Congress Attempts to Close U.S. Tax Loophole for Bermuda Insurers

Tax-news.com

07 April 2000

House Ways and Means Committee Members Rep. Nancy Johnson (R-Conn.) Rep. Richard Neal (D-Mass.) and Rep. Robert Matsui (D-Calif.) have introduced legislation to close a tax loophole that allows insurers based in foreign tax havens to avoid up to $7 billion annually from federal income tax. 

During the past year, a half a dozen American insurance companies have begun using this loophole by moving their headquarters to Bermuda or being acquired by a Bermuda insurer. These transactions were undertaken to avoid U.S. income tax on investment income by moving reserves from U.S. insurance business to a tax haven, which imposes no income tax. 

Treasury Department officials estimate that if all American property and casualty insurers took advantage of this provision, they could avoid $7 billion in taxes annually. This translates into Treasury losing 4 cents on every dollar of income taxes now collected from corporations of all kinds. 

"This disturbing trend represents a double whammy for the American taxpayer," said Representatives Johnson and Neal. "It not only deprives our country of tax revenues, but it gives foreign companies an unfair advantage over U.S.-owned companies and their workers." 

By escaping all income taxes, foreign insurers can gain up to a 10 percent profit advantage over U.S.-owned insurers. "Such an advantage for foreign companies at the expense of U.S.-owned companies is unfair and should be stopped," according to Representatives Johnson and Neal. "While other countries adopt tax laws to favor their business sector, it is ironic that current U.S. tax law favors foreign companies at the expense of U.S.-owned companies," they said. 

But what Johnson and Neal fail to mention is that the loophole has only been used by recent entrants to the US insurance market, and legislation to close the loophole has come about as the result of pressure from established US insurers for whom re-location to Bermuda would not be cost effective because of the massive tax bills they would face on the transfer of their large existing reserves, which have built up over a long period of time.

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