US ‘Bermuda Loophole’ Legislation Proposed

Two American lawmakers have introduced legislation to end a tax break they say favours foreign-based insurers — including those in Bermuda — over US insurers.

Congressman Richard E. Neal [pictured], the ranking Democrat on the House Ways and Means Select Revenue Subcommittee, and Senator Robert Menendez, a Democrat member of the Senate Finance Committee, introduced bills in both the House and Senate this week to close an unintended tax loophole that they contend costs American taxpayers billions of dollars and provides what the men call “foreign-owned insurers” a significant advantage over their US competitors in serving the domestic market.

Similar proposals are included in President Barack Obama’s 2014  budget plan.

Under current law, foreign-controlled property and casualty insurers are allowed to strip their income generated in the United States into overseas business tax havens and avoid US taxes by reinsuring their US business with foreign affiliates.

Over the past decade, the amount of domestic insurance capital that has migrated to off-shore business centres to take advantage of this has increased significantly.

“To close the loophole and eliminate the competitive advantage for foreign-owned insurers, the legislation would effectively defer the deduction for any reinsurance premiums paid to a foreign affiliate, if the premium is not subject to US tax,” Congressman Neal and Sen. Menendez said in a statement.

Congressman Neal went on to say: “Many foreign-based insurance companies are using affiliate reinsurance to shift their US reserves into tax havens overseas, thereby avoiding US tax on their investment income.

“This provides these companies with a significant unfair competitive advantage over US based companies, which must pay tax on their investment income.

“That is why I am filing legislation to end the Bermuda reinsurance loophole. 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. It simply reinforces my efforts to combat offshore tax avoidance, regardless of what industry is impacted.”

Congress’s Joint Tax Committee estimates that the legislation would help to reduce the deficit by over $12 billion over 10 years.

Congressman Neal has made repeated attempts in recent years to close what he calls the “Bermuda reinsurance loophole”, last tabling legislation in conjunction with Sen. Menendez in 2010.

The revised legislation has been developed in consultation with tax experts at the Treasury Department and the staff of Congress’s Joint Committee on Taxation to address concerns that were raised with prior versions of the bill and to develop what its sponsors call “a balanced approach to address the tax loophole.”

To make sure that foreign-based insurers cannot be disadvantaged relative to domestic insurers, Congressman Neal and Sen. Menendez say the legislation allows foreign-based groups an election to avoid the deduction deferral rule and 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. The proposed legislation would be consistent with US tax treaty and trade agreement obligations.

“The increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill is incredibly troubling,” said Sen. Menendez. “This legislation will staunch the flow of capital overseas, protect American jobs, and reduce deficits by shutting down a tax loophole that provides a huge unintended subsidy to foreign companies at the expense of both their US competitors and American taxpayers.”

In a joint opinion piece published in “The New York Times”, Association of Bermuda Insurers & Reinsurers [ABIR] president Bradley Kading and Temple University Fox School of Business professor J. David Cummins said the revised legislation being proposed by Congressman Neal and Sen. Menendez would “impose punitive taxes that will drive up the costs for consumers and businesses.”

The net effect of the Neal-Menendez legislation “would impose a costly tariff on international reinsurance firms”, they said.

Mr. Kading and Professor Cummins said: “Aiming at global insurance companies with these taxes would be disastrous for areas vulnerable to natural calamities. An economic impact study prepared on behalf of an insurance industry coalition by the Brattle Group, a leading economic consulting firm based in Boston, found that the proposed tax would reduce the net supply of reinsurance in the United States by 20 percent. American insurers depend heavily on international reinsurers for nearly two-thirds of their backup catastrophe coverage, with insurers based in Bermuda providing 40 percent.

“A new tax that restricts the supply of reinsurance is bad for consumers …”

In April the respected “Insurance Journal” trade publication said US insurers and companies that write reinsurance in the American market from off-shore jurisdictions like Bermuda provide “vital” property & casualty coverage.

The industry journal said the last time the subject was seriously considered was in 2010 when the House Ways and Means Committee considered R3424, the last bill introduced by Congressman Neal to tax foreign-based insurers and reinsurers.

“It failed, as have Congressman Neal’s other efforts to right what he, and a number of US insurers, see as a loophole that allows the reinsurers, mainly based in Bermuda, to escape US taxes,” said business journalist Richard E. Boyle. “As a report from A.M. Best points out, however, the foreign reinsurers do pay a federal excise tax [FET] on the premiums they cede back to a ‘tax exempt country, which is usually Bermuda. The FET is four percent on P&C premiums and one percent on life premiums.”

Characterising the “foreign-based insurers” as tax avoiders, however, is a bit disingenuous said Mr. Boyle as it conjures up “visions of stealthy Swiss bankers and bowler hatted Englishmen poaching America’s righteous worth.”

He went on to point out the Bermuda-based entities are almost entirely American in origin, beginning with ACE and XL. The newer ones, and their founders and capital providers, created after the September 11 attacks, include the following:

• Endurance Specialty Insurance Limited – Aon and Zurich.
• Allied World Assurance Co. – AIG, Chubb, Goldman Sachs
• Axis Capital Holdings – Marsh’s Trident II Investment Trust, CSFB, The Blackstone Group, J.P. Morgan and Thomas Lee
• Arch Capital – Warburg Pincus and Hellman & Friedman private investment funds
• Montpelier Re – White Mountains Insurance Group and Benfield [now part of Aon]
• Platinum Underwriters – spun off from The St. Paul, as well as
• Harbor Point Limited, established in 2005 by Trident III, L.P., a private equity fund

Any change in the tax law would primarily affect P&C catastrophe reinsurers — companies that take on the risks of devastating disasters like Hurricane Katrina and Superstorm Sandy, as well as the tornadoes, earthquakes and brush fires that regularly strike parts of the US.

According to A.M Best, the US ”accounts for more than 70 percent of global cat risk, and foreign insurers and reinsurers absorb approximately 50 percent of the total losses on US cat events.”

“This coverage is vital, and it is likely to become more so in the future,” concluded Mr. Boyle. “It is hard to see where else it will come from other than those companies, which aren’t all that foreign, currently providing it, as only one large US reinsurer remains in the mix – General Re. Any significant decrease in capacity and/or increased reinsurance premiums would inevitably threaten the current balance, which, while by no means perfect, has served the US consumer quite well over the years.”

#AmericanPoliticians #AmericanRelations #BermudaBusiness #BermudaInsurance

Category: All, Business, News