US Treasury Stays Neutral In Bermuda Tax Loophole Debate

by Mike Godfrey, Tax-News.com, Washington

20 July 2001

In May this year it was reported that the US Ways and Means Committee members, Nancy L Johnson (R-Conn) and Richard E Neal (D-Mass) introduced legislation that would close a glaring tax loophole that allows companies to avoid US income taxes by relocating their operations to Bermuda and other tax haven countries.

Entitled the Reinsurance Tax Equity Act 2001, the legislation aimed to defer the deduction for reinsurance premiums until the underlying risk has been closed out or a loss has been settled. Under the proposed law, insurers establishing that they are subject to foreign tax equal to a material percentage of US company income tax or electing to be taxed based on income related to US business could avoid the deduction deferral.

However, according to a report from the Bermuda Sun this week, the US Treasury department has decided to remain neutral on what has become known as the 'Bermuda Loophole' bill. Mark Weinberger, assistant secretary-tax policy at the Treasury Department, has sent a letter to Rep. Neal explaining that there are possible benefits for subsidaries of offshore insurers when reinsuring with related companies in low-tax domicles. Mr Weinberger wrote: 'This is not unique, however, to related-party reinsurance and is not necessarily limited to low tax rate… countries. In studying this issue, we have found conflicting information regarding both the extent and nature of the problem.'

He further explained: 'While examples of businesses reorganizing outside the US are cited as evidence that US insurance companies will expatriate wholesale to take advantage of lower taxes abroad, this is countered by evidence that the proportion of US risks reinsured with companies located in Bermuda, for example, a low tax rate jurisdiction, has remained relatively steady over time.'

Mr Weinberger said that, at present, the Treasury has decided that it will not take any position on the affair but will continue consider all options while monitoring the situation.

However, all is not lost for Neal and Johnson, although the Treasury has chosen not to support the bill, it has yet to go before the Congress Joint Tax Committee. It is widely supported by the large US-based insurers such as Chubb Corp., Hartford Financial Services Group Inc. and Liberty Mutual Insurance Co. They argue that the Bermuda-based insurers and the re-insurers with operations in the US, such as ACE Ltd., and XL Capital Ltd., possess an unfair advantage in the form of little or no tax bills which allows them to charge their customers lower rates.

But the Bermuda insurers have argued that they reinsure the business at market rates and are subject to other taxes and costs that US-based insurance groups do not have to contend with. Naturally, ACE et al are in opposition to the bill, spokesperson of ACE Wendy Davis-Johnson told the Bermuda Sun: 'The Johnson/Neal legislation is pork barrel politics at its worst. It would favour a few Northeastern US insurance companies but jeopardize the ability of the industry to meet the capacity needs of the domestic market, particularly with respect to coverage for hurricanes, floods and other natural disasters.'

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