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Legislation has been reintroduced in both the United States House of Representatives and the Senate to close a so-called "tax loophole" that could provide foreign-owned insurers with a significant advantage over their US competitors in serving the domestic market.
Many foreign-based insurance companies are said to be using affiliate property and casualty reinsurance to shift their US reserves into lower tax countries, thereby avoiding US tax on their investment income. It has been estimated by the Joint Committee on Taxation that legislation to control this use of reinsurance would reduce the US fiscal deficit by nearly USD12bn over 10 years.
The legislation, introduced by Richard Neal (D – Massachusetts), the Ranking Member of the House Ways and Means Select Revenue Subcommittee, and Robert Menendez (D – New Jersey), Chairman of the Senate Committee on Foreign Relations, would eliminate the perceived competitive advantage for foreign-owned insurers, by deferring the deduction for any reinsurance premiums paid to a foreign affiliate (if the premium is not subject to US tax) until the insured event occurs.
In addition, to make sure that foreign-based insurers cannot be disadvantaged relative to domestic insurers, the legislation allows foreign-based groups an election to avoid the deduction deferral rule and, thereby, to be taxed similarly to a US company on the income from these affiliate reinsurance transactions. A foreign tax credit is provided for any foreign taxes paid on such income.
Neal disclosed that the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of USD4bn ceded in 1996 to USD33bn in 2011, including nearly USD20bn to Bermudan affiliates and over USD7bn to Swiss affiliates. Over the same period, there has also been a doubling in the growth of market share of direct premiums written by groups domiciled outside the US, from 5.1 percent to 11.1 percent, representing USD57bn in direct premiums written in 2011. Bermuda-based companies represent the bulk of this growth, rising from 0.1 percent to 3 percent.
The Coalition for A Domestic Insurance Industry, representing thirteen US-based insurance groups with more than 150,000 employees, recently wrote to the House Ways and Means Committee's working groups urging passage of the legislation.
One of its members, W. R. Berkley Corporation, said: "Closing unintended loopholes to recover lost revenue is one of the best ways to offset the cost of needed tax reform. Closing this loophole, staunching the flow of capital overseas, and restoring competitiveness for this important domestic industry is a win for all."
However, the Coalition for Competitive Insurance Rates (CCIR), an organization made up of businesses, consumer advocates, and insurance industry groups, has strongly objected to the proposed bills, saying that the proposals would drive up consumer insurance rates by reducing competition and critical US insurance capacity.
The CCIR has pointed out in the past that "the US insurance market relies on an international network of reinsurance companies to meet the country's insurance coverage needs. Nearly two-thirds of all reinsurance coverage required to protect US consumers and businesses is provided by non-US reinsurance companies or their affiliates."
As quoted by the CCIR, Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers has described the bills as a "direct attack on the business models of international reinsurers … for whom the ability to pool risk globally onto a central balance sheet is key. In doing so, re-insurers are able to diversify their sources of risk, enabling them to write more capacity and ultimately helping the end consumer."
A study conducted in 2009 and updated in 2010 by researchers at the Brattle Group, a Cambridge, Massachusetts-based economic consulting firm had demonstrated that the proposed legislation would cost consumers more than USD11bn per year and would reduce US reinsurance capacity by 20 percent.
It has also been considered that the effects of the bills would be felt most in disaster-prone states like California, Florida, Louisiana and Texas. "Consumers in states like Florida rely on a global reinsurance market to protect their homes and businesses," said Bill Newton, executive director of the Florida Consumer Action Network, following a previous attempt to introduce the bills. "Neal’s legislation chooses to benefit a few large, profitable companies while putting average Americans at risk. Now is certainly not the time to make access to insurance more costly."A comprehensive report in our Intelligence Report series which studies the 20 main offshore jurisdictions which offer captive insurance regimes is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report11.asp
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