US Congress In New Attack On Bermuda Insurance Industry

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

11 September 2001

Bermudian politicians and business leaders squirm if you say the word 'tax' too loudly in their presence: they would like to believe, and the world to believe, that Bermuda is a 'normal', well-run country that attracts business because it has more to offer than its first world competitors. Strangely enough, their dreams are coming true, at least in the reinsurance sector. Even though Bermuda first attracted reinsurers for the same reason as other offshore captive jurisdictions - low or no tax - it is now the unequivocal world centre of reinsurance, and its low-tax competitive advantage has turned into a high-tax competitive disadvantage for any country that imposes tax on reinsurance.

That's very interesting. Is it the way of the future? Will low or no corporate taxes become the norm in other branches of the financial sector? That's the belief of offshore e-commerce groupies. But Bermuda has done it for reinsurance without the internet.

"Effectively, the entire publicly-traded US reinsurance market is now domiciled in Bermuda," Hartford, Connecticut insurance stock analyst Vincent J Dowling, Jr of Dowling and Partners Securities, told the Financial Times. "There is no longer an independent, US-based monoline reinsurance company. A Bermuda-based reinsurer avoids taxes on a significant percentage of its earnings, resulting in a higher after-tax return to shareholders, and enjoys a regulatory environment which provides more privacy and flexibility," says Mr Dowling. "It is simple: Bermuda is a better mousetrap."

The flood of reinsurers that have redomiciled to Bermuda, especially from the US, or simply started up there cold turkey, has caused a backlash among those US insurers that cannot follow due to the tax consequences of a transfer for their established reserves. Major companies such as Chubb, Hartford, Liberty Mutual and Kemper have lobbied the US Congress for legislation to protect them from what they see as unfair competition from Bermudian companies such as Ace and XL.

The US insurance lobby failed in the 106th Congress, but is trying again in the new Congress. Representatives Nancy Johnson (R-CT) and Richard Neal (D-MA) have proposed legislation (HR 1755) that would impose additional taxes on the US subsidiaries of insurance companies based in low-tax jurisdictions, effectively cutting the offshore parents off from the stream of premiums collected in the US, which amount to two-thirds of their income.

Yet, says Daniel J Mitchell of the Washington-based Heritage Foundation, because the United States is a low-tax jurisdiction compared with other industrialized nations, the Johnson-Neal legislation creates a dangerous precedent. If HR 1755 is enacted, high-tax European countries likely would use the same approach to create trade barriers and impose discriminatory taxes against US companies operating overseas.

Mitchell says that instead of creating tax barriers to foreign competition, the US should go in the opposite direction, lowering corporate taxes and moving towards a 'territorial' basis of taxation which would create a force for healthy tax competition between nations and be to the advantage of a liberal, open economy such as the US, with its mostly low tax rates compared to its business competitiors in Europe and elsewhere.

In fact, it's unlikely that Bermuda has much to worry about in this case. The Republican administration of George W. Bush appears happy with the status quo, and the House of Representatives is in any event rather unlikely to pass HR 1755, with its inbuilt Republican majority. The Senate is perhaps a different proposition, but even there it would be hard to assemble a consensus in favour of overtly protectionist legislation, especially at a time when the US is facing a major trade war with the EU over the WTO's rejection of its Foreign Sales Corporation regime.

Daniel Mitchell's extensive analysis of HR 1755, its consequences and the arguments in favour of a territorial basis of taxation can be found at http://www.heritage.org/library/backgrounder/bg1469.html

Recommended