Closing reinsurance tax loophole proposed in Congress

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Rep. Richard E. Neal, chairman of the U.S. House Subcommittee on Select Revenue Measures, introduced a bill to close a reinsurance tax loophole, saying its passage would end “a significant market advantage” that foreign firms have over U.S. companies.

Richard E. Neal

Richard E. Neal

The bill from Neal, a Massachusetts Democrat, would disallow deductions for excess reinsurance premiums with respect to U.S. risks paid to affiliated insurance companies that are not subject to U.S. tax.

Neal seeks to end “the use of excessive affiliate reinsurance by foreign insurance groups to strip their U.S. income into tax havens, avoid tax, and gain a competitive advantage over American companies,” he said in comments on the House floor.

He called the no- or low-tax jurisdiction that is now available to reinsurance companies “tempting.”

“Use of affiliate reinsurance allows foreign-based companies to shift their U.S. reserves and their investment income overseas into tax havens, thereby avoiding U.S. tax,” Neal said.

The Coalition For A Domestic Insurance Industry, composed of 13 major U.S.-based property-casualty insurers, voiced its “strong support” for Neal’s bill.

“Mr. Neal’s legislation is crucial to the long-term health of the U.S. property and casualty insurance industry,” said William R. Berkley, spokesman for the Coalition For A Domestic Insurance Industry, in a statement. “This legislation remedies an inequitable situation and ensures that all competitors are treated similarly on their U.S. activities under the tax code. Closing this loophole would save the U.S. Treasury billions of dollars in lost tax revenues, without impacting arms length reinsurance transactions with third parties that occur in the ordinary course of business.”

Dramatic growth

Since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of $4 billion ceded in 1996 to $33 billion in 2008, including nearly $21 billion to Bermuda affiliates and more than $7 billion to Swiss affiliates, Neal said.

In the last decade, a doubling in the growth of market share of direct premiums written by groups domiciled outside the U.S. has occurred, with share rising from 5.1% to 10.9%, representing $54 billion in direct premiums written in 2006, Neal said. Bermuda-based companies represent the bulk of this growth, rising from 0.1% to 4%. During this time, the percentage of premiums ceded to affiliates of non-U.S. based companies has grown from 13% to 67%, Neal said.

Congress has been working with the U.S. Treasury Department since 1984 to make adjustments in reinsurance transactions to prevent tax avoidance or evasion.

The Competitive Enterprise Institute, a free-market think tank, called Neal’s proposal a “protectionist tariff” that will hurt consumers, especially those who struggle to obtain coverage for their homes in coastal and other areas where disasters can and do strike.

“This is the last thing that disaster-prone homeowners need,” said Eli Lehrer, director of CEI’s Center for Risk, Regulation and Markets, in a statement. “It’s an awful, awful idea.”

As written, the Neal bill would impose a special 25% tax on the offshore affiliated reinsurance—insurance for insurance companies—that some primary insurers purchase from parent and sister companies. These transactions, already taxed under a federal excise tax, would become economically unattractive for a great many companies that engage in them, Lehrer said, noting that one result could be a reduction in the supply of reinsurance and increased insurance rates.

“This is a battle of U.S.-based reinsurers against U.S. consumers. And the consumers will lose if Rep. Neal’s bill becomes law,” Lehrer said in a statement. “Those who hope for a revenue windfall are hoping in vain. If this bill becomes law, it’s likely that tax revenues will probably fall as companies stop using offshore affiliated reinsurance.”

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