Foreign Insurers Fight US Offshore Tax Proposals

by Leroy Baker, Tax-News.com, New York

05 May 2009

America’s consumers would have to pay billions of dollars in higher insurance premiums if Congress passes legislation that imposes a higher tax on certain insurance companies, according to a new study.

The study, sponsored by the Coalition for Competitive Insurance Rates, analyzes the economic impact of imposing higher taxes on foreign-owned insurance and reinsurance providers, as proposed in legislation by Rep. Richard Neal, a Massachusetts Democrat.

The study, by the Brattle Group, a Massachusetts-based economic consulting firm, concludes that Rep. Neal’s proposed bill would cost consumers an additional USD10 - USD12bn per year to maintain their current insurance coverage. The report also argues that the legislation would significantly weaken competition and reinsurance capacity in the United States by 20%.

"This study confirms the fears of the nearly 40 independent experts, state government officials, business owners, and associations who publicly filed opposition letters to legislation pending in Congress," said Bradley Kading, President and Executive Director of the Association of Bermuda Insurers and Reinsurers (ABIR).

"This legislation imposes an unnecessary and costly tariff on companies that help spread insurance risks for consumers and businesses in areas subject to hurricanes, earthquakes, crop failures and other forms of natural disasters. When insurance is needed to cover billions of dollars in consumer property damage – as occurred following hurricanes Katrina and Rita – international reinsurance companies are there,” Kading added.

The Coalition for Competitive Insurance Rates has submitted three letters to Congress in recent years in opposition to such “discriminatory” reinsurance tax proposals. The Coalition is made up of business organizations, consumer advocacy groups, insurers and their associations. The ABIR and several leading European insurance and reinsurance companies supported the research project.

Foreign insurance companies may have a competitive advantage over US firms because they can use related party reinsurance to reduce their tax liabilities on investment income. This may be accomplished when a US subsidiary writes the initial insurance policy and then reinsures the policy to its foreign parent corporation, or 'related party,' that is located in a low or no-tax jurisdiction. The US subsidiary deducts the premium and the foreign parent company does not pay US or local tax on the premium while earning investment income subject to low or no tax.

Neal’s bill, introduced in the House of Representatives last September, seeks to disallow deductions for excess reinsurance premiums with respect to US risks paid to affiliated insurance companies that are not subject to US tax. The legislation also provides the US Treasury with authority to prevent avoidance of the provisions of the bill.

According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of USD4bn ceded in 1996 to USD34bn in 2007, including USD19bn alone to Bermuda affiliates. There has also been a steep rise in premiums written in the US by offshore entities, which have doubled in the last decade, representing USD54bn in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favorable jurisdiction due to its network of tax treaties.

"These insurance profits are shuttled out of the US and then the investment income on those profits is also sheltered from US taxes. It is easy to see why foreign reinsurers, with such a tax benefit, enjoy a significant market advantage," Neal commented upon the bill’s introduction.

A discussion draft of a proposal to adjust the United States tax code to ensure that offshore reinsurance entities are taxed "appropriately" so as to limit any competitive advantage they may currently hold over American companies was released by the Senate Finance Committee, which has jurisdiction over tax legislation, last December. This staff draft contains similarities to Neal’s proposals.

The Committee announced at the time of the draft’s distribution that it intends to use public comment to understand more about the potential implications of any such tax code changes for insurance companies and consumers alike before any new legislation is drawn up.

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