EY has confirmed it will limit tax services and not report any benefits from ‘listed transactions’ on tax returns should the Internal Revenue Service’s criteria for micro-captives in its proposed regulations be confirmed later this year.
Speaking on a GCP Short, Paul Phillips, EY partner and Global Captive Network co-leader, and Mikhail Raybshteyn, partner and Americas Captive Insurance Services co-leader, gave their views on the proposed regulations published 10 April, what they mean for captive owners and services providers.
The proposed rules set the criteria for whether captive insurance companies making the 831(b) tax election should be designated listed transactions, transactions of interest or neither.
The captive industry has been encouraged to submit comments in response to the proposed regulations by 12 June, with a public hearing due to be held on 19 July, 2023.
Raybshteyn said the 831(b) tax election remains valid because it is still congressionally approved law and tax code, but that does not mean they are “free of scrutiny”.
“As we all know, due to some abuse in this space, the IRS’s focus in this space increased and the proposed regulations is the latest step in the IRS’s approach to review and assess legality of certain transactions that the IRS deems abusive and have been used as such by some of the participants,” he said.
“As we’ve mentioned on numerous prior occasions, a captive insurance arrangement needs to be structured for valid business and insurance reasons, not tax reasons. Validly structured arrangements should be well documented and supported.”
Many service providers that work with captives taking the 831(b) tax election likely now have a choice to make, especially those that have clients that fall into either of the ‘listed transaction’ or ‘transaction of interest’ buckets.
Jeremy Colombik, managing partner at Management Services International, told Captive Intelligence last week that he would be more hesitant to manage 831(b) captives that qualify as a transaction of interest, and he would not work with any that qualify as listed transactions.
The majority of EY’s captive work is with larger captives, often owned by multinational corporations and writing tens or even hundreds of million in premium, but Phillips said it was EY’s policy not to work with structures that are designated a listed transaction by the IRS, aside from helping clients to exit them.
“I suspect that many service providers would have internal policies or internal controls that would prohibit them from participation or assistance with any transaction that the government has deemed abusive,” Phillips said on the Global Captive Podcast.
“For EY and our team, the difference between a transaction of interest and a listed transaction is important because, by policy as well as our own operational controls, EY will not participate in a listed transaction.
“And with this restriction, it includes the fact that EY will not be the preparer of a tax return that reports the benefits of a listed transaction.
“So as a listed transaction, the only real tax assistance that we will provide is how to properly exit the transaction.”
Listen to the full 19-minute podcast episode with EY’s Paul Phillips and Mikhail Raybshteyn on Captive Intelligence here, or on any podcast app. Just search for ‘Global Captive Podcast’.