SERVICE PROVIDES INTERIM GUIDANCE FOR FOREIGN INSURANCE COMPANIES' ESTIMATED TAX CALCULATION.

Notice 88-52

This notice describes the effect of section 842 of the Internal Revenue Code of 1986 on the taxable income of foreign insurance companies and provides guidance on making estimated tax payments for taxable years beginning after December 31, 1987. Section 10242 of the Omnibus Reconciliation Act of 1987, 101 Stat. 1330, Pub. L. No. 100-203, amended section 842 of the Code to provide a minimum amount of net investment income that is effectively connected with the conduct of an insurance business within the United States. This provision applies to any foreign company carrying on an insurance business within the United States that would qualify under part I (relating to the taxation of life insurance companies) or part II (relating to the taxation of other insurance companies) of subchapter L of the Code if it were a domestic corporation. The effect of the provision is that income from sources without the United States of a foreign life or property and casualty insurance company that carries on an insurance business within the United States may be treated as effectively connected with that trade or business and subject to taxation on a net basis. Under section 842 of the Code as amended, the net investment income of a foreign insurance company that is effectively connected with the conduct of an insurance business in the United States may not be less than the required U.S. assets of the company multiplied by the domestic investment yield applicable to the company for the taxable year or, if the company elects, by its worldwide current investment yield. The required U.S. assets of a foreign insurance company for any taxable year are determined by multiplying the mean of the company's total insurance liabilities on U.S. business by the domestic asset/liability percentage applicable to the company. The Secretary will prescribe for each year a separate domestic asset/liability percentage for foreign life insurance companies and foreign property and casualty insurance companies. The domestic asset liability percentage for each type of insurance company equals a fraction, the numerator of which is the mean assets of domestic companies of the same type and the denominator of which is the mean liabilities of domestic companies of the same type. The Secretary also will prescribe for each year a separate domestic investment yield for foreign life insurance and foreign property and casualty insurance companies. The investment yield for each type of insurance company equals a fraction, the numerator of which is the net investment income of domestic insurance companies of the same type ad the denominator of which is the mean of the aggregate assets held for the production of investment income of domestic companies of the same type. In lieu of using the domestic investment yield, a foreign insurance company may elect to use its worldwide current investment yield. The worldwide current investment yield equals a fraction, the numerator of which is the net investment income of the company from all sources and the denominator of which is the mean of the worldwide assets of the company that are held for the production of investment income. The Secretary has not yet determined the asset/liability percentages and the domestic investment yields for taxable years beginning after December 31, 1987. Therefore, to compute the estimated tax and the installment payments of estimated tax for the first such year, a foreign insurance company (whether a life or a property and casualty company) will, until publication by the Secretary of the domestic asset/liability percentages and the domestic investment yields, be allowed to compute their tax due on investment income by using the actual investment income that is effectively connected with the conduct of the company's U.S. trade or business. Any reduction in a required installment resulting from using a company's actual investment income rather than the amount of investment income computed under section 842 of the Code must be recaptured by increasing the amount of the first installment payment due after publication of the domestic asset/liability percentages and the domestic investment yields. No additions to tax will be made because of any underpayment of estimated tax for any required installment in the first taxable year beginning after December 31, 1987 due prior to the publication of the domestic asset/liability percentages and the domestic investment yields if: (1) the foreign insurance company timely computes and pays such required installment based on its actual investment income, and (2) the foreign insurance company's first estimated tax payment due after publication of the domestic asset/liability percentages and the domestic investment yields (the "subsequent installment payment") meets the conditions of paragraphs (1) or (2), below. (1) ANNUALIZATION EXCEPTION. The subsequent installment payment is sufficient if the amount of the payment satisfies the requirements of section 6655(e) of the Code with respect to all applicable taxes specified in section 6655(g). Thus, the foreign insurance company must determine its annualized taxable income under section 6655(e)(2)(A)(i)(II), (III), or (IV), whichever is applicable, and compute the resulting tax using the domestic asset/liability percentages and the domestic investment yields. The resulting tax shall include the alternative minimum tax under section 55 and the environmental tax under section 59A and may take credits into account to the extent permitted under section 6655(g). The sum of this subsequent installment payment and the earlier installment payment or payments of the foreign insurance company must equal or exceed the following percentages of the tax so computed: (i) 45 percent (50 percent x 90 percent), if the subsequent installment payment is the second installment payment for the taxable year; (ii) 67.5 percent (75 percent x 90 percent), if the subsequent installment payment is the third installment payment for the taxable year; or (iii) 90 percent, if the subsequent installment payment is the fourth installment payment for the taxable year. (2) INSTALLMENT PAYMENTS EQUAL TO APPLICABLE PERCENTAGE OF TAX SHOWN ON RETURN. The subsequent installment payment is sufficient if the sum of that payment and the earlier installment payment or payments of the foreign insurance company equals or exceeds the applicable percentages listed in paragraph (1)(i), (ii), or (iii), above, of the tax shown on the return of the foreign insurance company for the taxable year to which the installment payments relate. The tax shown on the return includes all taxes specified in section 6655(g) of the Code. In addition, no additions to tax will be made if each installment of a foreign insurance company that is not a large corporation, as defined in section 6655(g)(2) of the Code, equals 100 percent of the tax shown on the return of the foreign insurance company for the preceding taxable year multiplied by 25 percent, provided that the requirements of the flush language of section 6655(d)(1) are met. A foreign insurance company that computes its estimated tax installment payments pursuant to this Notice should write "Subject to section 842" at the top of Form 2220 (Underpayment of Estimated Tax by Corporations). EFFECTIVE DATE This document serves as an "administrative pronouncement" as that term is used in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure. See Rev. Rul. 87-138, 1987-52 I.R.B. 17. Taxpayers may rely on this notice for the first taxable year beginning after December 31, 1987. Questions concerning this notice may be directed to Philip L. Garlett of the Office of the Associate Chief Counsel (International), either by writing to CC:INTL:Br2, Room 3042, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, or by calling (202) 566-6645 (not a toll-free number).