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US Lawmaker Introduces Offshore Reinsurance Tax Bill

by Mike Godfrey,, Washington

26 September 2008

Congressman Richard E. Neal (D - Mass.), Chairman of the Subcommittee on Select Revenue Measures, has introduced legislation that would end the advantage of offshore reinsurance entities over American companies.

The bill, introduced by Neal on September 18, would disallow deductions for excess reinsurance premiums with respect to US risks paid to affiliated insurance companies that are not subject to US tax. The legislation also provides the US Treasury with authority to prevent avoidance of the provisions of the bill.

"I am pleased to come before the House to introduce legislation ending the advantage of offshore reinsurance entities over American companies," Neal said in a floor statement.

"In the past, I have offered a number of bills to limit offshore tax avoidance and have even previously offered bipartisan legislation on the issue of foreign reinsurance specifically. I am here today to try a different approach to tackle the problem of excessive reinsurance to related foreign entities and I hope my colleagues will join me in this timely effort," he added.

While some may view Neal's legislation as far from timely given the recent bailout of insurance giant AIG by the Federal Reserve, Neal argued that now is "precisely the time to shore up the US market."

"With the advantage of a no- or low-tax jurisdiction from which to operate, you can bet that foreign competitors are already eyeing purchases of the AIG business," he observed.

According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of USD4bn ceded in 1996 to USD34bn in 2007, including USD19bn alone to Bermuda affiliates. There has also been a steep rise in premiums written in the US by offshore entities, which have doubled in the last decade, representing USD54bn in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favorable jurisdiction due to its network of tax treaties.

"These insurance profits are shuttled out of the US and then the investment income on those profits is also sheltered from US taxes. It is easy to see why foreign reinsurers, with such a tax benefit, enjoy a significant market advantage," Neal noted.

While measures are already in place under Section 845 of the US Tax Code to permit the Treasury to reallocate items and make adjustments in reinsurance transactions in order to prevent tax avoidance or evasion, Neal argued that this has patently failed to stem the offshore tide.

"My colleagues may be thinking that this sounds similar to another provision in the code, and they would be right. The tax code currently tries to limit the amount of earnings stripping – that is, sending US profits offshore through inflated interest deductions – by disallowing the interest deduction over a certain threshold," Neal said.

"In the reinsurance context, US affiliates of foreign based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the US tax system. My bill limits the deduction for those premiums to the extent the reinsurance to a related party exceeds the industry average," he explained.

"I assure my colleagues that I will continue my efforts to combat offshore tax avoidance, regardless of what industry is impacted," Neal concluded.

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