US Reinsurance 'Loophole' Closer Reintroduced

by Leroy Baker, Tax-News.com, Washington

18 October 2011

Legislation has been reintroduced in both the United States House of Representatives and the Senate to close what is called an "unintended tax loophole" that provides foreign-owned insurers a significant advantage over their US competitors in serving the domestic market.

It is said that, over the past decade, there has been a significant increase in foreign-controlled insurers reinsuring their US property and casualty business with their foreign affiliates resident in lower tax countries, so as to avoid US tax on their income generated in the country. It has been estimated by the Joint Committee on Taxation (JCT) that legislation to control this use of reinsurance would reduce the US fiscal deficit by nearly USD12bn over 10 years.

The legislation, introduced Richard E. Neal, the Ranking Member of the House Ways and Means Select Revenue Subcommittee, and Robert Menendez, a member of the Senate Finance Committee, has been developed with both the Treasury Department and the JCT to address concerns that have been raised with prior versions of the bill and, it was said, to “develop a balanced approach to address this loophole”.

Specifically, to eliminate the perceived competitive advantage for foreign-owned insurers, the revised legislation would effectively defer the deduction for any reinsurance premiums paid to a foreign affiliate (if the premium is not subject to US tax).

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.

In introducing the legislation, Neal said: “Ending this unintended tax subsidy for foreign insurance companies will stop the capital flight at the expense of American taxpayers and restore competitive balance for domestic companies. Closing this loophole does not impose a new tax. It merely ensures that foreign-owned companies pay the same tax as American companies on their earnings from doing business here in the US.”

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 pointed out 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.”

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%.

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. “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.”

“The choice to single out foreign-based insurers and reinsurers is a particularly bad one at a time when we are looking to create jobs in the US,” Nancy McLernon, President of the Organization for International Investment added. “The bill sends an unfortunate, but clear message to global companies that they cannot count on being treated in a fair and equitable fashion when doing business here.”

Recommended