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Regulatory Threats – Fact or Fiction? Bridget Gainer – Director of Governmental Affairs, Aon Corporation Christopher Iovino – Managing Director, Aon Global.

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Presentation on theme: "Regulatory Threats – Fact or Fiction? Bridget Gainer – Director of Governmental Affairs, Aon Corporation Christopher Iovino – Managing Director, Aon Global."— Presentation transcript:

1 Regulatory Threats – Fact or Fiction? Bridget Gainer – Director of Governmental Affairs, Aon Corporation Christopher Iovino – Managing Director, Aon Global Risk Consulting

2 Congress & Captives 2009 – Policy and Politics Setting the Stage Drivers: Timing is Everything Players in the Offshore Debate Regulatory Risk In a Global Context How are Firms Assessing Global Regulatory Risk? Obama Policy Proposals & Legislation of Interest to Captives Obama International Tax Proposals Neal Reinsurance Bill Levin Stop Tax Haven Abuse Act Handicapping the Proposals

3 Setting the Stage: Politics and Policy

4 Drivers: Timing is Everything The State of the US Economy “Pay Go”: $1 Trillion in 10 years? Obama Priorities: Healthcare, Stimulus, Energy Why These Bills

5 Players in the Offshore Debate Administration: –Larry Summers & Austan Goolsbee, CEA, Treasury Congress: –The Bill Writers: Representative Neal (D-MA) Senator Carl Levin (D-MI) –Drivers of Tax Legislation: Senators Baucus (D-MT) & Grassley (R-IA) Representative Rangel Non-Governmental Players –Think Tanks –Industry

6 Regulatory Risk in a Global Context

7 How Are Firms Assessing Global Regulatory Risk? Ranked #2 Risk in Global Risk Management Survey Was #6 two years ago US is highly regulated; regulations expanding in other countries (e.g. China) Economic Impact –Anticipate increase in regulation globally, particularly for FI’s –Risk is the inability of an organization to comply with current, changing, or new regulations –Non-compliance could include penalties imposed by enforcement agencies, AND loss of markets, reputation and customers Mitigation Strategy –Increased focus on Risk Governance & Compliance

8 Obama Policy Proposals

9 Obama International Tax Budget Proposals On May 11, the Administration issued the “Green Book”, which detailed the tax proposals in President Obama’s budget. –The budget included some, but not all of the tax proposals that will be introduced this Congress. The absence of these provisions in the budget does not mean that these proposals will not be part of a tax reform bill. –Traditionally, tax bills are targeted for discussion and passage in September and October –This year, a major tax overhaul memo is rumored for release December 4 th, 2009.

10 Summary of Obama Budget Proposal: “Reform U.S. International Tax System” Reform business entity classification rules for foreign entities Defer deduction of expenses, except R&E expenses, related to deferred income Reform foreign tax credit: Determine the foreign tax credit on a pooling basis Reform foreign tax credit: Prevent Splitting of foreign income and foreign taxes Limit shifting of income through intangible property transfers Limit earnings stripping by expatriated entities Prevent repatriation of earnings in certain cross-border reorganizations Repeal 80/20 company rules Prevent the avoidance of dividend withholding taxes Modify the tax rules for dual capacity taxpayers

11 Legislation of Interest to Captives

12 Representative Neal Reinsurance Bill

13 Neal Reinsurance Bill Rep. Neal (D-MA) introduced a bill in 2008 to amend the Tax Code to disallow deductions for excess non-taxed reinsurance premiums for to U.S. risks paid to affiliates. –Neal’s bill applies the “earnings stripping” theory usually associated with interest payments to reinsurance: –“U.S. affiliates of foreign based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system. The bill limits the deduction for those premiums to the extent the reinsurance to a related party exceeds the industry average.” The Neal reinsurance bill will be reintroduced in summer 2009. Rep. Neal asserts that $34B in tax revenue was diverted in 2007 and thus his bill would generate $34B in additional annual revenue. This has not been vetted by the CBO.

14 Neal Reinsurance Bill: Summary Would disallow any deduction to covered insurance companies (any P&C Company subject to US tax) for “excess reinsurance premiums” with respect to U.S. risks paid to affiliate insurance companies that are not subject to U.S. income taxation. Excess reinsurance premiums”: “affiliated nontaxed premiums” paid by a covered insurance company in excess of (1) the premium limitation and (2) qualified ceding commissions with “Affiliated nontaxed premiums:” “Premium limitation:” An “industry fraction” determined by Treasury multiplied by gross premiums written for the line of business for the taxable year, over the aggregate, not affiliated non-taxed reinsurance premiums. “Qualified ceding commissions:” portion of ceding commissions paid to a covered insurance company, determined by the ratio of (i) the amount of such affiliated non-taxed reinsurance premiums paid by the company during the taxable year that exceeds the premium limitation for that year, to (ii) the aggregate amount of affiliated non-taxed premiums paid by the company that year.

15 Industry Groups Supporting the Neal Bill AMBAC Financial Group, Inc. American Financial Group, Inc. Berkshire Hathaway Inc. The Chubb Corporation EMC Insurance Companies The Hartford Financial Services Group, Inc. Liberty Mutual Markel Corporation MBIA Insurance Corporation Safeco Corporation Scottsdale Insurance Company, a Nationwide subsidiary The Travelers Companies, Inc. Zenith Insurance Company

16 Senator Levin: Stop Tax Haven Abuse Act

17 Stop Tax Haven Abuse Act On March 3, 2009, Senator Levin re-introduced the Stop Tax Haven Abuse Act –As a Senator, President Obama co-sponsored a nearly identical bill in the last Congress and some of these provisions have been included in the “Green Book” –Senator Levin asserts that this bill would bring $100 Billion in additional revenue to the US tax system annually. This has not been vetted by the Congressional Budget Office.

18 Stop Tax Haven Abuse Act: Summary Summary of Provisions: Treat foreign corporations managed/controlled in the United States as domestic corporations for income tax purposes; Treat dividend equivalents and dividend substitutes as dividends for purposes of determining source; Expand the tax return reporting requirements for passive foreign investment corporations (“PFICs”) to include U.S. persons who do not own a PFIC, but have formed, sent assets to, received assets from, or benefitted from a PFIC; Allow U.S. tax and securities law enforcement to presume that non- publicly traded, offshore corporations and trusts are controlled by the U.S. taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise; Impose tougher requirements on U.S. taxpayers using offshore secrecy jurisdictions by listing 34 jurisdictions which have already been named in IRS court filings as probable locations for U.S. tax evasion

19 Stop Tax Haven Abuse Act: Offshore Secrecy Jurisdictions An “Offshore Secrecy Jurisdiction” is a designation of the US Treasury Secretary. The initial list includes 34 Offshore Secrecy Jurisdictions taken from IRS court filings, identifying them as probable locations for U.S. tax evasion. The Treasury Secretary can add or subtract from the list using certain criteria.

20 Stop Tax Haven Abuse Act: Initial List of Offshore Secrecy Jurisdictions Anguilla Antigua and Barbuda Aruba Bahamas Barbados Belize Bermuda British Virgin Islands Cayman Islands Cook Islands Costa Rica Cyprus Dominica Gibraltar Grenada Guernsey/Sark/Alderney Hong Kong Isle of Man Jersey Latvia Liechtenstein Luxembourg Malta Nauru Netherlands Antilles Panama Samoa St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Singapore Switzerland Turks and Caicos Vanuatu

21 Handicapping the Proposals

22 Aon 2009 Global Risk Management Survey Survey conducted Q4 2008: 551 organizations, 40 countries Respondents’ domicile by region Respondents by revenue

23 Top Ten Risks

24 # 1 The Economic Slowdown Ranked #8 two years ago Pressure to deliver results with fewer resources Tough to remain committed to established, effective risk management strategies Effects all other risks in survey

25 Strategies For Turbulent Times Convergence of complex challenges –Cost pressures from the C suite –Short term (survival) thinking –Risk Management Dept – doing more with less –Validation of role – is the Risk Manager adding value?

26 Strategies For Turbulent Times Impacting Operating Costs –Compliance spend v discretionary spend –Back to basics…blocking and tackling is key –Focus on variable cost elements of total cost of risk –Look for the opportunities...there may be some in your program! –Build for the future...invest in risk management Return on Investment Cost Benefit Analysis

27 PRE LOSS SOLUTIONS Loss prevention advocacy to drive injury/claims reductions Property engineering CAP EX mitigation process Business Continuity initiatives –Contingency planning (identify, evaluate, prioritize, proactively address) Business Interruption Valuations (# 3 risk) –21% of respondents feel “unprepared” Strategies for Turbulent Times – What We are Seeing

28 PRE LOSS SOLUTIONS Targeted risk assessments and supply chain mapping (#8 risk) –30% of respondents feel “unprepared” –Reductions/consolidations of supplier base –Inability to produce/deliver products “Understanding enterprise-wide risk” is #2 priority –Enterprise Risk Management - Risk Identification and Assessment to help understand and articulate risks Outsourcing Strategies for Turbulent Times – What We are Seeing

29 POST LOSS MITIGATION Property and Casualty Claims Initiatives as cost containment strategies Downsizing initiatives Outsourcing Post Loss Business Interruption Valuations Subrogation Opportunities Impacting open reserves and legacy claims Third Party Administrator/Medical Cost Management Strategies for Turbulent Times – What We are Seeing

30 Regulatory Threats – Fact or Fiction? Global Risk Management Survey results can be found at Questions?

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