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NEAL, MENENDEZ INTRODUCE BILLS TO CLOSE TAX HAVEN LOOPHOLE Favoring Foreign-Controlled Insurers

October 12, 2011
Press Release

FOR IMMEDIATE RELEASE - October 12, 2011

(WASHINGTON, DC / October 12, 2011): Congressman Richard E. Neal, Ranking Member of the House Ways and Means Select Revenue Subcommittee, and Senator Menendez (D-NJ), member of the Senate Finance Committee, today introduced bills in both the House and Senate to close an unintended tax loophole that costs taxpayers billions of dollars and provides foreign-owned insurers a significant advantage over their U.S. competitors in serving the domestic market. The Joint Tax Committee estimates that this legislation will help to reduce the deficit by nearly $12 billion over 10 years. 

In introducing the legislation today, Congressman 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 United States.”

“The increasing trend of foreign insurance companies moving profits made in America offshore and sticking Americans with the bill is incredibly troubling,” said 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 U.S. competitors and American taxpayers.”    

Under the current law loophole, foreign-controlled property and casualty (P&C) insurers are allowed to strip their income generated in the United States into tax havens (and avoid U.S. tax) merely by reinsuring their U.S. business with foreign affiliates. Over the past decade, the amount of domestic insurance capital that has migrated to tax havens overseas to take advantage of this flaw in our tax law has increased significantly.

The legislation introduced today has been developed working with the tax experts at both the Treasury Department and the staff of the Joint Committee on Taxation to address concerns that have been raised with prior versions of the bill and develop a balanced approach to address this loophole. Specifically, to close the loophole and eliminate the 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 U.S. tax).

Also, 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 be taxed similarly to a U.S. 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 is consistent with U.S. tax treaty and trade agreement obligations.