax and are defined in domestic law as an excluded account, provided the exclusion of such accounts does not frustrate the purposes of CRS. On this basis, for example, supplementary pension schemes (falling under the scope of the Luxembourg law of 1999 on supplementary pensions) are generally excluded from the notion of financial accounts for CRS purposes, regardless of the above-mentioned thresholds that would otherwise apply (while the same product may not qualify as an excluded account for FATCA when these financial thresholds would not be met, or in the absence of an exclusion of “substantially similar” products under the Model 1 IGAs).

It goes without saying that, in practice, when a new pension or other life insurance or pension product is launched, the analysis of its FATCA and CRS classification is necessary before launching the product in order to avoid, or at least anticipate, unexpected differences in classification of the same product between FATCA and CRS.

2. Beneficial owners – not always identifiable or subject to change

Under the usual life insurance contracts, it is common to have flexibility as to the definition of beneficial owners of the contract. Most contracts allow changing the beneficiaries upon simple demand. On the other hand, beneficial owners may have been generically defined as, for example, “the legal heirs”. In the latter case, the beneficial owners would only be identifiable upon death of the insured person.

To a certain extent, this particularity was already taken into account as under FATCA and CRS IGAs, an optional presumption rule simplifies the due diligence obligations for insurers: it may be presumed that an individual beneficiary (other than the owner) of a cash value insurance contract or annuity contract receiving a death benefit is not a reportable person unless the insurer has actual knowledge, or reason to know, that the beneficiary is reportable (for example, in case the information collected regarding the beneficiary contains FATCA or CRS indicia).

In practice, given the particularity of possibly changing beneficiaries and temporarily non-identifiable beneficiaries, life insurers need to implement additional procedures to appropriately classify beneficiaries for FATCA and CRS purposes upon changes within the list of beneficiaries or (ultimately) upon death of the insured person, so as to ensure possible reporting obligations regarding the effective beneficiaries are met.

3. Groups – the challenge of maintaining global compliance

Within an international insurance group, ensuring local entities are fully compliant with local FATCA/CRS laws, regulations and guidance notes is challenging. Indeed, CRS laws are still being implemented in a number of jurisdictions; laws are still being completed with decrees or other executive measures in other jurisdictions; plus FATCA/CRS guidance notes and/or Circular Letters from tax authorities are being issued or updated from time to time. Additionally, regarding FATCA, certain entities may be located in IGA Model 1 jurisdictions, others in IGA Model 2 jurisdictions or even in non-IGA jurisdictions, giving rise to different sets of FATCA rules to be applied.

FATCA/CRS group procedures therefore, need a certain level of tailoring with regard to the jurisdictions involved.   In practice:

• either group procedures could separately be adapted to each jurisdiction covered, or
• a standard set of group procedures could be completed with a country-specific appendix covering the relevant deviating rules for the jurisdiction concerned.

Keeping the procedures updated for each relevant jurisdiction remains a challenge, as this exercise should be carried out at least on an annual basis.

Time for action – Avoid bad surprises through a health check

Ensuring compliance with FATCA and CRS regulations is important as sanctions for non-compliance can be significant.

In this context, a FATCA/CRS health check is probably the most efficient way to ensure there are no deficiencies, or, where deficiencies are identified, to establish and execute a remediation plan.

Such a health check is recommended to be carried out as soon as possible in order to remediate possible implementation issues, before audits are carried out by local authorities on FATCA/CRS compliance.