[Congressional Record Volume 147, Number 62 (Tuesday, May 8, 2001)]
[Extensions of Remarks]
[Page E755]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       REINSURANCE TAX EQUITY ACT

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                          Tuesday, May 8, 2001

  Mr. NEAL of Massachusetts. Mr. Speaker, today I am joining my 
colleague, Representative Nancy Johnson, in introducing legislation to 
put an end to the Bermuda reinsurance tax loophole.
  During the past few years, several Bermuda-based companies have 
either acquired a U.S. property-casualty insurer, or U.S. reinsurers 
have relocated to Bermuda. One 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 I 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 on investment income, 
these companies can have up to a ten percent pricing advantage over 
U.S. taxpaying companies in the U.S. in the ``long-tail'' insurance 
marketplace.
  Mr. Speaker, such an advantage for some foreign companies over U.S. 
owned companies is patently unfair and should be eliminated 
immediately. Our legislation solves the problem by deferring the 
deduction for reinsurance premiums until the loss is paid in 
recognition that the primary insurance covers U.S. business risk. 
Again, this would only apply when reinsurance to parent companies in 
tax havens is used. Of course, these companies would have the option of 
being taxed like a U.S. company and thereby avoid this provision.
  This is not a trade issue, as some would like to make it. The purpose 
of reinsurance 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--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.
  Mr. Speaker, 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, 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.
  Mr. Speaker, this may be simply one issue in a series of issues that 
may need to be addressed by Congress. For example, there is another, 
separate issue, emerging involving hedge funds and Bermuda insurance 
companies. When U.S. taxpayers invest in hedge funds, they pay taxes 
each year on realized profits, usually at the ordinary income tax rate. 
However, if they invest in shares of an offshore reinsurance company in 
a tax haven country like Bermuda, they pay nothing on trading profits 
until they sell shares of the company and those profits are taxed at 
the capital gains rate. Congress has taken the position several times 
over the past few years that investors should not get better tax 
treatment by investing indirectly than they would have gotten if they 
had made a direct investment in an asset. To quote one article, ``The 
Bermuda reinsurance game is a thing of beauty. High-net-worth investors 
get the double tax advantage of investing in a Bermuda insurance 
company while literally capitalizing on hedge fund returns. 
Institutional investors that might be prohibited from investing 
directly in hedge funds can do so through an insurance company . . . 
You are effectively taking U.S. assets and moving them offshore. . . 
.''
  Mr. Speaker, I believe we need to look generally at these issues. 
However, the matter at hand is one specific transaction that has been 
studied for a year at the Treasury Department, and it is time to either 
create fair competition for U.S. businesses, or declare that the U.S. 
government does not care if U.S. tax laws give a competitive advantage 
to foreign companies doing business in the United States.

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