[Congressional Record Volume 146, Number 42 (Thursday, April 6, 2000)]
[Extensions of Remarks]
[Page E504]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       END THE BERMUDA TAX DODGE

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                        Wednesday, April 5, 2000

  Mr. NEAL of Massachusetts. Mr. Speaker, the Hartford Courant recent 
ran an editorial endorsing an effort to ``end the Bermuda tax dodge.'' 
I agree with this editorial, which is why I am joining my colleague 
Representative Nancy Johnson in introducing legislation to put an end 
to this loophole.
  During the past year, several Bermuda-based companies have either 
acquired a U.S. property-casualty insurer, or U.S. reinsurers have 
relocated to Bermuda. A major reason for these actions was to allow 
insurers to avoid U.S. income tax on investment income by reinsuring 
their U.S. owned subsidiaries' reserves to a parent located in a tax 
haven such as Bermuda, which has no income tax. It works like this: the 
company pays a one-time 1 percent federal excise tax to reinsure 
offshore, and in return, the foreign reinsurer earns tax-free 
investment income on the transferred reserves for as long as they are 
held offshore. By escaping all U.S. income tax, these companies can 
have up to ten percent pricing advantage over U.S. taxpaying companies 
in the U.S. marketplace.
  Mr. Speaker, such an advantage to foreign companies over U.S. owned 
companies is patently unfair and should be eliminated immediately. Our 
legislation solves the problem by imputing investment income to the 
U.S. subsidiary of the foreign reinsurer or business sent offshore to a 
tax haven. This language is intended to affect only reinsurance 
transactions with foreign reinsurers domiciled in tax haven countries 
such as Bermuda, and it only impacts business ceded between related 
parties.
  This is not a trade issue, as some would like to make it. The purpose 
of insurance is to enable property-casualty companies to spread risk 
among several companies. The practice of reinsurance allows greater 
access to insurance for consumers, promotes solvency in the 
marketplace, and helps ensure claims are paid to customers. But this is 
not the true purpose of the transactions affected by this bill. In 
these cases, reinsurance is written between related parties--a U.S. 
subsidiary cedes U.S. business to its foreign based parent--simply to 
obtain a tax benefit. No risk has been spread in this transaction, the 
company is simply moving money from one pocket to another pocket within 
the same corporate entity. The primary purpose is to escape U.S. income 
tax.
  Mr. Speaker, we welcome any comments or suggestions on this 
legislation from the Treasury Department, the Joint Committee on 
Taxation, any party affected by this bill, or anyone concerned that 
they might be. This is clearly a very technical issue, but that should 
not stop Congress from moving quickly to shut down this loophole. If we 
do not stop this practice, then other U.S. companies will be forced to 
relocate to Bermuda, or be bought by a Bermuda based parent, in order 
to stay competitive. This, in turn, will result in a significant 
reduction in U.S. corporate tax payments, and has implications not only 
for the property casualty business but also for affiliated 
corporations, especially life insurance companies, who could in theory 
benefit from this loophole.
  Now is the time to take action, and hopefully Congress will act now.

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