Tax Analyst recently reported on Senior United States Senator Ron Wyden’s June 25 legislation “designed to prevent offshore tax avoidance by hedge fund reinsurers,” the article reported. While Wyden is confident that his Act will be able to round out the guidance that was issued in April 2015, many practitioners are questioning if his Offshore Reinsurance Tax Fairness Act will bring a resolution.

The article reports that the Offshore Reinsurance Tax Fairness Act will make “changes to the section 1297 PFIC insurance exception by changing section 1297(b)(2)(B) to provide an exception for passive income derived in the active conduct of an insurance business by a ‘qualifying insurance corporation.’”

“The question for years has been what constitutes the active conduct of insurance, and this proposed revision doesn't do anything with that," Buchanan Ingersoll & Rooney Shareholder Susan E. Seabrook told the publication. “It basically preserves that question for regulatory interpretation.”

Further analyzing Wyden’s proposed legislation, Seabrook noted that the use of the phrase “temporary circumstances” in the facts and circumstances test is interesting because there is no indication of how it will be measured.

Also raising questions about how the U.S. taxpayers will know whether the ratio meets the 25 percent requirements, Seabrook told the publication that “if a foreign insurance company is over the 25 percent threshold, one would expect the company to notify its U.S. shareholder, because they can’t take a return position based on nothing.”

She asks: “Can a taxpayer accept on its face documentation provided by the insurance company? Does the taxpayer have to attach something to its return? Does the taxpayer have to test the financials, or does it presume them to be accurate?” 

Read the full article – “Wyden's Offshore Insurance Bill Not the Hoped-For Resolution” (Tax Analyst, June 30, 2015) Subscription required.