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Life assurance bruised Back  
The Finance Act has assaulted the Life Assurance industry on three fronts. It has introduced periodic tax charges on policies; charged CGT on the foreign assets of life assurance companies operating here through branches; and granted special investigation powers to the Revenue Commissioners in relation to life assurance policies. Are Life Assurance companies to join the banking industry as popular whipping boys?
The periodic charge
With effect from 6 April 2000 a gross roll upbasis of taxation was introduced for the holders of life assurance policies. The policy itself is exempt from tax on income and gains accruing to its benefit but a tax charge was imposed, broadly on the excess of the value of a policy over the cumulative premiums paid, on the occasion of its maturity, or encashment in whole or in part, or assignment.
Brian Daly, Editor, Tax Monitor

The Finance Act proposes to add a new occasion of charge to tax on the policy. This will be on every seventh anniversary of the inception of the policy. The Finance Act does not distinguish between policies issued after this proposal was published, and those already in place. However, following urgent representations by the Life Assurance industry, the original proposal was modified and its operation was suspended, pending a Ministerial Order. That order is capable of commencing the section by reference to a particular class of policy only. It seems quite unfair that such an adverse change to the tax regime applying to a life assurance policy should be imposed on policies entered into in good faith on the basis of a tax regime introduced only five years ago.
In the D?il debates the Minister explained the thinking behind the new tax charge. He said that the Revenue had only become aware that life assurance policies were being used as a form of long term investment combined with a facility to switch the type of funds to which the value of the policy was related. The Minister said that this was not intended. Accordingly the seven year charge has been introduced.

The Minister’s explanation is astonishing. Life assurance, of its very nature, is capable of being in existence for a lifetime. Traditionally, a life assurance policy would have existed for 30 years or more, the span of a normal generation. Nor is it new that the portfolio of underlying investments to which the policy value is related should be actively managed over time. That is inherent in the nature of these policies. It therefore seems a bit disingenuous to suggest that it was not known when the Finance Act 2000 was enacted, that life assurance policies could have a long duration, or that the asset backing for them could be actively managed portfolios.
Indeed, since September 2000 there has been a special treatment for life assurance policies where the policy holder was able to dictate or influence the investment policy of the underlying portfolio related to his policy.

The fact that the type of investments to which a policy is linked may change over time appears to be one of the factors that has been identified as a reason for the new charge to tax. This focus on changes in the underlying investment portfolio is misconceived. A person who buys shares in a life assurance company, as opposed to a policy with that life assurance company, is, for many economic purposes, buying a share of an actively managed diversified portfolio of quoted shares, which constitute a large part of the assets of the life assurance company. To some degree, buying a share in a life assurance company is not unlike buying ‘an index’. The same may be said of shares in some diversified conglomerates eg Hathaway Berkshire, or quoted investment trusts. In such cases the investment is being made on the basis of faith in the investment management skills of the company management and the investment may be both a long term investment and one enjoying the benefits of an actively managed portfolio. No one would conceive of a tax charge on the seventh anniversary of holdings in Berkshire Hathaway as a sensible proposal, so why the focus on life assurance policies?

Apart from the objections in principle to the measure , there are unnecessary practical problems in the legislation. It fails to provide adequate relief for losses which may arise following a seventh anniversary charge. It has imposed additional costs on some insurance providers who have had to change their business model in relation to timing of obtaining nonresidence declarations from overseas customers.

It is to be regretted that this major change in the taxation of savings products was first introduced without prior discussion with interested parties. Subsequent major changes to the original proposals, and the deferment of the commencement of the proposals pending a Ministerial Order, were the result of hurried representations made in the short period between the publication of the Bill and its approval by D?il Eireann. This is a completely unsatisfactory method of dealing with tax legislation. Consultation should precede the publication of a Bill, rather than occurring as an emergency measure subsequent to publication.

Offshore assets
The comment above regarding lack of consultation applies even more so to the decision to impose capital gains tax on the foreign assets of non resident life assurance companies operating in Ireland through a branch. This measure was not even included in the Finance Bill as initiated, but was published as a Committee Stage amendment. For all practical purposes that confined the opportunity for discussion of the proposal with the Minister to a period of three days, during most of which the Minister was attending the Finance Bill committee sessions, and therefore was not available to the industry. If a measure such as this was under consideration, why was it not flagged in the Budget on 1 December? If not that, why was it not included in the Finance Bill as initiated in mid February? Either of these approaches would have allowed some limited opportunity for meaningful discussion of the proposal. Instead it has been enacted into law with no real opportunity for discussion.

What has been brought within the charge to capital gains tax are assets held outside the State used or held for the purpose of a life assurance company’s branch operations in the State. Pre existing law imposed capital gains tax on assets located in the State used or held for the purpose of any branch trade carried on in the State by a non resident person. Life assurance companies are therefore singled out for a more extensive charge of capital gains tax than applies to any other form of trade carried on by a non resident in Ireland.

The explanation given for the proposed change was that it would correct an unequal tax treatment that could arise for certain overseas life companies doing business in Ireland, compared with Irish life companies doing business here, in relation to life assurance business contracted for before the introduction in January 2001 of the new gross roll up regime for life policies. The Minister stated that an overseas life assurance company was subject to a special capital gains tax treatment where its Irish assets were less than the value of its Irish branch liabilities. The special treatment was to proportionately increase the capital gains tax charge arising on its Irish assets, by reference to the ratio of Irish assets to liabilities. The Minister said that in a small number of cases that resulted in the overseas company having a higher tax charge than would be the case had they been taxed not only on their Irish gains, but also on their overseas gains. The Minister stated that the extended charge to capital gains tax would mean that there would be less need to resort to the special uplift in the capital gains tax charge, by reason of the chargeable assets of the Irish business being less than the liabilities of the Irish business.

It is worth noting that the old rule, which the Minister said gave rise to inequitable results in some cases, has not been cancelled as one might have expected, if the Minister were concerned about its adverse effects. The new treatment has been brought into effect as respects the accounting periods ending on or after 1 March 2005. It therefore is effectively retroactive in its effect, potentially for up to one year.

Information and audit powers
The Finance Act has inserted a new section 902B into the Consolidated Taxes Act. It permits the Revenue Commissioners to investigate specific assets of life assurance policies and the policy holders. In order to use the powers of investigation the Revenue Commissioner must form an opinion that there are circumstances that would suggest that a class of policies have been issued to policy holders at least some of whom financed premiums out of the proceeds of tax evasion. The Revenue Commissioners are entitled in such circumstances to enter premises, inspect there all records relating to such policies (other than medical records) and acquire information and explanations.

The Revenue are not authorised to make direct use of any information obtained on foot of these powers. They may use the information only as a basis for seeking a court order under s902A, which could direct the life assurance company, or any other person, to provide them with such records and information as they require in order to investigate the affairs of specific taxpayers.

The section as enacted is not an open ended power to the Revenue Commissioners to trawl through life assurance records for information on policy holders. The power may be exercised ultimately where a Revenue Commissioner has formed the opinion that policies were acquired from the proceeds of tax evasion. Such an opinion could not be merely speculative but would require, in all probability, some basis in evidence, although the threshold of evidence required to support such an opinion might be quite low.

The main objection which may be made to all of this is not so much the power granted but rather the damage done to the life assurance industry by media reports of statements from official sources that might have led a person to believe that the life assurance industry was in some sense responsible for any tax evasion that some policy holders might have engaged in. Less sophisticated members of the public might reasonably have concluded that there was something in the nature of life assurance policies that was improper. Careless vilification can have long term adverse effects on the political and economic well being of the State and should be carefully guarded against.

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