New Legislation Aims To End Offshore Insurance Loophole

by Mike Godfrey, Tax-news.com, Washington

10 May 2001

On Tuesday, US Ways and Means Committee members Nancy L Johnson (R-Conn) and Richard E. Neal (D-Mass) introduced legislation which aims to end what the Coalition For Tax Fairness calls the 'Tax Haven Advantage'. The Johnson-Neal bill, if it passes into law, would prevent property and casualty insurers that do business in the US from exploiting a loophole enabling them to move offshore to tax havens or be purchased by companies located in offshore jurisdictions, thereby avoiding a significant portion of their federal income taxes.

Johnson and Neal introduced a similar bill last year on the back of complaints from a number of US insurance giants who said companies could easily exploit the loophole by relocating to an offshore jurisdiction. This latest legislation - the Reinsurance Tax Equity Act of 2001 - aims to defer the deduction for reinsurance premiums until the underlying risk has been closed out or a loss has been settled. Insurers establishing that they are subject to foreign tax equal to a material percentage of US corporate income tax or electing to be taxed based on income related to US business could avoid the deduction deferral.

The Coalition For Tax Fairness - which has long lobbied for tough new legislation - is made up of the major American insurance and property players, notably American Financial Group Inc, the Chubb Corporation, the Hartford Financial Services Group, the Kemper Insurance Companies, Liberty Mutual Group, and PMA Capital.

The Coalition said in a statement: 'This loophole is going to cost the US Treasury - and thus US taxpayers - significant revenues. It also creates an unfair competitive advantage for these foreign-based insurers over those that remain headquartered in the US and pay their fair share of taxes.'

It continued: 'Neither Congress nor the American people would ever support the creation of a tax loophole that effectively takes tax dollars from US taxpayers to subsidize foreign companies at the expense of US companies. Yet that is what we now have, unless Congress acts quickly to terminate the Tax Haven Advantage. We commend Congresswoman Nancy Johnson and Congressman Richard Neal for their willingness to stand up for US taxpayers and for basic fairness in the tax code. We urge the Congress to act quickly to plug this discriminatory loophole.'

But things are not so simple. It's true that a US insurer, simply by paying away large parts of its premium income to an offshore subsidiary or parent, can move income out of a high-tax area into a low-tax area; but it's also true that the only thing stopping the remaining large US insurers from doing the same thing is that they would suffer heavy taxation on the transfer of their historical reserves out of the jurisdiction. It's also true that the proposed legislation would replace one discrimination with another, by preventing insurers who are based in low-cost overseas markets from competing against their US peers. Since the US administration nowadays supports international tax competition, unlike the last administration, it's not clear that the bill will succeed - at least not in its present form.

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