[Congressional Record Volume 154, Number 149 (Thursday, September 18, 2008)]
[Extensions of Remarks]
[Page E1847]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              INTRODUCTION OF REINSURANCE TAX LEGISLATION

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                      Thursday, September 18, 2008

  Mr. NEAL of Massachusetts. Madam 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 U.S. 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 U.S., from 5.1 percent to 10.9 
percent, representing $54 billion in direct premiums written in 2006. 
Again, Bermuda-based companies represent the bulk of this growth, 
rising from 0.1 percent to 4 percent. 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 percent to 67 percent. 
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.

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