Legislation would remove incentives for foreign insurance groups to move capital to tax havens abroad
Sep 28 2016
WASHINGTON—Today, Sen. Mark R. Warner (D-VA), a member of the Senate Finance Committee, and Rep. Richard E. Neal (D-MA), a member of the House Ways and Means Committee, introduced legislation to close the affiliate reinsurance tax loophole, which currently allows foreign insurance groups to shift their U.S. reserves into low or no tax jurisdictions overseas through the use of related-party reinsurance transactions, thereby avoiding U.S. tax on their investment income. This provides an unfair competitive advantage over U.S.-based companies in attracting capital to write U.S. business.
“As we continue to face a growing budget deficit, I am increasingly worried about the erosion of our U.S. tax base. The Congressional Budget Office estimates that over the next 10 years, corporate income tax receipts will fall by roughly 5 percent – with half of that difference attributable to the shifting of additional income out of the United States. This legislation will help stem the flight of capital and tax revenue abroad, and put all insurers on a level playing field. I am proud to introduce this legislation with Congressman Neal, who has championed this issue for many years,” said Senator Warner.
“I am pleased to introduce legislation to close a loophole that allows foreign insurance groups to strip their U.S. income into tax havens to avoid U.S. tax and gain a competitive advantage over American companies. It is illogical that we continue to allow many foreign-based insurance companies to shift their U.S. income into tax havens to avoiding paying U.S. taxes. By closing this loophole, we not only preserve our US tax base, we will stop an unfair competitive advantage for our U.S.-based companies. I look forward to working with Senator Warner to get this bill enacted into law to which will help bring down the deficit, and restoring a level-playing field for U.S. businesses,” said Congressman Richard E. Neal.
Since 1996, the amount of reinsurance sent to offshore affiliates has grown more than ten-fold from a total of $4 billion ceded in 1996 to nearly $42 billion in 2014, over 90 percent of which went to Bermuda, Swiss and Cayman affiliates.
Under this bill, the deduction for premiums paid to the offshore affiliate is deferred until the insured event occurs. By deferring this deduction, any tax benefit from shifting reserves and associated investment income overseas is effectively recaptured. This is another way of addressing inversions and base erosion, as several U.S. companies have “inverted” into tax havens and numerous other companies have been formed—or been acquired and taken—offshore to take advantage of this tax-avoidance strategy.
The bill allows foreign groups to avoid the deduction disallowance by electing to be subject to U.S. tax with respect to the premiums and net investment income from affiliate reinsurance of U.S. risk. Special rules are provided to allow for foreign tax credits to avoid double taxation. Both the deferral disallowance, and this election would ensure a level-playing field, treating U.S. insurers and foreign-based insurers alike.