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(WASHINGTON) Congressman Richard E. Neal, Chairman of the Subcommittee on Select Revenue Measures, introduced legislation today that would end the advantage of offshore reinsurance entities over American companies. The following is a copy of his floor statement.
Introduction of Reinsurance Tax Legislation
By Rep. Richard Neal
September 18, 2008
MADAME SPEAKER, today I am pleased to come before the House to introduce legislation ending the advantage of offshore reinsurance entities over American companies. 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.
Now, some may question why it would be timely to offer this legislation considering that one of the largest US insurance companies was just bailed out by the Fed. I think it is precisely the time to shore up the U.S. market. Already, the speculation has begun as to what parts of AIG will be sold off. A leading insurance industry research entity, Dowling & Partners, posed the question yesterday: “Will the offshore tax issue be highlighted once again, with much of AIG’s business potentially moving to competitors offshore?” 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.
There is no doubt that there is a legitimate role for reinsurance. It is a fundamental business technique for risk management and is to be fostered. But just as Congress and Treasury have attempted to measure what is legitimate in sharing debt and earnings between affiliates, there have been attempts to appropriately characterize reinsurance between related entities. Unfortunately, as recent data shows, those attempts have been unsuccessful.
Since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of $4 billion ceded in 1996 to $34 billion in 2007, including $19 billion alone to Bermuda affiliates. These insurance profits are shuttled out of the U.S. and then the investment income on those profits is also sheltered from U.S. taxes. It is easy to see why foreign reinsurers, with such a tax benefit, enjoy a significant market advantage.
Now we are beginning to see a new problem: the offshore affiliates are writing direct insurance here in the U.S. We have seen in the last decade a doubling in the growth of market share of direct premiums written by groups domiciled outside the US, from 5.1% to 10.9%, representing $54 billion in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, rising from 0.1% to 4%. And it should be noted that during this time, the percentage of premiums ceded to affiliates of non-U.S. based companies has grown from 13% to 67%. Bermuda is not the only jurisdiction favorable for reinsurance, and in fact earlier this year, one company moved from the Cayman Islands to Switzerland citing “the security of a network of tax treaties,” among other benefits.
Congress first recognized the problem of excessive reinsurance in 1984 and provided specific authority to Treasury under Section 845 of the tax code to reallocate items and make adjustments in reinsurance transactions in order to prevent tax avoidance or evasion. In 2003, the Treasury Department testified before Congress that the existing mechanisms were not sufficient. In 2004, Congress amended this provision to expand the authority of Treasury to not only reallocate among the parties to a reinsurance agreement but also to recharacterize items within or related to the agreement. Congress specifically cited the concern that these reinsurance transactions were being used inappropriately among U.S. and foreign related parties for tax evasion. Despite this grant of expanded authority, Treasury has still been unable to stem the tide moving offshore.
Recently, a coalition of U.S.-based insurance and reinsurance companies has been formed to express their concerns to Congress. With more than 150,000 employees and a trillion dollars in assets here in the U.S., I believe it is a message of concern that we should heed.
That is why I am filing legislation today to disallow deductions for excess reinsurance premiums with respect to U.S. risks paid to affiliated insurance companies that are not subject to U.S. tax. The excess amount will be determined by reference to an industry fraction, by line of business, which will measure the average amount of reinsurance sent to unrelated parties. The legislation provides Treasury the authority to carry out or prevent the avoidance of the provisions of this bill.
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 U.S. profits offshore through inflated interest deductions – by disallowing the interest deduction over a certain threshold. In the reinsurance context, U.S. affiliates of foreign based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system. My bill limits the deduction for those premiums to the extent the reinsurance to a related party exceeds the industry average.
I hope that in the coming weeks, my colleagues and experts in the industry will carefully review this new proposal and provide constructive commentary on it. A fuller technical explanation of the bill will be posted on my website, which will provide some background on the industry as well as a technical description of the bill. Madame Speaker, I appreciate the opportunity to address the House on this important matter and I assure my colleagues that I will continue my efforts to combat offshore tax avoidance, regardless of what industry is impacted.
Neal introduces reinsurance tax legislation
DOWNLOAD Technical Explanation of Bill (PDF)