[Congressional Record (Bound Edition), Volume 155 (2009), Part 15]
[Extensions of Remarks]
[Pages 20495-20496]
[From the U.S. Government Publishing Office, www.gpo.gov]




            BILL TO CLOSE OFFSHORE REINSURANCE TAX LOOPHOLE

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                        Thursday, July 30, 2009

  Mr. NEAL of Massachusetts. Madam Speaker, today I am pleased to come 
before the House to introduce legislation ending the use of excessive 
affiliate reinsurance by foreign insurance groups to strip their U.S. 
income into tax havens, avoid tax, and gain a competitive advantage 
over American companies. In the past, I have offered a number of bills 
to limit offshore tax avoidance. Today's bill follows on that trend but 
focuses specifically on one area of the financial services sector.
  The financial services industry has, like all us, experienced a tough 
year with the economic upheaval. As businesses realign, merge, and in 
some cases, cease operations, the advantages of a no- or low-tax 
jurisdiction from which to operate is tempting. The benefits of being 
headquartered in a tax haven can be quite significant for a company 
with investment income over long periods of time. Use of affiliate 
reinsurance allows foreign-based companies to shift their U.S. reserves 
and their investment income overseas into tax havens, thereby avoiding 
U.S. tax.
  The President has recently suggested a number of proposals tightening 
tax rules for U.S.-based companies operating overseas. Those proposals 
deserve a thorough review to assess their merits. But before we 
consider cracking down on the foreign earnings of U.S. companies, we 
should make sure we are taxing the earnings of foreign groups that do 
business in the United States the same way we do for those based here. 
Ending the tax advantage for foreign-based insurance groups from use of 
affiliate reinsurance was even a platform issue for candidate Obama 
last year.
  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. However, reinsurance among affiliates can serve other 
purposes as well, including tax avoidance. Just as Congress and 
Treasury have attempted to measure what is legitimate in debt 
transactions between affiliates, there have been previous attempts to 
address the problem of excessive 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 $33 
billion in 2008, including nearly $21 billion to Bermuda affiliates and 
over $7 billion to Swiss affiliates. Use of this affiliate reinsurance 
provides foreign insurance groups a significant market advantage over 
U.S. companies in 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. In fact last 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. 
Last month, they wrote to the leadership of the House and Senate tax-
writing committees urging passage of my bill because, as they wrote, 
``This loophole provides foreign-controlled insurers a significant tax 
advantage over their domestic competitors in attracting capital to 
write U.S. business.''
  That is why I am again filing legislation 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

[[Page 20496]]

determined by reference to an industry fraction, by line of business, 
which will measure the average amount of reinsurance sent to unrelated 
parties by U.S. companies. The bill allows foreign groups to avoid the 
deduction disallowance by electing to be treated as a U.S. taxpayer 
with respect to the income from affiliate reinsurance. Thus, the bill 
merely restores a level-playing field, treating U.S. insurers and 
foreign-based insurers alike. 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. Madam 
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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