House Leader Dick Armey Attacks Reinsurance Tax Bill

by Mike Godfrey, Tax-News.com, New York

03 July 2001

House Majority Leader Dick Armey has written to Treasury Secretary Paul O'Neill asking his help in resisting a bill which seeks to impose additional taxes on US insurers who reinsure risk in low-tax jurisdictions. Premiums paid away to companies in countries with a mainstream corporation tax rate of less than 20% would not be deductible for corporate income tax purposes.

The bill, HR 1755, was introduced by Nancy Johnson (Rep. Connecticut) and Richard Neal (Dem. Massachusetts) and was not unexpected. Those US insurance companies which don't have reinsurance subsidiaries in Bermuda consider themselves to be prejudiced and sponsored similar legislation which was lost in the last Congress.

The bill's heading is: 'To amend the Internal Revenue Code of 1986 to prevent the use of reinsurance with foreign persons to enable domestic nonlife insurance companies to evade United States income taxation.'

Dick Armey's letter, reproduced below, points out that when the US has just asserted the value of tax competition at the OECD, this is no time to be introducing new measures which would limit such competition.

The Honorable Paul O'Neill
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue
Washington, D.C. 20220

Dear Secretary O'Neill:

Congratulations on your stance opposing the Organization for Economic Cooperation and Development's (OECD) tax harmonization agenda. I applaud you for the leadership you have shown in withdrawing U.S. support for this misguided effort, and I urge your continued vigilance in promoting the cause of tax competition.

In that regard, I wanted to bring to your attention a Congressional matter that brings to mind many of the same concerns raised by the OECD initiative. HR 1755, the Reinsurance Equity Act, would impose new punitive taxes on certain U.S. insurers who reinsure with affiliates located in low-tax jurisdictions. I understand that Treasury has been asked to comment on this proposal, and wanted to encourage you to keep the following policy matters in mind as you develop a response.

First, by singling out low-tax jurisdictions as warranting punitive treatment, HR 1755 rests upon a fundamental assertion that "fairness" requires foreign nations to adopt the same high-tax regime as the United States. This notion not only runs counter to your recent pronouncements extolling the benefits of tax competition, but actually validates the concept of tax harmonization. If the U.S. is to stand against global tax-raising efforts like those of the OECD, it must remain true to its principles of promoting lower taxes and rejecting efforts to unilaterally impose one nation's tax structure onto another.

Second, the underlying concepts and structure of HR 1755 will clearly tempt other nations with even higher tax rates than the U.S. to begin imposing similar penalties on U.S. companies. Reinsurance is not the only industry that benefits from the free-flow of capital, and the U.S. should not begin erecting artificial barriers to capital that eventually will impede markets and hurt consumers.

Third, HR 1755 is simply a new tax being proposed by one set of competitors on another set of competitors. Neither Treasury nor Congress should be engaged in picking winners and losers in today's global economy, particularly based solely on the tax system of a foreign nation.

And fourth, in this environment of record surpluses, we should not even be entertaining the notion that new taxes are necessary. I look forward to working with you on this matter, and in our common pursuit of tax competition.

Respectfully,

DICK ARMEY
Member of Congress

HR 1755, which is currently in the Ways and Means Committee, reads as follows:

IN THE HOUSE OF REPRESENTATIVES

May 8, 2001
Mrs. JOHNSON of Connecticut (for herself and Mr. NEAL of Massachusetts) introduced the following bill; which was referred to the Committee on Ways and Means

--------------------------------------------------------------------------------

A BILL
To amend the Internal Revenue Code of 1986 to prevent the use of reinsurance with foreign persons to enable domestic nonlife insurance companies to evade United States income taxation.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Reinsurance Tax Equity Act of 2001'.

SEC. 2. PREVENTION OF EVASION OF UNITED STATES INCOME TAX ON NONLIFE INSURANCE COMPANIES THROUGH USE OF REINSURANCE WITH FOREIGN PERSONS.

(a) IN GENERAL- Subparagraph (A) of section 832(b)(4) of the Internal Revenue Code of 1986 (relating to insurance company taxable income) is amended to read as follows:

`(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance (except as provided in paragraph (9)).'

(b) TREATMENT OF REINSURANCE WITH RELATED REINSURERS- Subsection (b) of section 832 of such Code is amended by adding at the end the following new paragraph:

`(9) DENIAL OF DEDUCTION UNDER PARAGRAPH (4) FOR REINSURANCE OF U.S. RISKS WITH CERTAIN RELATED PERSONS-

`(A) IN GENERAL- No deduction shall be allowed under paragraph (4) for premiums paid for the direct or indirect reinsurance of United States risks with a related reinsurer.

`(B) EXCEPTIONS- This paragraph shall not apply to any premium to the extent that--

`(i) the income attributable to the reinsurance to which such premium relates is includible in the gross income of--

`(I) such reinsurer, or

`(II) 1 or more domestic corporations or citizens or residents of the United States, or

`(ii) the related insurer establishes to the satisfaction of the Secretary that the taxable income (determined in accordance with this section 832) attributable to such reinsurance is subject to an effective rate of income tax imposed by a foreign country at a rate greater than 20 percent of the maximum rate of tax specified in section 11.

`(C) ELECTION BY REINSURER TO BE TAXED ON INCOME- Income of a related reinsurer attributable to the reinsurance of United States risks which is not otherwise includible in gross income shall be treated as gross income which is effectively connected with the conduct of a trade or business in the United States if such reinsurer--

`(i) elects to so treat such income, and

`(ii) meets such requirements as the Secretary shall prescribe to ensure that the taxes imposed by this chapter on such income are paid.

`(D) DEFINITIONS- For purposes of this paragraph--

`(i) UNITED STATES RISK- The term `United States risk' means any risk related to property in the United States, or liability arising out of activity in, or in connection with the lives or health of residents of, the United States.

`(ii) RELATED INSURER- The term `related insurer' means any reinsurer owned or controlled directly or indirectly by the same interests (within the meaning of section 482) as the person making the premium payment.'

(c) TECHNICAL AMENDMENT- Subparagraph (A) of section 832(b)(5) of such Code is amended by inserting after clause (iii) the following new clause:

`(iv) To the results so obtained, add reinsurance recovered from a related reinsurer to the extent a deduction for the premium paid for the reinsurance was disallowed under paragraph (9).'

(d) EFFECTIVE DATE- The amendments made by this section shall apply to premiums paid after the date that the Committee on Ways and Means of the House of Representatives votes to report this bill.

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